When a company enters administration the control of the company is passed to an appointed administrator. Their primary goal is to then leverage the company’s assets to repay creditors as quickly and as fully as possible. These are advantages and disadvantages to be considered for administration:
The advantages of going into Administration:
- Administration provides a moratorium preventing creditors from taking any further action immediately. This provides necessary breathing space to deal with the company’s affairs. Whilst creditors can seek permission from the administrator or the court to continue with their enforcement, this is usually declined if it would prevent the administrator from achieving the purpose of the Administration.
- Administration puts the company in the hands of a licensed IP acting as the administrator. This ensures that all actions taken during Administration are carried out with the interest of the company and its creditors in mind. As it is linked into the very purpose of Administration, the total funds realised in an Administration will usually be greater than in Liquidation. This is due to either the continuity of trade or a pre-packaged sale preserving the value of the assets.
- The continuity of the business can be protected using the Administration procedure. The process can be used to discard historic debt which is otherwise holding back a credible business and get rid of contracts which have become onerous. The additional advantage 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 additional credence to the procedure.
- During the procedure the administrator can propose a company voluntary arrangement (CVA). Following on from the moratorium, one of the possible exits routes from Administration can be to propose a CVA. This can be done outside of the Administration procedure, although 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.
The disadvantages of going into Administration:
- During Administration, directors are no longer in control of the affairs of the company. From the point that the notice of appointment is filed in court, they immediately lose all control of the company to the administrator, even if the intention is to propose a CVA. This can be daunting if the proposed arrangement is rejected and it becomes necessary for the administrator to seek to sell the business. Directors will still have a chance to bid for the business, but no input into the sale process.
- The Administration becomes a matter of public knowledge because correspondence with all creditors and clients must include a note that specifies the company is “in Administration” next to the company name. This could cause uncertainty with customers and directors will need to rebuild relationships to demonstrate they can still provide the same service they are accustomed to, or better.
- As with liquidation, the administrator is obliged to examine and report on the actions of the directors 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.
- The cost of Administration can be quite excessive. Unless you have decent cashflow and are being threatened by aggressive creditor action you might wish to avoid it.
- Whilst you are may be able to shed a number of 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. This can create a problem if the budget of the new company cannot afford to cover the payroll of the original company.