Business insolvency can often be a difficult subject to talk about, whether it’s because you’ve been involved in an ailing business before or are worried about your finances as a company director. We are here to reassure you with facts – answering any questions you have about companies in administration. In any business insolvency circumstances, the best first step is to seek advice from a professional, such as a licensed insolvency practitioner. But to get answers to some frequently asked questions about administration, take a look at the following blog.
What does administration mean?
When a business goes into administration, it has entered a formal, legal process under the Insolvency Act 1986; this is to show that the business aims to achieve one of the statutory objectives of an administration procedure. This could be rescuing an insolvent business that cannot pay its debts or has problems with cash flow, and an appointed administrator will be required to fulfil the process.
The purpose of administration is to provide the business with breathing space, so that there can be no enforcement actions from creditors while plans to restructure the company’s finances are prepared.
When should I consider administration?
Administration does not have to mean the end of your business. If you are dealing with severe cash flow issues, long-term insolvency or your creditors have not agreed to a company voluntary agreement (CVA), however, then it may be wise to consider putting the business into administration.
If your business is not insolvent but needs to be sold quickly, you may also need to use administration. If the administrator deems that your business is financially viable, you may be able to continue trading.
Who is an administrator?
An administrator will be appointed to help the business with the process. This is a licensed insolvency practitioner such as McAlister, who will have experience in helping insolvent businesses.
The administration will usually be appointed by the company directors, a creditor or the courts.
What happens once my company enters administration?
Once your business enters administration, the company can continue to trade. However, the daily management of your business will pass from the directors to the appointed administrator who will make a proposal on what to do with the business within eight weeks of being appointed. Afterwards, the business’ creditors are asked to vote by a decision procedure to approve the proposals.
This may involve a sale of all or part of the company’s assets: if so, the proceeds will be distributed to creditors, once the costs of the procedure have been deducted. The distribution is done in a statutory order of priority to which there are specific rules, however the general order is as follows:
- Secured creditors
- Unsecured creditors, such as suppliers, customers and HMRC
- Shareholders and members
What happens if my business cannot be saved?
If the administrator and company directors deem that the business cannot be reasonably saved, they will aim to achieve an appropriate solution for creditors. This will likely be better than if the company were ‘wound up’, meaning that it is effectively closed without first going through the process of administration. The company may continue to trade for a short time while the administrator sells off assets, or the business itself.
Examples of assets that can be sold include trademarks, patents, a database of customers, any equipment needed to run the business - for example IT or machinery, software, or its digital footprint such as content, websites or social media accounts.
When does administration end?
Administration ends automatically after 12 months, unless the administrator asks for an extension from the court or from the business’ creditors.
What is pre-pack administration?
If your company is financially viable but struggling to pay its debts, a pre-pack administration may be the answer. It is still a legal insolvency procedure that requires a licensed insolvency practitioner, but means the company’s assets can be liquidated and sold to a board of directors. Often these are made up of the previous company’s board. This allows the directors to hire the same employees and produce the same goods or services from the same premises. Essentially, the company is restarted without its debts. This procedure is very common in the UK with over 100 pre-pack administration sales every month.
For companies entering administration, it doesn’t have to mean the end of the business. There have been many high-profile cases in the media where household-name businesses have not been saved; however these are usually very complex cases. If a company goes into administration and the appointed administrator finds that the business can be saved, your employees may be able to keep their jobs.
If you are considering administration or pre-pack administration, or you are looking for information on other business recovery options, contact us for a free, no-obligation consultation. Our friendly and experienced team are ready to help.