Advantages and Disadvantages of Administration
If a company is to enter a formal insolvency procedure it will generally result in creditors voluntary liquidation being the preferred option due to the speed, flexibility and low costs to the option. That is not to say however that the other procedures do not have their place.
The Advantages of Going Into Administration
1. Best deal for creditors
As it is linked into the very purpose of administration, the total funds realised in an Administration will generally be higher than in liquidation. This is due to either the continuity of trade or a pre-packaged sale preserving the value of the assets. Third parties are generally willing to bid higher in an administration as this is viewed as a rescue procedure rather than a terminal insolvency procedure like liquidation.
Administration is the only procedure which carries with it an automatic moratorium preventing creditors from taking any further enforcement action immediately. This generally gives the necessary breathing space to deal with the company’s affairs. Creditors may seek permission from the administrator or the court to continue with their enforcement, however this will generally not be granted if it would prevent the administrator from achieving the purpose of the administration.
3. Company voluntary arrangements
Following on from the moratorium, one of the possible exits routes from administration can be to propose a company voluntary arrangement. This can be done outside of the administration procedure, however, creditors can still take enforcement action. A small business moratorium is not attractive therefore if breathing space is required, proposing a voluntary arrangement through the administration route is generally the preferred option.
4. Shareholder approval
In order to place a company into liquidation voluntarily, 75% of shareholders must vote in favour of the resolution. If the requisite level of shareholders are unlikely to support voluntary liquidation, this leaves that the company can either enter compulsory liquidation or administration. When left with these options administration is the lower cost option and will always bring a better outcome for creditors than the alternative.
5. Pre-packaged sales
The administration procedure can be used to lend credence to a pre-packaged sale of the business of the company. The process can be used to shed historic debt which is otherwise holding back a credible business and get rid of contracts which have become onerous. The additional benefit of the pre-pack route is that it allows a seamless transition without any interruption in options. Also by using the pre-pack pool and providing viability statements you can lend addition credence to the procedure.
Disadvantages of Administration
Due to the intense and very active role an administrator plays in dealing with the matter, costs can very quickly mount up in administration matters. When with pre-pack sales, these are highly regulated and there is a much greater onus to demonstrate the sale represents the best value for creditors than in other procedures.
From the point that the notice of appointment is filed in court, you immediately lose all control of the company to the administrator, even if the intention is to propose a company voluntary arrangement in the long run. This can be particularly daunting if the proposed arrangement is rejected and it becomes necessary for the administrator to seek to sell the business. You will have a chance to bid for the business, but no input into the sale process.
3. Negative publicity
Administration is a very public procedure and it is inevitable that your clients will find out that the company has entered the procedure. It is necessary to advertise the fact as well as place notice in any branches and on the company website that the company is in administration. This will cause uncertainty with customers and you will need to rebuild relationships to demonstrate you can still provide the same service they are accustomed to or better.
As with liquidation, the administrator is obliged to examine and report on your actions as a director of the company. This can result in disqualification as a director or having to repay monies to the company which have been handled improperly. It goes without saying that if you have acted properly as a director this will not be an issue that will affect you.
Whilst you are able to shed a number of now onerous contracts through the administration process, you will not be able to effect large staffing changes, particularly by way of a pre-pack.
TUPE will likely apply to any sale through administration, preserving employees rights. The new company can even become liable for employees entitlements even if they are made redundant prior to any transfer.
You should take independent legal advice in relation to TUPE before engaging in any transfer and some additional information on the same can be found here.