Company administration is a formal insolvency procedure that can be useful when a previously profitable company is experiencing high levels of debt, and extreme creditor pressure.
It is suitable for companies that own assets of value, or that have been able to predict their cash flow reasonably accurately, and provides a period of protection from legal action by creditors.
The main aim of company administration is to rescue the company as a going concern. With this in mind, the administrator may decide to renegotiate contracts or close down parts of the company that are financially draining, during the eight-week ‘moratorium period.’
In fact they’ll need to quickly identify and deal with loss-making areas of the business, but how does a company go into administration initially?
Who places a company into administration?
Following a period of financial decline the company itself, its directors, a large creditor such as the bank or a qualifying floating charge holder, might apply to the court for the company to go into administration.
Creditors owed more than £750 can petition the court to wind-up the company, hence the need for a period of time where focus can be placed on company rescue. It can also be particularly helpful for businesses owing arrears of tax or National Insurance, as HMRC are very proactive in recovering their debts.
The administrator’s role
The appointed administrator, who must be a licensed insolvency practitioner (IP), works on behalf of the company’s creditors with a view to safeguarding their position and maximising returns.
Creditors are contacted by the administrator during the moratorium period, and provided with information on why the company has gone into administration and the plans to deal with the situation.
What does going into administration mean for directors?
When the administrator is appointed, control of the company and its assets is taken away from directors. During this time they’ll need to provide financial and operational information about the company, and generally assist the administrator when necessary.
If the company is liquidated at the end of the administration period, an investigation will take place into the running of the company prior to insolvency. Investigations can go back for several years, for instances of wrongful trading or misconduct that could have led to the company’s failure.
Potential outcomes of administration
By the end of the period of administration, which can be up to 12 months, the administrator must have achieved one of the following outcomes:
- Rescued the company as a going concern, or
- Achieved a higher return for creditors than would have been possible if the company had been liquidated, or
- Repaid one or more secured or preferential creditors
How a company might be rescued out of administration
Company Voluntary Arrangement (CVA)
If the business is thought to be viable in the long-term, a Company Voluntary Arrangement (CVA) might be the chosen route out of administration. A CVA allows directors to retake control of their company, with a view to trading their way out of insolvency whilst repaying an affordable amount towards their debts each month. Interest and charges on the debt are frozen, and the company continues to be protected from creditor legal action as long as the CVA terms are met.
Pre pack administration
A ‘pre pack’ sale involves selling some or all of the underlying business to a new buyer, or the existing directors in some cases, if they’re able to raise the funds privately. This procedure takes place quickly to preserve the value of the business, and minimise any bad publicity. Typically, the new company starts trading straight away, without the burden of debt.
What happens if business rescue isn’t possible?
Depending on the availability of funds once the business assets have been realised, the administrator may decide to liquidate the company via a Creditors’ Voluntary Liquidation (CVL). This may provide unsecured creditors with a return, but ultimately if rescue isn’t possible, the business will close down.
If you would like more information on company administration, your accountant will be able to advise, and may recommend an insolvency practitioner in your area. Handpicked Accountants can help you find a reliable and trustworthy local accountant, based on first-hand experience of their working practices.