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What are the Advantages and Disadvantages of Administration?
Administration may be appropriate if your business is financially distressed, but has a business with an 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.
Throughout the rest of this short guide, we have listed some of the key advantages and disadvantages to Administration.
Advantages of Administration:
- Administration provides a moratorium preventing creditors from taking further action against the company. Whilst creditors can seek permission from the Administrator or the court to continue with enforcement, this is usually declined if it prevents 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 are usually 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 Administration. 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 trade. Also, the ability to utilise the pre-pack pool and provide viability statements can lend additional credence to the procedure.
- During the process, the Administrator can propose a Company Voluntary Arrangement (CVA). Following on from the moratorium, one possible exit routes from Administration is to propose a CVA. Whilst this can be done outside of the Administration procedure, the company is afforded no protection, therefore creditors can still take enforcement action. A CVA can allow a company to be rescued in its current form and returned to the control of its directors.
Disadvantages of Administration:
- During Administration, directors are no longer in control of company affairs. From the point the notice of appointment is filed in court, their powers cease; the company is under the control of its Administrator, even if the intention is to propose a CVA. This may be a concern if the proposed arrangement is rejected and it becomes necessary for the Administrator to market and sell the business. It should be noted that directors will still be invited to submit an offer for the business and assets, although they have no input into the sale process.
- The Administration becomes a matter of public knowledge, as correspondence is issued to all creditors upon appointment. Furthermore, details of the appointment are filed at Companies House and advertised in the London Gazette. This may cause uncertainty with customers, so directors will need to rebuild relationships to demonstrate they can still provide the same service they are accustomed to, or better. Any new company set up by the directors to acquire the business and assets from the Administrator may also have difficulty obtaining credit from customers at the outset, in light of the previous failure.
- As with Liquidation, the 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. Of course, if you have acted properly as a director, then this will not be an issue that will affect you.
- 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.
- Whilst you are may be able to shed a number of onerous contracts through the Administration process, you may be unable 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. It is therefore always recommended that any prospective purchaser seeks independent legal advice from an employment lawyer, when considering any purchase of a business from an Administrator.
We hope that this summary of some of the key advantages of Administration and the corresponding disadvantages of Administration have given you a little more insight into the Administration process and how it may be of service to your company in its current financial situation. For more information on anything related to the range of Administration processes we advise on, get in touch with our expert team today by calling 0300 303 8284 or filling out the form over on our Contact page.
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