When a company gets into trouble it can often seem like things are spiralling out of control with threats of action from creditors taking up time that could be better spent fire fighting and making a plan to get the business out of difficulty.
Administration is a method of giving directors and staff time and support to bring a company back to the straight and narrow without closing down and starting again.
The process of administration though, is not for every company. The business must have a reasonable and realistic prospect of returning to profitability, must be of a good size and have a predictable cash flow for administration to be a viable option. The firm must also be either insolvent or contingently insolvent.
Administration by its very nature is not a ‘do-it-yourself’ option and a licenced insolvency practitioner must be appointed to serve as the formal administrator. The administrator is appointed by the High Court and is charged with restructuring the business and returning it to profitability and eventually solvency.
To enter into administration the company directors will need to make contact with a suitable insolvency professional. They will naturally have to complete some pre-work such as determining whether the company is indeed insolvent and assessing what option would be most suitable for the business.
The main thrust of the pre-work will be to show that administration will provide a better outcome than a Voluntary Arrangement or even liquidating the company. The administrator and directors will need to formulate a plan as to the way forward and articulate what the final result will be.
If there are floating charge holders such as banks then they will need to be contacted beforehand. It is possible that they may apply to appoint their own administrator however in practice an insolvency practitioner who is recognised by the charge holder and has a realistic plan of action should face little difficulty here.
The administrator will need to ensure that their plan achieves one of three aims;
- To effect a company rescue so that the business can exit administration as a going concern. Typically this will end with a Company Voluntary Arrangement allowing the business time to pay off the debts due to creditors.
- To trade on with the company with the outcome of a sale of the business as a going concern. This has to be identified as realising a better return for creditors than simply immediately winding up and liquidating the company and its assets.
- If the first two objectives are not possible then the administrator can look to sell assets to allow creditors to be paid.
Once a court order has been made the firm enters a debt ‘moratorium’ in which any insolvency and other legal proceedings are stayed temporarily. This allows the firm to take breath and begin to enact the recovery plan already formed.
Although there is a time limit of eight weeks for proposals to be sent out to creditors, administration can last for up to a year or even longer if consent is obtained from the court and creditors and during this time the administrator will also handle legal requirement such as the statement of affairs and reports to the court/creditors.
There are of course some disadvantages to a business entering administration.
Firstly directors effectively lose control. This means that, should an offer come in to buy the company they can be removed from office. It also means that they have no powers to stop layoffs or asset sales.
Administration is also a public process. Notices are published in the Gazette and creditors will be duly informed. This means that the company will be unable to raise money or obtain credit terms and may suffer reputational damage, as will the directors.
That having been said there are some significant advantages to administration.
Probably the most immediate advantage is that legal action is stayed and creditors are bound to deal with the administrator in charge rather than the directors.
It also means that the experienced professional insolvency practitioner will be able to consider all options and ensure that the directors do not inadvertently fall foul of company law leaving themselves open to possible action.
The ‘pre-pack’ or ‘phoenix company’ option of buying the company and its assets out of administration is also open to the directors allowing the business to continue on without onerous debts or contracts.
Administration is not suitable for all companies and it very much depends upon the size and type of company as to whether it is the best course of action however it can be a useful method of protecting both a trading business and directors from legal action.
As with all things insolvency it is always essential to get experience qualified advice before embarking on any course of action.
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