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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.
We have listed out below some of the key advantages and disadvantages to administration:
Advantages of Administration:
- Administration provides a moratorium preventing creditors from taking any further action against the company. 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 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 of the possible exits routes from Administration can be to propose a CVA. Whilst this can be done outside of the Administration procedure, the company is afforded no protection, and therefore creditors can still take enforcement action. A successfully implemented CVA, allows the 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 the affairs of the company. From the point that the notice of appointment is filed in court, their powers cease, and the company becomes 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. However; it should be noted that directors will still be invited to submit an offer for the business and assets, although they will have no input into the sale process.
- The Administration becomes a matter of public knowledge because correspondence is issued to all creditors upon appointment. Furthermore, details of the appointment are filed at Companies House, and also advertised in the London Gazette. This may 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. 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 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. Of course, 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, although it should be noted that these costs will be subject to creditor approval, and 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.
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