Company Administration

What are the Consequences of Entering into Administration?

Entering into administration can have significant consequences for a company, its directors, and its creditors.

Firstly, once an administrator is appointed, the company's directors lose control of the company and its affairs. The administrator takes over the day-to-day running of the company and has the power to make decisions on behalf of the company.

Secondly, entering into administration can have an impact on the company's employees. The administrator may have to make difficult decisions about redundancies or restructuring to help the company become viable in the long term.

Thirdly, entering into administration can have a significant impact on the creditors of the company. Once an administrator is appointed, a moratorium comes into effect, which prevents creditors from taking further action against the company without the administrator's consent.

Fourthly, the creditors may only receive a portion of the money owed to them. The administrator will develop a restructuring plan designed to help the company become viable in the long term. As part of this plan, some creditors may be asked to accept reduced payments or write off some of the debt owed to them. For example, a landlord may be asked to accept lower rent payments.

Finally, entering into administration can have an impact on the company's reputation. The fact that the company has entered into administration may lead to a loss of customer and investor confidence, which could make it more difficult for the company to operate in the future.

Can a Company Continue Trading While in Administration?

Yes, a company can continue trading while in administration. In fact, continuing to trade can be essential to the company's survival. However, the administrator must approve all new transactions, and any payments made to creditors during the administration period must be approved by the administrator.

What is the step-by-step process of Company Administration?

Entering into administration is a complex process that involves several steps. Here is a detailed breakdown of the process:

1. Appointment of an administrator: An insolvency practitioner is appointed to act as the administrator and take control of the company. The administrator will deal with all aspects of the Administration including dealing with all creditors, employees and informing Companies House in line with all legal requirements.
2. Investigations: The administrator investigates the company's financial situation, including its assets, liabilities, and cash flow.
3. Moratorium: A moratorium comes into effect, which prevents creditors from taking legal action such as a winding up petition against the company without the administrator's consent.
4. Meetings with creditors: The administrator arranges meetings with the company's creditors to discuss the company's financial situation and the proposed restructuring plan.
5. Developing a restructuring plan: The administrator develops a restructuring plan designed to help the company become viable in the long term. This may involve negotiating with creditors to accept reduced payments or writing off some of the debt owed to them.
6. Implementing the restructuring plan: The administrator implements the restructuring plan, which may involve selling assets, making redundancies, or restructuring the company's operations.
7. Monitoring the company's progress: The administrator monitors the company's progress and provides regular updates to creditors on its financial situation.
8. Exit from administration: Once the restructuring plan has been implemented, the administrator will prepare a report for the creditors outlining the outcome of the administration process. The company may then exit administration and continue trading, or it may be liquidated if it is not viable in the long term.

It is important to note that the specific steps involved in the process may vary depending on the circumstances of each case. Companies should seek professional advice before entering into administration to ensure that they fully understand the process and the potential consequences.

What role do creditors play in a company administration?

Creditors play an important role in the administration process, as they are owed money by the company and stand to lose if it is unable to pay its debts. Here are some key aspects of the role that creditors play in a company administration:

• Creditors Voting on the administrator's proposals: The administrator will prepare proposals for the company's restructuring plan, which must be approved by the company's creditors. Creditors are given the opportunity to vote on the proposals and can either accept or reject them.
• Negotiating with the administrator: Creditors may negotiate with the administrator to try to reach a compromise on the terms of the restructuring plan. For example, they may agree to accept a reduced payment or to write off some of the debt owed to them.
• Monitoring the administration process: Creditors have the right to monitor the administration process and can request regular updates on the company's financial situation and progress.
• Receiving payments: If the company is able to make payments to its creditors during the administration process, they will be paid according to a predetermined hierarchy. Secured creditors, such as those with a charge over the company's assets, will be paid first, followed by preferential creditors, such as employees owed wages, and then unsecured creditors.
• Making a claim: Creditors who are owed money by the company must make a claim to the administrator in order to receive payment. They may also be required to provide proof of the debt owed to them.

Overall, creditors have an important role to play in the administration process, as they can influence the outcome of the restructuring plan and the future of the company. Companies should keep their creditors informed throughout the administration process to maintain good relationships and to ensure that they are able to continue trading once the process is complete.

