Frequently Asked Questions about Company Administrations
The main objective of company administration is business rescue. This differs from liquidation, where the sole purpose is to close down a company because there is no possibility of recovery.
A company typically enters administration when it is under persistent pressure from creditors. The process offers an eight-week moratorium, which protects the business from being forcibly wound up by a creditor.
Liquidation is the end for a company, however. It involves selling the business’ assets, distributing the proceeds to creditors, and ultimately removing the company name from the register at Companies House.
A further notable difference between administration and liquidation is that the administrator works on behalf of the company as well as its creditors. In the case of liquidation, the office-holder operates firmly in the best interests of creditors to provide as high a return as possible.
How long does the administration process take?
Company administration typically lasts for up to one year, but for larger businesses with complex affairs, the timescale can be much longer. The court can extend the time period for administration where necessary, with some admins lasting several years.
An eight-week moratorium begins when a company enters administration, enabling the office-holder to plan for the business’ future and prepare the necessary information for creditors.
Various deadlines must be met during the process, including an initial creditors’ meeting, which should be held within 10 weeks of entering administration. Creditors should also be provided two weeks’ notice of this meeting, which now tends to take place virtually.
How long a company administration takes also depends on the planned outcome. That might be a business sale via pre-pack administration, for example, which is a fast process that can considerably reduce the overall timescale.
What happens to staff when a company goes into administration?
The first 14 days after entering administration are crucial for the company’s employees. Staff who retain their jobs during this time stand a better chance of recovering any payroll arrears that are due, as they become ‘preferential creditors.’
This means they lie higher in the hierarchy for payment in insolvency. Employees kept on after the initial two weeks of admin can also be transferred under TUPE if the business is sold.
The Transfer of Undertakings (Protection of Employment) regulations protect their employment rights and contractual terms and conditions when transferring to a new employer, including working hours, rates of pay, and holiday allowances.
Employees who are made redundant during the first 14 days of administration become unsecured creditors, and are less likely to receive the monies owed to them by the company. If eligible, however, they can claim redundancy pay and other statutory entitlements.
Differences between admin and a CVA?
Company administration and Company Voluntary Arrangement (CVA) are both business rescue processes. 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 ironically, can sometimes lead to a Company Voluntary Arrangement. 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.
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.
Is admin only for big companies?
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, admin 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 admin 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 IP.