Administration of a Limited Company or PLC can be an intimidating process for many company directors, even so it can offer the best chance of effecting the recovery and successful turnaround of a business if used properly.
Entering into administration is often seen as a punishment that insolvent companies are given by the courts when they’re unable to pay. Although some administrators are appointed in this way, many company directors choose to voluntarily appoint their own administrator independently.
A company can be put into administration by its directors/owners and its secured creditors. The directors will use the administration process to try and protect the company and their position. Secured creditors might force the company into administration if they are owed money by the business and believe that, as things stand, it is not going to be repaid.
The directors of the company can appoint an administrator quickly with the guidance of their insolvency practitioner.
- 1 What does going into administration mean?
- 1.1 Why would a company go into administration?
- 1.2 Eight-week breathing space
- 1.3 What are the objectives of administration?
- 1.4 How long does going into administration last?
- 1.5 What does going into Administration mean for employees?
- 1.6 What’s the role of the administrator?
- 1.7 If a company goes into administration do I have to pay them
- 1.8 What happens at the end of administration?
- 1.9 Sale as a ‘going concern’
What does going into administration mean?
Going into administration is a process that businesses can use to try and protect themselves from creditors. It gives the company time to restructure their finances and try to become profitable again. The main objective of administration is to rescue the company as a going concern, which means that it can keep trading.
Administration is often seen as a last resort option for companies, but it can be an effective way to give them a chance to get back on track. One of the key advantages of administration is that it can give businesses some breathing space from their creditors. This can be vital in allowing the company to come up with a plan to pay off its debts and become solvent again.
Another advantage is that it can help businesses to negotiate better terms with their creditors, which can save them money in the long term.
However, there are also some disadvantages to going into administration. One of these is that it can damage the business’s reputation, which can make it harder to trade successfully in the future.
It can also be expensive and time-consuming, which can put even more strain on the business. Overall, going into administration is a decision that should only be made after careful consideration. It can be an effective way to give a struggling business a chance to turn things
Why would a company go into administration?
It’s a common misconception that any insolvent company can enter into administration – it can’t. Administration is only an option if the business is insolvent but remains viable. That is:
- It’s a reasonable size
- It generates a consistent level of cash-flow
- It has the potential to return to profitability
Although the immediate goal of the administration process is to ensure the company’s creditors receive the best possible return, it also gives the business the chance to make changes to its core operations in a bid to return to profitability. To achieve this goal, the administrator can sell assets, reduce staff and negotiate a Company Voluntary Arrangement (CVA) to repay its debts without the threat of legal action from creditors.
If a business has no assets of value, no ongoing cash-flow and no real prospect of returning to profitability, administration would not be appropriate. In that case, the only option is to liquidate the company.
Eight-week breathing space
So what happens when a company goes into administration? During the time the company is in administration, there is an eight-week period that protects the company against any creditors taking legal action. This gives the company, and insolvency practitioner, time to address the situation and come up with a plan that is then proposed to the stakeholders invested in the business.
What are the objectives of administration?
In order to understand what happens when a company goes into administration, we must first look at the objectives of the procedure.
To be able to use the procedure, one of three purposes must be achieved:
- The primary aim is to rescue the company as a going concern. If this is not possible, objective two is considered.
- The second (i.e. next best) aim is to sell the business and its assets, therefore providing the company creditors with a better outcome than if the company had first gone into liquidation. If this purpose is not attainable, the last objective must be achieved.
- The final aim is to realise assets in order to pay a dividend to secured and/or preferential creditors – which will mainly be unpaid wages and holiday.
How long does going into administration last?
It depends very much on the circumstances, but in general administrations don’t last longer than 12 months, without the courts consent. The administrators take on the employment contracts of the company after 14 days so it is desirable that the business is sold out of administration before that date. The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off.
If there are large amounts of money to collect in or substantial realiseable assets then they may trade for longer periods. During this time they will need to report to the creditors at regular intervals.
What does going into Administration mean for employees?
What happens to staff when a company goes into administration, the insolvency practitioner attempts to bring the company back into profitability by using different rescue tools.
For employees the administration process may well bring redundancies and job losses. In this instance, the crucial point for the employees concerned is whether this happens in the first 14 days of the administration. Those that experience job losses in this period become what are called ‘ordinary creditors’ meaning they fall lower down the queue of creditors owed money by the company.
Those who retain their jobs beyond 14 days become ‘preferential creditors’ meaning they stand a much higher chance of being paid their statutory entitlements.
What’s the role of the administrator?
The administrator takes over the management of the business with the view of achieving one of the three objectives. The directors’ powers cease on the appointment of the administrator. However, the administrator may choose to keep the directors as employees if they believe it will benefit the administration.
The administrator has a duty to present to the creditors – within eight weeks of their appointment – their proposals, a written report which outlines the objective of the administration, and the strategy they intend to adopt.
The administrator then has an obligation to keep the creditors updated on the progress.
If a company goes into administration do I have to pay them
If a company goes into administration you still have to pay them, it is the insolvency practitioners duty to collect all outstanding monies owed to the company.
Before an insolvency practitioner can end the insolvency they have to demonstrate that they taken all actions to collect outstanding monies that are owed to a company, this process must be followed in order for the company to be dissolved.
One of the first steps in this process is for the administrator to send out notice to all creditors, including any individuals who may be owed money by the company. Once this notice has been sent, the administrator will begin working on a plan to pay off the company’s debts.
If you are owed money by the company, you will be included in this plan and you may have to make a payment to the administrator in order to receive your money. However, the amount that you will have to pay will depend on the overall financial situation of the company and how much money is available to pay creditors. If the company does not
What happens at the end of administration?
We’ve gone over what happens when a company goes into administration – but how does it end?
Common ways to end administration include placing the company into a creditors’ voluntary liquidation (CVL) or a company voluntary arrangement (CVA), or dissolution of the company (striking off).
How the procedure ends will depend on the specific circumstances of the administration.
Sale as a ‘going concern’
The business may be sold as a going concern if circumstances allow, either by placing it on the open market, or using what is termed a ‘pre-packaged’ sale. ‘Pre pack’ involves marketing the business prior to officially appointing administrators, and selling it on quickly to minimise loss of trade.
Members of staff may be transferred over to the ‘new co’ under TUPE – the Transfer of Undertakings (Protection of Employment) regulations, which protect their terms and conditions, and maintains a continuous term of employment.
Business Insolvency Helpline can provide more professional advice about company administration, or any other aspect of corporate insolvency. We operate from a number of offices around the country, and offer a free same-day consultation in complete confidence.