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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.

"A company can trade in administration, but the directors are not in control during this period"

What are the advantages of trading whilst in administration?

  • Damage to the company’s reputation is lessened due to the continued trade
  • The company is protected from legal action
  • Directors regain control of the business once administration ends
  • Inventory values are protected whilst trading
  • Additional charges and interest on the debts are frozen
  • Tax debts may be included in the CVA

Are there any disadvantages?

  • Directors lose control of the company when they enter administration
  • The company’s financial position is made public
  • Directors may not be able to appoint the administrator – in some cases, the bank will appoint their own
  • Although the impact of bad publicity is reduced due to the company’s continued trade, there will be some loss of reputation

Why choose a trading administration?

Administration is designed to help businesses that are fundamentally viable to recover. It can save jobs, provide creditors with greater returns than would otherwise be possible, and offers a vital ‘breathing space’ in which to formulate a plan for the future.

Although as a director you don’t have control over what happens to the company in administration, carrying on trading is a sign that it has the potential to recover its footing in the market and return to profitability.

If your company is in financial distress and you’re worried about the future, our expert team at RBR Advisory can help. We specialise in helping businesses recover from insolvency, and will advise on the best way forward. We operate a network of offices around the UK, and can arrange a free same-day consultation to quickly establish your needs.

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