How does administration work?
Going into administration is a commonly-used procedure that can give a viable business an opportunity to draw breath and consider its future options. It’s a legal process and forestalls creditor action.
It means that your company is taken under the management of a court-appointed administrator who will consider various ways of managing its future. These could include refinancing, restructuring or the sale of part or all of the business.
Administration is now a much-simplified procedure that involves filing various notices with the court. A licensed Insolvency Practitioner (IP) is appointed as Administrator and they are then responsible for dealing with your creditors. They will take control of the business in place of the directors, and it’s their job to put forward proposals for the future of the business to creditors.
This might involve the business continuing to trade, or all or part of it being sold as a going concern. If this isn’t a realistic proposition, then the IP may have no alternative but to realise assets for the benefit of the secured and preferential creditors.
What is a pre-pack administration?
It’s a tool to help struggling businesses to remain viable by selling the business and all its assets to a new company which could be made up of the current directors and shareholders, trade competitors or new investors. It allows the current owners and directors to choose who they sell their company to. A pre-pack can be a cost-effective option that provides business continuity.
In this case, the IP is appointed in the capacity of an adviser. It’s their role to draw up a contract for sale and obtain a valuation of the business and its assets. The IP will put the business up for sale and third parties can enter the bidding at this point, then an Administrator will be appointed to facilitate the sale.
The ‘newco’ would need to ensure that premises, asset finance, customer contracts are all transferrable. Employee rights have to be protected.
When is administration the best solution?
Going into administration gives protection from further creditor action. If the business has a future and could overcome its underlying problems by refinancing or restructuring, then going into administration could provide a simple and effective solution to its problems, providing the best possible chance of debt repayment and continued employment for the future. The IP could formulate proposals that would see the business being restored to a going concern.
If the business can’t be saved, the IP must look to achieve a better outcome for creditors than could be achieved through putting the company into liquidation
What are the disadvantages?
It should be borne in mind that under Administration, directors do not retain control. Once an Administrator has been appointed the directors lose the power to run the company.
In addition, it has to be made crystal clear in all communications, including phone calls that the company is in administration, which can be damaging to the market profile of the business and making trading difficult.
Administration can be a relatively expensive solution as the costs involved are generally high.
How can I avoid administration?
If an administrator has been appointed, there is little you can do to reverse the process. However if the warning signs are spotted early enough, it may be possible to avoid conventional administration and go down the pre-pack route.
The key to avoiding administration is to recognise the signs of impending insolvency and to take appropriate measures. Our role is to offer professional help and guidance to businesses facing challenging times. Our advice can mean the difference between a business being wound up, or recovering and going on to better times.