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A Simple Guide to Company Administration
At the Insolvency Experts, we specialise in company administration and aim to support businesses through this process, whether the business returns to profitability or is sold.
Our guide discusses what company administration is, how it works and how long the process takes. If you are a business owner, creditor, shareholder or employee of a business looking at administration, read on for more information.
Table of contents
- What is company administration?
- What actually happens when a company goes into administration?
- Company Administration Process
- What are the options for a company during and after administration?
- What happens after an insolvency process is chosen?
- How long does the administration process take?
- How much does the administration process cost?
- Advantages and disadvantages of company administration
What is company administration?
Company Administration is a process whereby an Insolvency Practitioner is appointed as Administrator to restructure a business, with the aim of either turning it into a profitable company or effecting a sale of the business to preserve value and employment.
In essence, administration seeks to either provide time for a business to restructure and become profitable, be sold and revived or be wound up and liquidated.
The defining features of administration include:
Objective: The objective of a business entering administration is to rescue it through restructuring to help it return to profitability and ultimately, to avoid insolvency.
Trading position: The company is currently experiencing cash flow problems however, the underlying business is viable and insolvency could be avoided.
Interests served: When the company enters into an administration, the Insolvency Practitioner is working for the company but must consider the creditors’ interests as well.
Administration may be appropriate if your business is financially distressed, but has underlying value. If your company has a strong order book and a strong brand that may be of interest to either the existing management team or a third party, then the possibility of administration should be explored.
What are the criteria for a company going into administration?
In order to enter administration, there are certain circumstances that a business must meet:
- The company must be insolvent, but still be able to achieve a specific statutory purpose laid down by current insolvency legislation.
- It should have significant creditor pressure so that the act of entering into administration would be a step to prevent compulsory liquidation.
Who can put a company into administration?
Depending on the situation that the business is in, and how severe the financial issues may be, there are a few people who can put a company into administration. Typically, it is the directors who initiate the administration proceedings, though it can sometimes be company shareholders that start this process.
In more extreme cases, administration proceedings can be started by a bank through the courts. This means that the company directors have no choice in the matter and an Insolvency Practitioner will be appointed for them.
What protection is offered by entering into administration?
Once your business enters into administration, it ensures that your company is protected from compulsory liquidation or other legal recourse, offers legal protection from your creditors and ensures that any ongoing legal action is stopped.
What Actually Happens When a Company Goes into Administration?
The first step taken once a company goes into administration is usually, the company searching for a buyer. Whilst this is happening, if this is a viable option, the company will inform shareholders, creditors and employees of the administration period. If a potential buyer is found, the transfer will begin and the company may change in line with the new buyers ideas for the future.
If the company is not sold, the appointed Insolvency Practitioner will choose the best insolvency process for the company and this route will then be taken. A company may be restructured and encouraged back to viability through a CVA, for example.
If the company needs to be shut down and liquidated, the closing down procedure will begin. A company may hold a sale in order to sell off existing stock and employees will begin to be made redundant. The company will be wound up and removed from the Companies Register.
Company Administration Process
The company administration process may be a tough and intimidating one for the directors of a company, but it can help provide a much-needed recovery route when conducted in the correct manner.
Having the professional assistance from a qualified insolvency practitioner will help directors to understand their responsibilities and legal obligations at what is a difficult time for not only the business, but for directors and employees, suppliers, clients and all creditors owed money.
The first step is to appoint an Administrator. Directors of the company can appoint an administrator- in this situation, a court order isn’t required and the appropriate forms are simply completed and submitted to Court. If the company has secured creditors holding the benefit of floating charges, 5 days’ notice of the administration must be served.
A precise and extensive proposal will be put together and given to all creditors, outlining the work undertaken to date and any ongoing strategies. The administrator has one primary goal; to act in the best interests of the creditors of the company. All company assets will be assessed and realised in order to release cash that can be used to repay the creditors of the company.
Details of the company’s creditors must be obtained and the administrator must notify them of their appointment. The appointment also has to be advertised in the London Gazette.
Upon appointment, the directors must provide the administrator with a Statement of the Company’s Affairs (SOA) within 11 days. This will contain details of all the company’s assets and liabilities, and must specify any assets which are subject to fixed or floating charges.
The administrator has a time limit of 8 weeks to submit proposals of intended strategy to the company’s creditors. The proposals will include full details of the administrator’s appointment, a copy of the SOA and details of how they anticipate the administration will conclude.
An initial decision procedure to approve the proposals must be held within 10 weeks of the date the company entered into administration. The creditors must be given at least 14 days’ notice, although this can be extended by the Court or the creditors themselves.
In the event that the administration process takes 6 months or more, the administrator must report to the creditors on the progress and file reports to Company House.
When does the Administration period end?
Each case is unique, but it is usually the case that administration ends when the purpose of it has been achieved. Administration automatically ends after a 12-month period, but this can be extended if more time is needed to achieve the statutory purpose and finalise asset realisation and all company administration matters.
What are the options for a company during and after Administration?
There are various options for what can happen, with the main options being:
Sale as a ‘Going Concern’
The business will either be placed for sale on the open market or sold in the form of a ‘pre-packaged’ sale, which involves the marketing of the business prior to administrators being appointed.
