Is There a Right Time for a Company to Enter into Administration?

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Company administration is a process that offers viable businesses the chance to deal with financial decline without the threat of enforced winding up. An eight‐week moratorium on creditor legal action commences on entering administration, and there are various potential outcomes.

These include a restructuring of the company’s debts to make it more streamlined and better able to move forward with confidence, sale as a going concern, and a sale of underlying business assets.

What are the criteria to enter company administration?

Administration is only suitable under certain conditions, so what are the general criteria for entering the process? It’s only appropriate for larger companies that are:

• Insolvent and suffering relentless creditor pressure
• Fundamentally viable with the current financial problems deemed temporary
• Able to demonstrate reliable cash flows/profits, or ownership of valuable assets

When is the best time to enter company administration?

When the company is insolvent
There are three different types of insolvency to consider, and the company’s financial position must be confirmed by a licensed insolvency practitioner (IP):

• Cash flow insolvency – the business cannot pay its bills as they fall due
• Balance sheet insolvency – the value of its liabilities exceeds that of its assets
• Legal action insolvency – one or more creditors has taken legal action that could result in compulsory liquidation

On insolvency, directors must change their focus to prioritise creditor interests. This is a statutory requirement, and includes ceasing trade to prevent further financial losses.

When there is extreme creditor pressure
If a winding‐up petition has already been made, or is expected imminently, directors may be able to place their company into administration to protect it from liquidation. In fact, the process provides a much‐needed ‘breathing space’ when a company is suffering relentless creditor pressure. For eight weeks, the administrator can develop a plan for the business that’s appropriate for its situation.

If the company is viable
Long‐term viability is a key criterion when considering administration as a potential option. If it’s believed the company’s financial decline can be halted and reversed, the time may be right to enter administration.

A common exit from the process involves formally restructuring the company’s debts within a Company Voluntary Arrangement, or CVA. This brings into force a new debt repayment structure designed to support the company’s recovery over several years, but other potential exits from the process also exist.

Possible outcomes of company administration

Sale as a ‘going concern’ or a ‘pre‐pack’ sale
Debt restructuring isn’t the only way forward when a company is in administration. Other common outcomes include a ‘pre‐pack’ sale of the company’s underlying assets to a third party or the existing directors ‐ this is called pre‐pack administration. If appropriate, however, the company may also be placed on the open market for sale as a ‘going concern.’

Liquidation
If the business cannot be rescued or sold, the only available avenue may be liquidation. Creditors’ Voluntary Liquidation, or CVL, allows the company to be closed down according to statutory requirements, and its directors may also become eligible to claim redundancy pay.

Creditors’ Voluntary Liquidation is preferable to compulsory liquidation as it protects creditors from further financial losses, and also minimises the likelihood of misconduct or wrongful trading allegations being made against the directors.

Professional guidance on the right time to enter company administration

Company administration must be conducted by a licensed IP, and it’s crucial to obtain professional insolvency advice at the earliest stage of financial decline. This opens up more options for restructure and recovery, and provides the company with a better chance of returning to profitability in the long‐term.

Real Business Rescue are insolvency specialists and can provide the early advice you need. Please get in touch with our partner‐led team to arrange a free same‐day consultation. We work from a wide network of offices throughout the UK.