Companies in dire financial straits often go into administration, as they seek a way of escaping their debt and surviving as a business.
Administration is a proven way of bringing insolvent businesses back from the brink of financial disaster. But there are many factors to ponder and important questions to consider before pursuing this route.
One of the most important questions we’re asked is whether a company in administration can still trade. We put that question to our financial experts.
What Is Administration?
Businesses and companies that have found themselves in financial difficulties can be placed into administration as a means of avoiding liquidation. A company can be placed into administration if it’s insolvent, i.e. if the company can no longer pay off its debts.
Going into administration involves the company in financial difficulties being ‘administered’ by an outside entity. The company must appoint an administrator to oversee its operations during the administration period. This administrator must legally be an insolvency practitioner.
While in administration, the company in trouble cannot be pursued by its creditors, who are unable to take legal action against them during the administration period. Administration gives back control to a company and protects them, as they try to find a solution to their insolvency.
How Long Does Administration Last?
Insolvent companies can voluntarily enter into administration or they may be forced into administration by a court order.
When an insolvent company is placed into administration, the appointed administrator has a maximum of eight weeks in which to present their plan of action. This action plan is the proposed route out of administration and out of insolvency.
The actual period of administration may last longer than this depending on the route chosen, while administrators also have fixed length contracts that expire.
During the administration period, the company is not under directorial control. Instead, the appointed administrator does their best to set a course of action that brings the company out of insolvency. The aim of the administration period is to improve cash flow, save jobs, and pay off creditors.
If improvement doesn’t occur during the administration period and a company remains insolvent, it can ultimately still end up being liquidated.
Can a Company in Administration Trade?
Because the aim of administration is to improve cash flow and bring a company back from the red zone of insolvency and into the green zone, companies will still need to trade.
In fact, companies are encouraged to continue trading during administration. Not trading and ending business agreements or stopping sales will negatively affect the bottom line of the company and be detrimental to the process.
While it can trade, a company needs to take that opportunity as much as possible to improve its financial position. The fundamental difference is that trading is undertaken under the directives of the administrator, not the company director.
This means that while trading continues it might be shaken up, trading agreements might be looked at, changed or improved, with the ultimate goal of keeping the company afloat.
If the company stops trading altogether during administration, it loses an opportunity to improve its cash flow in the short term, but more importantly it will begin to lose value. The end goal of administration can often be the sale of a company. For this to work, it has to continue to be an attractive purchase that continues to do business.
The End of Administration
Ultimately, administration doesn’t last forever. Continuing to trade during the administrative period is simply a way to keep things running in the short term while a longer plan of action is readied and put into place.
The aim is to keep a company not only trading during administration but after administration too. If it can’t continue trading, then it’s likely that liquidation is the only other option and the company will be closed down entirely.
To avoid this, if the company can’t recover despite trading in the administration period, it often enters into what’s known as a company voluntary arrangement. A CVA gives the company a chance to restructure and redefine its goals, as it arranges a repayment plan for its debtors.
At the end of the day, continued trading is always the end goal of everyone involved. If the company stops trading, then those who are owed money are unlikely to get it back. If your company is facing administration and you’re wondering if you’ll still be able to trade, then why not give our expert team a call. Contact Irwin Insolvency today to find out how we can help you through financial difficulties.