Administration is a formal insolvency process. Under the process the company director’s recognise the company is insolvent and appoint an Insolvency Practitioner (IP) to restructure the business so that it survives (ideally) in some shape or form.
When a company enters into administration it is immediately protected from creditors and further legal action. A moratorium is placed over the company that stops creditors suing the company to recover their debts.
Administration buys the company time and enables a strategy to be formulated and enacted. Once the IP has reviewed the business, a plan is implemented. If the company is fundamentally sound a recovery plan aimed at keeping the company going as a trading business can be implemented.
If the company cannot trade on then it can be refinanced, sold or liquidated.
Putting a company into administration can be sought by the company, its directors or one of the creditors.
A company in administration may continue to trade whilst a plan is formulated. The plan must achieve one of 3 goals:
- Keeping the company trading on as a going concern, or
- getting more money back for the creditors than an alternative insolvency process (eg liquidation); or
- selling the company assets in order to repay secured creditors (the bank) or preferential creditors (employees of the company who are owed money).
Administrations are useful because they can be implemented quickly (in as little as a few hours). They stop creditors taking action against the company, and they allow an insolvency expert, the IP, to review the options and come up with a plan that can save viable businesses.
Once a company is in administration it must ultimately exit administration. There are a number of ways this can be done:
- Refinance – the company can secure alternative working capital that allows it to continue trading;
- CVA – the company can enter a Company Voluntary Arrangement that will allow it to repay some (but not all) of the money it owes, the unpaid element of the debt will then be written off and the company returns to the directors control free of debt;
- Liquidation – if the assessment by the IP shows that the company is not viable, liquidation follows whereby the company’s assets are sold and paid out to its creditors. The company is then struck off;
- Share sale – the company’s shares are sold to a third party allowing it to trade on;
- Asset sale – the company’s assets are sold off and paid out to creditors;
- Struck off – the company can be closed (struck off the Registrar of Companies and formally cease to exist); and
- Pre-pack sale.
Under a pre-pack, the company is placed into administration and immediately the assets are sold to a third party. The buyer of the assets can be a shareholder or even a director of the insolvent company. The Administrator is appointed to conduct the sale.
Under a pre-pack the IP must satisfy himself that in selling the assets immediately after administration he is getting the best price for those assets. To that end all of the pre sale work should be undertaken in the run up to the appointment of the administrator. Typically the assets will be valued and the enquiries will be made as to whether the business can be sold as a going concern. The major creditors of the company should also be consulted to confirm that they have no objections to the pre pack. The consent of these creditors is not required, but consulting them shows good practice and prevents any future accusations of skullduggery (especially where the current directors buy back the business).
Pre packs are useful when the business can’t really be sold on the open market – for example if a director is the business (ie so important to the business that it cannot function without him).
FREQUENTLY ASKED QUESTIONS – ADMINISTRATION
What is an Administration Order?
A court order that stops any creditor taking action against the company. The order puts the IP (Administrator) in charge of the company.
How long does it take to get into administration?
As little as a few hours.
As a director or shareholder can I buy assets back from the Administrator?
Yes, but you must pay a fair value. The IP will decide this.
What will the bank do?
The bank if they are secured must be consulted and agree to the plan of action. Ultimately they can stop it if they chose to.
What will it cost to put the company into Administration?
It varies and depends on the complexity of the case. Anything from £5,000 upwards
Do they work?
They can do but there are no guarantees. A viable business that is being dragged down by historic debts though can almost always be saved.
How long does it last?
12 months, though they can be extended to 18 months.
Who runs the company?
The Administrator. He must be a licensed insolvency practitioner (IP). The directors work with the IP and assist in the day to day running of the business.
What will happen to me as a director?
Typically the company will continue to be run by the directors under the Administrator’s supervision. The Administrator will have absolute sanction on all matters however, which is a situation many directors find difficult to adjust to.
Who can appoint an Administrator?
Creditors, shareholders, secured creditors and company directors.
What will happen to my personal guarantee
You will still be liable for this. Once the creditor is paid as much as it can be from the company, the creditor will turn to you to make up the shortfall. We can assist in dealing with this too.
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