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What Is Company Administration?

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Understanding company administration

Company administration is a formal insolvency process which can be used to help rescue the viable elements of a struggling business. This can be achieved through financial and/or operational restructuring or via a sale to a connected or unconnected party. The administration process can also be utlised to help increase creditor returns in terminal insolvency situations. 

What does it mean when a company is going into administration?

Company administration is a formal insolvency process designed to rescue viable elements of a struggling business, or else increase returns for outstanding creditors prior to it being dissolved. When a company is going into administration, a licensed insolvency practitioner is appointed as part of the process, and they will assume control of the company for the duration of time it remains in administration.

Once a company enters into administration, a moratorium will be placed around the company. This acts as a legal ringfence which protects the company from ongoing or threatened legal action against the business. This gives the company and the appointed appointed insolvency practitioner time and space for a route forward to be plotted.

If your company is under pressure from creditors (such as a landlord, HMRC, your bank, or trade suppliers) and you fear that you could be taken to court and put out of business, then administration could be used to protect your company from closure in the right circumstances.

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What is the purpose of company administration?

Company administration is not suitable for all instances of company distress. In order for administration to be entered into, the appointed insolvency practitioner must clearly demonstrate that an administration process will be able to satisfy one of three statutory purposes:

1. To rescue the company as a going concern

2. Achieve a better return for creditors than would otherwise be possible if the company entered into liquidation without first being in administration

3. Realise property to make a distribution to one or more secured or preferential creditors 

If none of these objectives can realistically be achieved, then the company will not be able to enter into an administration process. Once appointed, the insolvency practitioner - acting as the company's administrator - must submit a report to all creditors detailing which one of these statutory purposes the administration is aiming to achieve. 

What is the process of company administration?

As no two administrations are the same, there is not a set process that follows. Once the company is in administration, control of the company will be passed to the appointed administrators who will work towards satisfying the intended purpose.

In some administrations, there will be a sale negotiated to either a connected or unconnected buyer; in other cases a process will follow to restructure and streamline the company's operations and divest the business of any unprofitable areas. 

It may also be the case that the administration process will end in the eventual liquidation of the business if a turnaround strategy cannot be successfully implemented.

How long does the company administration process last?

The administration process doesn’t typically last beyond 12 months, although in cases where more time is required, this will often be permitted so long as the administrator can show that this is required in order to obtain the best result for the company and its creditors.

There is no upper- or lower-time limit that dictates how long a company can remain in administration. When it comes to company insolvency, each case is different and depending on the scale of the problems, as well the ambitions of the directors, and future viability of the company, differing levels of professional input will be required.

How does a company exit administration?

Administration is a temporary position for a company to be in. Sooner or late it will have to exit administration and the protections this process offers. An exit from administration can take many forms including; a sale to a connected or unconnected party, entry into an alternative recovery process such as a Company Voluntary Arrangement (CVA), or even liquidation if it is established that the company cannot be saved.

What is the difference between administration and a CVA?

Company administration and Company Voluntary Arrangements (CVAs) are both business rescue processes. The premise of a CVA is to enable a company to trade its way out of financial difficulty, whilst repaying creditors at an affordable rate.

Unlike CVA, however, entering administration means that directors lose control of their business. The appointed administrator takes over and determines the company’s future, which could possibly lead to a Company Voluntary Arrangement. 

Although trading administrations are sometimes allowed, entering administration typically means that trade must cease whilst a plan is made and implemented. A further difference, and an important consideration for directors, is that directors of a company in administration may be subject to investigation, whereas no investigation takes place when a company enters a CVA.

When should a company enter administration?

Administration is not an appropriate solution for every instance of insolvency. Before being placed into an administration process an insolvency practitioner must be able to demonstrate that the following apply:

  1. The business should be insolvent or contingently insolvent, yet should have a significant amount of assets and/or value. Cash flow and profitability should be reasonably predictable.
  2. Creditor pressure is present and there is a concern that the company could be taken to Court in the near future. Often creditors have already made threats to force the business into compulsory liquidation by way of a winding up petition in order to recover what is owed to them.
  3. Any proposed administration process must be able to satisfy one of the three statutory purposes as laid out in the Insolvency Act 1986.

Administration is most appropriate for companies with assets of value and/or fairly predictable cash flows or profit levels. It is typically used for larger companies that need a little breathing space from creditor pressure.

In recent times, administration has been used to protect high profile retail businesses from liquidation, offering the administrator vital time to negotiate new rental agreements or determine the best way forward.

