In this article, we’ll be exploring what it means for a business when they go into administration…

When a business is facing financial difficulties and cannot pay its debts, it may consider going into administration as a way toavoid insolvency and seek a solution. This is where administration lawyers come into play. 

Administration is a legal process that involves the appointment of an independent professional, called an administrator, who takes over the management of the business and tries to rescue it or maximise the returns for its creditors. In this article, we will explain what administration means for a business, how it works, and what are the possible outcomes.

What Does Administration Mean for Businesses?

Administration is a formal insolvency procedure that provides a struggling business with legal protection against creditor actions. It allows the company to temporarily halt debt repayments and protect its assets while restructuring or seeking a resolution. Administration can be initiated by the company’s directors, its creditors, or a court order. 

The process is overseen by an administrator, who is usually an insolvency practitioner or a qualified accountant. The administrator’s role is to assess the financial situation of the business, explore options for its survival, and maximise returns for creditors. Administration lawyers can advise and assist the company and the administrator throughout the process.

Legal Protection

One of the main benefits of administration is that it gives the business legal protection from its creditors. This means that creditors cannot take any legal action against the company, such as suing it, demanding payment, or seizing its assets, without the permission of the court or the administrator. 

This protection is known as a moratorium and it lasts for the duration of the administration process, which can be up to 12 months or longer if agreed by the creditors or the court. The moratorium gives the business some breathing space to restructure its finances and operations without being pressured by its creditors.

Appointment of an Administrator

An administrator is appointed to take control of the company’s operations and make decisions on behalf of the business. The administrator must be an independent and qualified professional, who acts in the best interests of the company and its creditors. The administrator has various powers and duties, such as:

• Investigating the affairs of the company and preparing a statement of its assets and liabilities.
• Reporting to the creditors and holding meetings with them to inform them of the progress and proposals.
• Exploring options for rescuing or selling the business or its assets.
• Implementing restructuring measures or negotiating with potential buyers.
• Distributing funds to creditors according to their priority.

The administrator must act as quickly as possible and aim to achieve one of three statutory objectives:

• Rescuing the company as a going concern.
• Achieving a better result for creditors than if the company were wound up.
• Realising property to make a distribution to secured or preferential creditors.

Restructuring and Turnaround Efforts

The primary objective of administration is to rescue the company and return it to profitability. The administrator may implement restructuring measures, such as renegotiating contracts, cutting costs, selling assets, or making staff redundancies, to improve the business’s financial viability. 

The administrator may also seek new funding sources, such as loans, equity, or grants, to support the turnaround efforts. The aim is to create a sustainable business model that can generate enough income to cover its expenses and debts.

Business Continuity

Administration aims to keep the business operating, preserving its value and safeguarding jobs. The administrator may continue trading the business during the process, ensuring that customers are served and contracts are fulfilled to the extent possible. The administrator may also transfer some or all of the business’s activities to another entity, such as a subsidiary or a new company, to maintain continuity. This can help retain customer loyalty, supplier relationships, and employee morale.

Creditors’ Rights and Outcomes

Administration seeks to achieve the best outcome for creditors. The administrator will assess and prioritise creditors’ claims, negotiate with them, and develop a repayment plan. Creditors are divided into four categories:

• Secured creditors: These are creditors who have a charge over some or all of the company’s assets, such as banks or mortgage lenders. They have the first claim over those assets or their proceeds.
• Preferential creditors: These are creditors who have a preferential status by law, such as employees who are owed wages or pensions. They have a second claim over any available funds after secured creditors are paid.
• Unsecured creditors: These are creditors who do not have any security or preference, such as suppliers, customers, or HMRC. They have a third claim over any remaining funds after secured and preferential creditors are paid.
• Shareholders: These are owners of the company who have invested in its shares. They have the last claim over any surplus funds after all creditors are paid.

The administrator will propose a repayment plan that outlines how much each creditor will receive and when. The plan must be approved by at least 50% of the creditors by value and 50% of the creditors by number. The plan may involve a partial or full repayment of the debts, a debt-for-equity swap, or a write-off of some or all of the debts.

Potential Outcomes

The outcome of administration can vary depending on the circumstances. It may result in the successful restructuring and continuation of the business, with reduced debts and improved operations. Alternatively, if a viable solution cannot be found, administration can lead to the liquidation of the business, where its assets are sold to repay creditors. Some of the possible outcomes are:

• Company Voluntary Arrangement (CVA): This is a legally binding agreement between the company and its creditors, where the company agrees to pay a proportion of its debts over a period of time, usually three to five years. The company can continue trading under the supervision of an insolvency practitioner.
• Pre-pack Administration: This is a process where the sale of the business or its assets is arranged before the company enters administration. The sale is then completed by the administrator as soon as possible after the appointment. The buyer may be a third party or a new company set up by the existing directors or shareholders.
• Asset Sale: This is a process where the administrator sells some or all of the company’s assets to raise funds for creditors. The assets may be sold individually or as a whole. The buyer may be a third party or a new company set up by the existing directors or shareholders.
• Liquidation: This is a process where the company is wound up and ceases to exist. The administrator sells all of the company’s assets and distributes the proceeds to creditors according to their priority. Any remaining debts are written off.

Going into Administration

Administration is a complex and challenging process that can have significant implications for a business and its stakeholders. It can provide an opportunity for a business to restructure its finances and operations and avoid insolvency. However, it can also result in the closure or sale of the business and losses for creditors and shareholders. Therefore, it is important for businesses to seek professional advice from administration lawyers and insolvency practitioners before entering administration or as soon as possible after doing so.

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained legal professional. Be sure to consult an administration lawyer/solicitor if you’re seeking advice on your business going into administration. We are not liable for risks or issues associated with using or acting upon the information on this site.