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How Does Company Administration Work?

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Understanding what happens when a limited company enters administration

Despite having strong sales and a loyal customer base, my company is struggling financially. Even though there is money coming in, there is far more going out. We have various business loans to a number of different creditors and have started to fall behind with tax payments to HMRC.

Despite its current problems, I truly believe the company has a future and I am keen to do anything to save the business from closure. I have heard about company administration and wondered whether this would be a suitable strategy for my company to allow trading to continue.

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Answer

Making the decision to enter administration can be a tough one, especially if you’re not sure what the outcome will be. When an insolvency practitioner is appointed as the administrator of a company by its directors, the goal is usually to do whatever is necessary to preserve the business whilst making sure creditors’ positions are protected and returns maximised.

All control of the business operations are relinquished to the administrator. The company is protected from all legal action through a moratorium while the administrator executes the plan proposed at the official creditors’ meeting.

Company administration is a temporary measure rather than a long-term solution. The protection afforded by an administration gives the time needed to devise a suitable exit strategy to take the company forward. The company will then exit administration either with a return to trading as usual (albeit with a carefully considered business plan), or else into an alternative insolvency procedure such as a Company Voluntary Arrangement (CVA) or a Creditors’ Voluntary Liquidation (CVL).

The exit strategy chosen will depend wholly on the financially position of the company and what would be in the best interests of its outstanding creditors.

When the business is a viable prospect going forwards, it may be possible to implement a CVA. This is essentially a formal payment plan between a distressed company and its creditors. Typically creditors will agree to write off an amount of the company’s debt with the rest being paid monthly over a set period which is usually up to 5 years. Creditors are only likely to agree to a CVA if they have a realistic chance of recouping more of the money owed than if the company was liquidated.

In many cases when a company exits administration through a CVA, this was always the ultimate aim. However, as CVA proposals can be time-consuming to put together, placing the company into administration initially allows for this process to be completed without the threat of aggressive creditors looking to wind up the company before this can be done.

In some cases the company is beyond rescue, and should the appointed insolvency practitioner believe creditors will be better off if the company is wound up and its assets sold, then the company will enter a formal liquidation process known as a CVL.

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You can rest assured that if an insolvency practitioner recommends a voluntary administration then it is highly unlikely that the outcome would be negative in comparison to alternative routes, as we’re required by law to pursue the most suitable plan of action taking into account of the interests of all stakeholders.

Creditors who hold security in the form of a debenture may be able to place your company into administration if you fail to meet a demand for payment or if the loan agreement terms contain a provision that allows for express appointment of an administrator.

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