This is not to say that administration is only for big companies, however. It can now be a cost-effective way for some smaller companies to deal with unmanageable debt, if they meet the basic criteria and the process is deemed appropriate by a licensed insolvency practitioner.

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What is a moratorium in company administration?

Once a company enters administration it is given the benefits of a moratorium, a powerful legal ringfence which prevents legal action being taken against the company. This means creditors of a company in administration cannot initiate further recovery action including petitioning the court for the company to be wound up.

An interim moratorium is granted once the company files a notice of intention to appoint an administrator. The appointment of an administrator must be made within 10 business days of filing the notice of intention in court and, immediately on appointment, a second moratorium is given. This moratorium lasts until the company exits administration.

The important thing to note with a moratorium is that it is a temporary measure. It is not a get out of jail free card; instead it gives the company a chance to sort out its issues, safe from the threat of legal action. Creditors still retain their rights and the claim over the money they are owed; however, they are temporarily stayed while the moratorium remains in place.

What happens to employees and staff during company administration?

Once a company enters an administration process, control of running the business will automatically shift from the current owners to the appointed administrator. If the administrator manages the business for more than 14 days without dismissing employees, they must ‘adopt’ any existing employee contracts. This means that any unpaid staff wages or untaken holiday entitlement from this point onwards would be seen as ‘preferential creditors’ and must be paid through the proceeds of the company’s assets ahead of a number of other creditors.

The Transfer of Undertakings (Protection of Employment) Regulations 2006, more commonly known as TUPE, is a powerful ruling which aims to protect employee rights when the company they work for is sold or ownership otherwise changes. In line with TUPE regulations, in the event of a company being sold out of administration the new owners are required to transfer the contracts of all existing staff over to the new business, and they also become responsible for any outstanding payments owed to employees.

Under TUPE regulations, the new owners cannot pick and choose the employees they want to transfer over; instead they are acquiring the entire workforce along with the other assets of the business. Existing terms and conditions of employee contracts cannot be changed and continuation of service is also protected.

Remember that when it comes to insolvency proceedings, TUPE only applies if the company you work for is sold out of administration; if the company ceases trading and enters liquidation then TUPE regulations are not activated.

What are the advantages and disadvantages of company administration?

Advantages of company administration:

  • Any legal actions being taken by creditors are immediately stayed, which means your company would be protected from the possibility of compulsory liquidation or any other litigation during the administration. This is done by way of a moratorium.
  • Puts the company in the hands of a licensed insolvency practitioner who will assume control for running the business while it is administration. This ensures that all actions taken during administration are carried out with the interest of the company's creditors in mind.
  • Keeps the financial position of the creditors from worsening.
  • The administrator is given time to communicate a clear picture of the company's finances to its creditors and outline the ways in which the administrator intends to conduct the administration and how the administrator intends to realise funds for creditors.
  • If a pre-pack sale is arranged then the continuity of the business can be protected.

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Disadvantages of company administration:

    • During administration the company's directors relinquish control of the affairs of the company.
    • The administration becomes a matter of public knowledge as correspondence with all creditors and clients must include a note that specifies the company is "in administration" next to the company name. For example, your company name printed on your invoices would have to appear as “Example Company Ltd. (In Administration).” Furthermore, the administrator is required to notify all creditors and employees that the business is in administration.
    • The bank or one of your creditors may have the right to appoint their own administrator.
    • Given the fact that the cost of administration can be significant we usually only recommend it for companies that have good cash flow but are being threatened by aggressive creditor action.
    • If a Pre-Pack administration is carried out then TUPE regulations will apply, which means you'll have to transfer the employees and their contracts over to the “newco.” This can create a problem if the budget of the purchasing company cannot afford to cover the payroll of the old company
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Who can appoint an Administrator?

The directors of a company can elect to voluntarily enter into an administration process with the assistance of a licensed insolvency practitioner. Alternatively, the company can be put into administration by the holder of a floating charge under a debenture granted after 15th September 2003.

If the charge is held on a debenture that was granted before that date then they would be able to put your company into administrative receivership. Keep in mind that even if the directors of your company are the ones who initiate the administration it is possible for the bank, or another holder of a floating charge, to appoint their own administrator at their discretion.

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If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
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Our licensed insolvency practitioners are experienced in all matters related to company administration and the process that follows. For free advice email us or call us today 0800 644 6080 and we’ll help you formulate a plan to get back on track. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 100 UK offices or a place of your convenience.

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