A pre-pack administration is the process whereby the business is prepared for sale prior to the appointment of an administrator being confirmed. The intention is to complete the sale immediately upon appointment of the administrator in order to maximise the value of goodwill and minimise the loss of customers and trade.
The pre-pack sale is a way of protecting the company brand, the business itself and all company assets before the old company is wound up during the administration process.
Company Voluntary Arrangement (CVA)
A CVA can be chosen by the administrator if it is thought that the company is viable as a long-term entity. An approved CVA would allow the business to exit administration, with the administrator becoming the supervisor. A CVA involves a monthly repayment of a single amount- this sum is then distributed to each creditor as agreed within the CVA.
Whilst the administrator works with the directors to put together a plan for the CVA, the company is protected by a moratorium. If the creditors agree to the CVA, control of the company is handed back to the directors who then continue to run their business. This process can often be completed in a matter of weeks.
If, following the Administration, there are assets that still need to be realised and/or a dividend to pay to creditors, this can be done by putting the company into Liquidation. The administrator will be appointed as Liquidator and the process can potentially take over 12 months to complete.
Company dissolution is appropriate when there is no need to put the company into Liquidation. This may happen where there is no money or other assets with which to pay a dissolution to creditors. The company will be closed and removed from the company record at Companies House.
What happens after an insolvency process is chosen?
During this period of protection, we will work with you to explore the options above to ascertain the correct time for the company to enter into administration.
In most cases, the business will be of most value to the existing management team – who hold prior knowledge of the business – and the key customer relationships. In these circumstances, administration offers you the opportunity of exploring the possibility of buying back the business and assets, free from the company’s historic debts. This enables you to retain all or part of the existing workforce and preserve the value of the company’s goodwill and work in progress.
Whichever route is taken, your Insolvency Practitioner will always be available to support you and guide your business through the entire process.
How long does the administration process take?
Entering into administration can take anything from a few hours to 2 weeks or more, depending on the circumstances. Between engaging an Insolvency Practitioner to the company entering into administration, a strategy will be devised- this typically takes one to two weeks.
The administration process can take up to 12 months, with possible extensions of up to 12 months further with the consent of the creditors or Court. However, if the administrator has completed their duties before the auto-expiry and satisfied a specific purpose of administration, the process can be completed earlier.
How much does the administration process cost?
Determining how to meet outstanding payments is a key concern for any company in financial trouble. An administrator will analyse the company and its assets, looking at potential outcomes and put forward a proposal to creditors. Sometimes, a company has enough assets to sell to be able to cover the cost of the administration.
Who gets paid first in an administration?
The Insolvency Act 1986 sets out the order of payments where a company enters administration. As a company enters a formal insolvency process, each level of creditors is paid what they are owed, with any leftover funds then moved on and allocated to the next level of creditors. This process continues until there are no longer any funds left.
Funds are established through the sale of assets, as well as possible restructuring of a company to realise as many assets as possible. Creditors are ranked in the following terms:
- The fees and costs of the Administrator
- All secured creditors that hold a fixed charge (usually property or stock debts)
- Preferential creditors
- Secured creditors holding a floating charge
- All unsecured creditors
- Shareholders of the company
The appointed Insolvency Practitioner will first take fees for the process of administration that they have undertaken- those creditors who hold title over a business asset will be next to be paid from the pot.
Preferential creditors then includes employees seeking wage arrears and holiday pay owed. Ordinarily, employees will claim via the Redundancy Payments Service who will in turn, submit a claim to the approved administrator. Secured Creditors are then entitled to receive money from the net property of the company.
Unsecured creditors, such as suppliers, contractors, customers, HMRC and some staff members are paid next, finishing with shareholders.
Advantages and disadvantages of company administration
Administration may be appropriate if your business is financially distressed, but has underlying value. If your company has a strong order book and a strong brand, then the possibility of administration should be looked into.
- Protection from your company’s creditors.
- Offers the opportunity for your business to be rescued with you leading the process.
- A moratorium prevents creditors from taking further action against the company.
- A licensed Insolvency Practitioner acts 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.
- The total funds realised in an administration are usually greater than in liquidation.
- The continuity of the business can be protected – the process can be used to discard historic debt and get rid of contracts which have become onerous.
- During the process, the administrator can propose a CVA which can allow a company to be rescued in its current form and returned to the control of its directors.
- Directors are no longer in control of company affairs; from the point the notice of appointment is filed in court, their powers cease and the company is under the control of its administrator.
- The administration becomes a matter of public knowledge. Details of the appointment are filed at Companies House and advertised in the London Gazette, which may cause uncertainty with customers.
- An administrator will be obliged to examine and report on the actions of any of the directors of the company. This can, in some cases, result in disqualification as a director or having to repay any monies to the company which have been handled improperly.
- The cost of administration can be quite excessive, although it should be noted that these costs will be subject to creditor approval and should be able to be covered by funds borne from the proceeds of asset realisations.
- You may be unable to effect large staffing changes. 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.
During the period of a business going into administration, there are many different challenges and complex situations to understand. It is a vital period for the long-term security of a company and you should search for a licensed Insolvency Practitioner that can offer you expert advice and guidance. This is a service we can offer through our professionals at The Insolvency Experts.
We handle administrations for a range of businesses and have vast experience in restructuring and returning businesses back to their directors. If you feel like entering administration may be the best course of action, it is important to seek the advice of a licensed Insolvency Practitioner.