Administration places a company that is, or is likely to become, insolvent under the control of an administrator, who is a licensed insolvency practitioner. The administrator must perform their functions with the objective of:
- Rescuing the company as a going concern, or if this is not possible;
- Achieving a better result for creditors as a whole than would be likely if the company were wound up, or if this is not possible;
- Realising property in order to make a distribution to one or more secured or preferential creditors.
An Administrator may be appointed by the Court, certain creditors holding security over the assets of the company, or by the directors or company itself.
The Administrators will initially review the company’s position and collect information about the company. The Administrators will assess whether there is the support (the employees, the suppliers, the customers and a funder if required) to continue to trade the business.
The Administrators will send a report to all known creditors with 8 weeks of appointment. This report is known as the Administrators proposals and will outline steps taken by the Administrators to date and the strategy going forwards.
The Administrators are required to provide a written update on the administration to all known creditors every 6 months. This report will be sent within one month of every 6 month anniversary or earlier if an Administrator vacates office or an extension to the administration is granted.
The administration of a company automatically ends after one calendar year, unless the creditors or the court agree to an extension. In practice, many companies remain in administration for more than one year and complex administrations can last several years.
If the administration leads to the rescue of the company as a going concern, the administrator hands control of the company back to the directors once the administration ends. More commonly, the net proceeds of the company’s assets are distributed to the company’s creditors, either by the administrator or by a subsequently appointed liquidator (who may be the same person as the administrator). Therefore, depending on the circumstances, the administration can end either by the company moving into liquidation or by the company being dissolved.
If the purpose of the administration is designed to enable the company to propose and implement a company voluntary arrangement, once approved by the necessary meetings, this may also enable the administration to end.
- Administration stops any legal action or process against a company from proceeding, unless the Administrators or the English Court give permission. This means that creditors cannot take legal action against a company in administration to recover outstanding amounts.
- The company can avoid liquidation. Although there is no guarantee that entering into administration will protect your company from liquidation, if your company is viable there is a significant possibility that it can exit administration and continue trading. Administrators typically aim to help a company recover as a first priority, as this is usually the best outcome for creditors. Only if a company isn’t viable will liquidation be used to create liquidity for creditors.
- Exit administration through a Company Voluntary Arrangement. If your company is viable and simply needs help or additional time to pay its debts, it can propose a Company Voluntary Arrangement to its creditors while its already in administration. Entering into a CVA is one of the most common and effective ways for viable but distressed companies to successfully exit administration.
- A better return for creditors than liquidation. The administrator is working for the benefit of the creditors. The solutions proposed and implemented must be likely to generate a better return for creditors than liquidating the company.
- Opportunity to restructure / streamline operations. Administration gives the opportunity for company restructuring. Non profitable parts of the business can be disposed of. Parts that have a future can be streamlined. This gives the best possible chance of debt repayment and sustaining employment into the future.
- Publicity may make trading difficult. All correspondence from the company must highlight clearly that the business is in Administration. This may seriously affect the companys ability to continue to trade with key suppliers unless sufficient cash can be generated.
- Directors lose control. Once an Administrator is appointed the directors lose the power to run the company. They must only act under the authorisation of the Administrator.
- Directors conduct will be investigated. The administrator has to investigate the affairs of the company and the directors conduct, sending a report on the directors conduct to the Insolvency Service, an executive agency of the Department for Business Innovation and Skills, and taking any necessary action to recover assets of the company. If the Insolvency Service considers that the conduct of those who have been a director of the company in the 3 years prior to the liquidation merits it, then they can apply to Court for a disqualification order, which stops the individual from being a director for a period of between 2 and 15 years.
- The cost of Administration is generally high. As such the solution will normally only be suitable for larger companies.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the issues covered above.
For further information, please contact one of our Partners who will be able to assist you.