Updated: 17th February 2020
When a company enters administration, control passes to the administrator who assesses the potential for business rescue. An eight-week moratorium period allows them to formulate a plan without the threat of legal action, and find the best way forward for the company.
There are several potential routes out of administration, including liquidation, sale of the business, and the company trading its way out of difficulty. Even in administration a company can trade and depending on the circumstances, the office-holder may decide that this offers creditors the best chance of higher returns.
Creditors’ interests are always placed first by the office-holder, and trading administrations are often used when a company is expected to recover. So what happens in practice when a company in administration continues to trade?
Trading whilst in administration
A company can trade in administration, but the directors are not in control during this period. It’s only when administration ends that directors take over the running of the company again with a view to trading their way out of financial distress.
In other instances the longer-term plan might be to sell the business as a going concern, and trading whilst in administration helps to preserve its value. Companies can be in administration for up to a year, but this timescale can be extended with agreement from the court if necessary.
Directors need to comply with the administrator’s plans for the business until such time as control is handed back. These plans will involve reorganising or restructuring the company to best achieve the administrator’s aims.
Exiting a trading administration
A common method of restructuring a company’s debt whilst carrying on trade in administration is to negotiate a Company Voluntary Arrangement (CVA). This involves formally negotiating with creditors to repay debts at an affordable rate over the longer-term.
Creditors benefit by receiving a proportion of their outstanding monies, and because the arrangement is legally binding, the company can trade without the threat of legal action as long as it meets its obligations under the CVA.