What does going into administration mean?
In this blog, we’re going to set out exactly what going into administration means; what it can and can’t do for a business and what the various stages of the process are.
What is administration?
Firstly – under The Insolvency Act 1986 – administration is defined as a legal process with the aim of achieving a statutory objective including rescuing a potentially viable business that’s insolvent due to cashflow problems.
Who runs the administration?
A qualified and licensed insolvency practitioner will be appointed either by the company directors, a creditor or the court in order to legally fulfil the administration process. You can’t do it yourself or get your friend to do it.
What does an administrator do?
The first thing administration does is put the company into a statutory moratorium which pauses all creditor enforcement actions and debt interest while the administrator’s plans are put in place to restructure the business or ready it for sale.
A company can continue to trade if it’s in administration but it’s not business as usual.
Everyday control and the daily management of a company passes from the directors to the appointed administrator. The directors & managers still have to come into work but the administrator has to OK any expenditure over and above the essential to keep the business running.
The administrator has up to eight weeks to formulate a series of administration proposals on how they will proceed.
The creditors of the business then have to vote to approve these proposals, which requires a majority to be accepted.
If there’s no reasonable chance that the company could be saved then it’s the administrator’s job then to get the best return for creditors if the business is going to be wound-up.
What if a business is going to be sold?
Whilst it’s in administration a company can continue to trade while the administrator can look to sell the business either wholly or individual assets including:
- Equipment and stock
- Patents and trademarks
- Intellectual property, websites and other content
- Customer files and databases
- Company name and associated goodwill
If a whole or part sale of assets can’t be achieved then those assets could be liquidated and any proceeds from this paid to creditors.
Who gets paid first?
If the administration involves the sale of all or part of the company’s business then any proceeds are distributed in a strict order of priority. These are:
- Secured creditors
- Preferential creditors including employees
- Unsecured creditors including suppliers, customers, trade creditors and HMRC*
- Shareholders and members
*HMRC are due to move into the preferential creditors category in April 2020.
How much is estimated to be recovered and distributed along with a likely timescale will be included as part of the administrators proposals.
What happens next?
After 12 months have passed then the administration will automatically come to an end unless the administrator asks the court or creditors for an extension.
If the administration has concluded then there will most likely have been one of the following outcomes:
- Been rescued/restructured successfully and the company passed back to the control of the directors
- Gone into liquidation
- Been dissolved if the administrator was only able to generate and distribute enough funds to pay secured and/or preferential creditors.
- Been sold as part of a pre-pack administration
Administration is a legitimate path to turn round an otherwise viable company, protect jobs and allow a business to flourish after a period of difficulty.
If you feel your business has a chance to be better than its current results show then get in touch with us.
One of our team of experienced, expert advisors will arrange a convenient, free initial consultation where you can outline your company’s current position, let us know any other information we might need and we can begin to work on a plan for you that’s both efficient, effective and realistic.