Keeping a going concern going - what is Trading in Administration?

The Arcadia group went into administration this week, meaning that we might ultimately see pivotal changes affecting such high street stalwarts such as Topshop, Topman and Dorothy Perkins.


Trading in Administration – keeping a going concern going

Topshop

 

Some may remain, some may close and others might just exist in cyberspace under the same or new owners. The situation is that fluid. 

 

There’s a strong chance that they’ll all remain open and trading throughout the whole process too. 

 

This is why we’ll answer a question we get asked a lot in this situation – how can a company keep trading if it’s in administration?

 

Keeping the lights on

 

If an administrator takes control of a company then their responsibility is to make sure that creditors are treated fairly and that their interests are considered first. 

 

So the administrator has to consider what course of action will give the best chance of securing the creditors the best possible return. 

 

It can be a takeover by another group or existing management through a buyout. It could also be through the sale of part of the business, or if there’s no realistic chance of recovery then assets could be sold and the business placed in liquidation.

 

But if the company is otherwise viable, trading its way out of trouble might be the best chance to secure higher returns for creditors and ultimate security for staff and other invested parties. 

 

The first thing to make clear is that a company can legally trade when it’s in administration.

 

If the business is to be sold as a going concern then trading in administration not only helps preserve its value but maintains this continuity of service.

 

Light touch, not a soft touch

 

In some cases it’s necessary and appropriate for an administrator to take the reins themselves and take control of a business to steer it away from imminent disaster. 

 

But for others, they might decide that it’s better to delegate the day-to-day running of the business to the existing management. This is generally known as a “light touch” administration.

 

The administrator still retains ultimate responsibility and authority but there’s other good reasons to do this. 

 

It’s the most cost-effective solution, it provides a degree of continuity and certainty to employees at a stressful time and it frees up the administrator to get on with their main task – completing a strategy that will enable the company to survive in the longer term. 

 

Occasionally an administrator might bring in their own management team to run the company on their behalf while focusing on rescuing the business but again, they’d ultimately retain legal responsibility for any decisions taken while the company is under their purview. 

 

One of the benefits of administration is that it’s an adaptable system. It’s not a one-size-fits-all solution and never has been. 

 

The UK’s insolvency regime is respected across the world because it retains a good balance between the interests of debtors and creditors while still being agile and entrepreneurial enough to adapt to the circumstances it has to.

 

“Light touch” administration is just one variant of the range of approaches administrators can take to get a business ready to leave administration in the best possible shape.  

 

Exit procedure

 

Out of all the methods of exiting administration, the CVA is the most common. 

 

Company Voluntary Arrangements (CVA) sees creditors agree to waive a proportion of outstanding debt in return for reduced but regular repayments over a longer period, usually five years. 

 

Landlord creditors might also have to agree to changes in rent calculations including payment holidays and/or a switch from a rateable valuation of the property to a turnover based model. 

 

This is where the company pays rent according to how much business is being generated at the location – another reason why trading in administration would be preferable to a landlord. 

 

The legal protections provided by a CVA also removes the threat of any legal action as long as the obligations of the agreement are met and maintained.

 

Once all the repayments have been made and HMRC certifies this is the case then the business emerges from the CVA and can literally get back to work.

 

Administrations are usually seen as dull or dry business stories but in reality their success or failure affects thousands of people and their livelihoods. 

 

Not just the staff employed in stores and their families, but pension funds that have invested in these companies, banks and other lenders that have lent them money and want to recoup their investments and small investors that have invested their faith and money into a venture. 

 

If you’re worried about how your business will make it through an uncertain Christmas and winter trading period then get in touch with us today

 

One of our experienced team of advisors will contact you to arrange a free, virtual consultation where we can get an understanding of your position and outline your choices. 

 

While they vary depending on the precise situation, one thing we can say with certainty is the earlier you tackle the issue and get in touch, the more leeway you’ll have in any decisions you’ve got to make. 

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