Advantages of Company Administration

Company administration offers several advantages over other insolvency procedures. Here are some of the key benefits:

• Protection from creditors: Once a company is in administration, it is protected from legal action by its creditors. This means that creditors cannot pursue the company for outstanding debts without the permission of the administrator or the court. This protection gives the administrator time to develop and implement a rescue plan without the threat of legal action.
• Continuity of business: Company administration is often used as a way to rescue a business rather than close it down. By developing and implementing a rescue plan, the administrator can help the company get back on its feet and continue trading. This is a significant advantage over other insolvency procedures, such as liquidation, which typically involve the closure of the business.
• Improved financial position: During the administration process, the administrator will identify the company's financial problems and develop a rescue plan to address them. This can involve reducing costs, renegotiating contracts, and restructuring debt. By implementing these changes, the company's financial position can be improved, making it more attractive to potential buyers or investors.
• Preservation of jobs: By rescuing the business, company administration can help to preserve jobs. This is particularly important in industries where there is a high level of skill or expertise required, or where there are limited job opportunities.

Disadvantages of Company Administration

While there are many advantages to company administration, there are also some potential disadvantages to consider. Here are some of the key drawbacks:

• Cost: Company administration can be an expensive process, with fees payable to the administrator and other professionals involved in the process. These costs can be significant, particularly for small businesses with limited cash flow.
• Limited control: Once a company is in administration, the administrator takes control of the company's affairs. This means that the directors and shareholders have limited control over the business, which can be frustrating for those who have invested time and money into the company.
• Length of the process: Company administration can be a lengthy process, taking several months or even years to complete. During this time, the company's future can be uncertain, which can be stressful for employees and other stakeholders.
• Limited options: Company administration is not suitable for all businesses, and there may be limited options available to rescue the company. In some cases, liquidation or other insolvency procedures may be a more appropriate option.

How much does Company Administration Cost?

The cost of company administration varies depending on the complexity of the case and the amount of work required by the administrator. Generally, the costs are higher for larger companies with more complicated financial structures. The fees associated with the process are typically paid for from the sale of the assets.

The administrator's fees are broken down into two parts: a fixed fee and a percentage of the value of the assets being sold. The fixed fee covers the initial work required to assess the company's financial situation, while the percentage fee is based on the value of the assets being sold during the administration process.

It's important to note that while company administration can be expensive, it may be a necessary step to save the company in the long run. By restructuring the business and eliminating debt, the company may be able to continue trading and ultimately save jobs and assets.

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What are the options for coming out of a company administration?

When a company enters administration, it is important to consider the options available for exiting the process. There are several possible routes a company can take, each with its own advantages and disadvantages.

1. Sale as a 'Going Concern' This option involves selling the company or its assets as a whole to a new owner, who can continue to run the business. This can be an attractive option for companies that have valuable assets and a good reputation in their industry.
2. Pre-Pack Administration A pre-pack administration involves the sale of the assets to a new owner before the administration process begins. This can help to preserve the value of the business and ensure continuity of trade. However, it can be controversial, as creditors may not receive the full amount owed to them. Further details of what a pre-pack administration entails can be viewed here.
3. Company Voluntary Arrangement (CVA) A Company Voluntary Arrangement is a legally binding agreement between the company and its creditors, which sets out a plan for the repayment of debts over a period of time. This can be a good option for companies that have a viable business model but are struggling with debt.
4. Liquidation Liquidation involves the sale of the company's assets to pay off its debts. This is typically seen as a last resort and should only be considered when there is no hope of saving the business.
5. Dissolution Dissolution involves the closure of the company without entering into liquidation. This option is only available if the company has no outstanding debts or liabilities.

It's important to consider all of the options available and seek professional advice before making a decision on how to exit company administration. The best option will depend on the company's financial situation, its assets, and its prospects for the future.

Conclusions

Company administration can be a lifeline for struggling companies. It provides breathing space and protection from creditors, allowing the company to restructure and return to profitability. However, it is a complex process with significant consequences, and companies should seek professional advice before entering into administration. The options available during and after administration should also be carefully considered to ensure the best outcome for the company and its stakeholders.

Need Help or Advice?

Here at Company Doctor, we have our own licenced insolvency practitioner and a team of insolvency experts with decades of experience. If you are the director of a business that is struggling to pay its debts and want to discuss whether an Administration is right for you, please complete the web form or call us today on 0113 237 9503 or on freephone 0800 169 1536.

References

The primary sources for this article are listed below.

https://www.gov.uk/put-your-company-into-administration

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