Updated: 5th February 2020
Administration is a formal insolvency procedure designed to help companies overcome severe financial difficulties. Once a company has entered administration, businesses benefit from a moratorium period which is essentially a legal ring fence. This allows time for restructuring plans to be formulated and implemented without the threat of legal action from creditors.
Administration is a temporary measure for a struggling company to get itself back on its feet. Various exit routes from administration are available which may involve a return to trade, entry into an alternative restructuring procedure such as a CVA, or even the closure of the company should its financial problems be insurmountable. The process itself can be instigated by the company, its directors, or creditors. In essence, it offers a respite in which to reorganise effectively for the future.
As the name suggests, during a trading administration, the company continues to operate during the period it is in administration. Trading administrations are often utilised in the administrations of retail chains or instances where recovery of the business is likely. If the eventual plan is for the company to be sold as a going concern, then a trading administration is more likely to be utilised as companies typically retain more value if they continue to trade.
The appointed administrator will determine whether the company should continue to trade during the administration after considering its position and likelihood of recovery. This is not the same as a company director choosing to trade whilst knowingly insolvent which is a breach of your duties as a limited company director.
In general, to be eligible for administration:
This emphasis on asset value and reliability of cash flows indicates whether you might be eligible for trading administration. Without predictable cash in-flows the company will be at risk of failing the agreement, and being forced into immediate liquidation.
So what is the timescale for this process, and what does it involve?
When a company goes into administration, a licensed insolvency practitioner (IP) takes control of the business on a temporary basis. With regard to trading administration, their objective is to reorganise the company’s affairs while operations continue in order to offer it the best chance of trading out of financial difficulty.
Although the IP will generally seek assistance from directors during this process, they have the authority to negotiate or end existing contracts, and can make staff redundant if it’s considered necessary to save the company.
After eight weeks, the administrator must produce a formal statement detailing what will happen. Copies are issued to creditors, members of staff, and Companies House, and a meeting of creditors is arranged to discuss all issues surrounding the company’s situation.
It often takes several months for plans to become effective once they’re approved by creditors, but the administration process as a whole can last for up to one year, with the potential for a further extension if needed.
One ‘vehicle’ that may be used to exit a successful trading administration is called a Company Voluntary Arrangement. Under this process, debts are paid off at an affordable rate, and as long as the terms continue to be met, it allows the company to trade its way back to profitability.
Company Voluntary Arrangements must be agreed by creditors before they become legally binding. So long as the business has a viable future, creditors as a whole typically stand to receive more through the implantation of a CVA rather than if the company had been forcibly liquidated. Therefore if you can demonstrate to creditors that the company has a realistic chance of turning around its fortunes, you will increase the likelihood of the CVA being accepted.
Real Business Rescue can help if your company is experiencing financial distress. Real Business Rescue provides director advice online, over the phone, or in person at one of our 78 UK offices or a place of your convenience.