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Written by Keith Tully
An administration procedure can be an ideal alternative to bankruptcy for an insolvent company, as it does not necessarily have to be the end of the business. In fact, one of the main advantages of administration is the freedom to continue trading as normal while the company is restructuring under the management of the administrator.
Continue reading to learn more about the administration process and its benefits:
What is Administration?
Company administration is a formal insolvency procedure in which an administrator is appointed to act on in the interest of creditors as the interim chief executive of an indebted business. Administration allows the company to continue its operations and avoid liquidation while alternative options are sought. The administrator may attempt to recapitalise by selling all or some of the business’ assets, they may sell the entire company to a third-party to recuperate debts, or they may conduct a “phoenixed” pre-pack administration in which the company’s assets are sold to the existing directors and a new corporation is founded “out of the ashes” of the old. Regardless of the actions taken by the appointed administrator, by law they must be in the best interests of the owed creditors, otherwise accusations of wrongful trading could arise.
When Should Administration Be Considered?
If a company already has a reasonable amount of assets, has somewhat consistent cashflow, and can accurately predict its own profitability, then it may be good a candidate for administration. If you’re concerned that a hostile creditor may try to petition your company to court, an administration could provide the protection needed to recover without being served payment demands or facing compulsory liquidation/receivership. Any time a business appears to be failing but has enough potential to survive administration should be considered.
Who Has The Ability To Appoint an Administrator?
According to the provisions of the Insolvency Act of 1986, an administrator must be a licensed insolvency practitioner (IP).The directors/owners of a company can appoint an administrator independently. This process usually does not require a Court Order; a simple fax will suffice. However, if the company is already undergoing liquidation or a CVA then a court order will be needed. The Court can also appoint an administrator to wind up a company during an insolvency proceeding. In the case of seeking an administration order during a liquidation or CVA, a Court Order will not be granted unless all creditors that hold qualifying floating charges are given a 5-day notice. Even if the request to appoint an administrator under these circumstances is honoured, the floating charge holders would still have the right to intervene and appoint their own chosen administrator if they’d like. If a bank holds a qualifying charge under a new debenture (after September 2003) then they would also be able to appoint an administrator over your company. If they hold a debenture charge that is older than that then they would have to resort to appointing an administrative receiver instead.
What Are The Advantages of Administration?
All legal actions are stayed and all unsecured debt is abolished during the process, so creditors won’t be able to wind up the company while it is under administration. The insolvent company is protected from creditor actions for a period of up to 8 weeks, which provides enough time to negotiate a possible arrangement (CVA). If a pre-pack administration is arranged then the existing directors may be able to form a new corporation and essentially transfer the assets of the old company to the new “phoenix” company. Insolvency practitioners can appoint qualified directors and managers to act on their behalf, thereby putting the company in the hands of capable professionals.
What Are the Disadvantages of Administration?
During administration directors lose all control of the company. Third-parties may even offer to buy the directors’ positions in the company, thereby leaving them without a job. Likewise, some of the company’s most important assets could be bought by another business -- maybe even a competitor. If a CVA is not proposed and accepted then the company could lose all of its tax losses. All details of the insolvency procedure become a part of the public record, as it must be listed in the London Gazette and at least one other relevant local paper; this could damage a company’s reputation.
If one of the creditors is a financial institution, they may decide to step in and appoint their own administrator, who would not be as concerned with preserving the business. If a phoenix company is formed in a pre-pack procedure it must abide by TUPE (Transfer of Undertakings, Protection of Employment) regulations, which means it has to keep the old company’s employees and it must adopt all of their contracts. This could present a significant financial problem for the new company, especially if the startup budget is limited. The cost of an administration is relatively high, which is why we usually recommend it for medium-to-large companies that are being threatened by creditors but still have the potential for recovery.
What is The Objective Of Company Administration?
The goal of every company administration is to repay as many creditors and eliminate as much company debt as possible. If the business absolutely has to be sold for this to happen then the outcome may be negative. However, administration offers hope for insolvent companies because there is at least the possibility of recovering. Although preserving the business and its assets is a secondary concern for any administrator, a bank or Court-appointed administrator is more likely to be less concerned with company preservation than an insolvency practitioner appointed by company directors.
Learn more about the administration process and procedure.
Undergoing an insolvency procedure without the right guidance and assistance is a recipe for a stress-filled disaster. Our licensed insolvency practitioners are experienced in all matters related to company administration. Contact us today on 0800 2316040 for a free consultation and we’ll help you formulate a plan to get back on track.Linked In Google+ Twitter