3rd November 2021
For a company experiencing financial distress there are a number of formal insolvency options which can be employed to help rescue the business and protect creditors from further losses. One of these options is placing the company into administration.
Administration is not a permanent solution to a company’s problems; instead it is a temporary measure which is used to give the company the opportunity to turn around its fortunes, or else ensure a better return to outstanding creditors. An administrator – who must be a licensed insolvency practitioner – will be appointed; they will seize control of the company, and will begin assessing options for the future of the business, whether that is by formulating a rescue plan, or else ensuring a more positive outcome for creditors should continuing to trade not be possible.
The administration must serve a purpose, and cannot be used as a way to prop up a failing company indefinitely. The Insolvency Act 1986 specifies three ‘statutory purposes’ of administration, one of which needs to be deemed achievable if a limited company is to enter administration. They are:
A company in administration is afforded an element of legal protection through what is known as a moratorium. This prevents the company’s creditors from initiating legal action to recover money it is owed. A moratorium is often a huge benefit to an ailing company as it provides valuable time and space through which a rescue package or a more advantageous realisation of assets can be effected.
There is no defined time limit on how long a company can remain in administration, however, the administrator has an obligation to do his or her duties as quickly as is practical and sooner or later the company will need to exit administration.
There are a number of ways this exit can be executed; the most appropriate option depends on several factors including the company’s financial position and its future viability.
It may be that the moratorium provides enough time for the company to resolve its financial issues through the sale of assets, sourcing additional funding, or else reaching an informal agreement with creditors on how to pay back outstanding debts.
If this is the case then the administrator, once satisfied the company was in a stable position, would relinquish control of the company with the directors resuming their day-to-day activities. The company would continue to operate and would no longer be seen as being in insolvency proceedings.
For many companies, however, administration acts as a precursor to an alternative insolvency arrangement in order to resolve the company’s issues.
In instances where the company is struggling to stay afloat under the pressure of cumbersome historic debts, yet the business is otherwise performing well and appears to have a bright future, a Company Voluntary Arrangement (CVA) may be recommended.
As a formal rescue procedure, the aim of a CVA is to allow a struggling company to trade out of a period of financial distress by using future profits to pay existing debts.
A CVA can be seen as a formal payment plan a company enters into with its outstanding creditors. A licensed insolvency practitioner will draw up a payment schedule and present this to the company’s creditors. At least 75% (by value) of these creditors must agree to the proposal in order for the CVA to be accepted and take effect. Should the required number of creditors give their consent, the CVA becomes legally binding on all parties.
This means the insolvent company must make the agreed payments on time and in full, while creditors must respect the payment plan and are not permitted to ask the company to pay anything above and beyond this amount, nor are they able to commence legal action so long as the company adheres to the terms of the CVA.
In the vast majority of CVAs, a portion of the company’s outstanding debt will be written off, and the company may also undergo an element of internal restructuring in order to cut operating costs.
While administration is often used as a rescue procedure, it can also be employed as a pre-cursor to placing the company into voluntary liquidation through a process known as Creditors’ Voluntary Liquidation (CVL).
A company may be liquidated if it is decided during the administration that the company is no longer viable and has very little chance of becoming a profitable entity in the future. In other instances, the eventual liquidation may have been decided upon as the preferred course of action from the start, however, creditor returns would be enhanced by placing the company into administration first.
Liquidation following administration works in much the same way as other CVLs; however, it is likely that in these cases, the business’s assets will have already been sold prior to the liquidation as part of the administration process. If this is the case, the entry into CVL makes it possible for the realisation of these funds to be distributed to creditors.
If your company is experiencing financial difficulties and you are considering the possibility of administration, ensure you take advice from a licensed insolvency practitioner at the earliest opportunity. At Real Business Rescue we have a nationwide network of offices and over 70 licensed insolvency practitioners. Contact our expert team today on 0800 644 6080 for immediate help and advice or to arrange a completely free initial consultation.