Updated: 15th May 2020
With the business world in turmoil due to the coronavirus pandemic, the inability to operate unrestricted in lockdown and the need to apply social distancing measures, has caused a widespread cash flow crisis.
Businesses that only a few weeks ago were trading profitably and held healthy cash reserves, are having to take drastic action simply to survive these unique and testing circumstances.
Company administration is just one formal insolvency measure that can protect your ailing business at this time, so if you need to go into administration, what should you be aware of?
What is company administration?
Company administration is an official insolvency procedure that offers protection from creditor legal action, and allows for a rescue plan to be developed and implemented by the appointed insolvency practitioner (IP).
A crucial aspect of administration is the eight-week moratorium period that commences on entering, which prevents any current or planned legal action by creditors.
The purpose of entering administration due to coronavirus
When you enter company administration you benefit from an eight-week moratorium with no creditor pressure. Control of the company is handed over to the appointed IP, who must achieve one of three statutory purposes:
- Rescue the business as a going concern
- Achieve a better result for the company’s creditors as a whole, than would be possible if the business had been liquidated without entering administration
- Realise property and/or business assets to distribute to one or more secured or preferential creditors
Business rescue may be possible by selling assets or otherwise restructuring the company’s affairs, which in some cases could include making staff redundancies. Formal renegotiation of debt within a legally binding agreement called a Company Voluntary Arrangement (CVA) might also be an appropriate exit route out of administration for some businesses.
What happens when your business enters administration?
Administration provides a transition period for your business so that plans can be put in place to help it survive. The eight-week moratorium allows a vital ‘breathing space’ so you can take stock and act without the pressure of having to deal with creditors.
- When you place your business into administration, you can choose your own licensed insolvency practitioner to carry out the procedure
- The IP will carefully assess your situation and decide on the best way forward, formulating proposals to put to creditors
- A detailed Statement of Affairs is prepared, detailing all company assets and liabilities
- The administrator’s proposals and the Statement of Affairs are sent out to creditors, who vote on whether or not to accept them
What are the likely exit routes from administration during coronavirus?
Company Voluntary Arrangement (CVA)
If your business is fundamentally viable – perhaps like many others, it’s only experiencing financial problems because of COVID-19 – you may be eligible for a Company Voluntary Arrangement.
In brief, this is a newly negotiated repayment plan that incorporates multiple debts, but only requires a single affordable repayment to be made each month. This payment is then distributed in the agreed proportions to creditors included in the legally binding arrangement.
Company restructuring
You may find that one or more restructuring measures enable your company to trade on exit from administration. These could include selling non-essential assets to generate working capital, renegotiating contracts informally, or more severe actions such as making staff redundant.
Creditors’ Voluntary Liquidation (CVL)
If the situation is inescapable and the only option is to close your business down, Creditors’ Voluntary Liquidation could enable you to claim director redundancy if you’re eligible. This statutory procedure also offers some protection from allegations of misconduct/wrongful trading as a director.
Benefits of going into administration during coronavirus
- You obtain a reprieve from creditor pressure whilst plans are put in place
- Inefficient aspects of the business can be removed so your company becomes more streamlined and better able to deal with the pressures of trading in the future
- You may be able to avoid liquidation, although this depends on individual circumstances
- Your company is placed in the hands of an insolvency professional with extensive experience of rescuing businesses
We can provide professional help if your business needs to go into administration due to coronavirus. Real Business Rescue is the UK’s leading business rescue and recovery firm, and offers free same-day consultations – please contact one of the team for more information.
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