Can a Company Still Trade in Administration?
A company enters into administration when it fails to pay its debts. To prevent insolvency, shareholders or directors of the company may appoint an administrator.
You may wonder if a company is in such poor shape it goes into administration, can it still trade?
The short answer is yes, but it depends on its position.
So how can a company still trade when in administration?
How Can a Company in Administration Still Trade?
The purpose of administration is not just to realise the company’s assets to pay off creditors, but also to revive the company. Trading is the lifeline of any business. If a company isn’t allowed to trade, it has a minimal chance of surviving.
When administrators are appointed, they take control of company management. After assessing the company’s position, they find the best way to protect the interests of creditors and rescue the company.
As long as it’s viable for a company to regain profitability, they allow it to trade. Because when a company gets back into healthy shape, it fulfils both purposes – it becomes able to repay its creditors and save itself from insolvency.
If the administrator thinks that trading no longer protects the interests of creditors, they stop it and start liquidating assets.
So an administrator decides how can a company still trade in administration.
How Long Can a Company Trade in Administration?
The administrator decides the duration of the trade period during administration. Each case is unique and requires a different approach.
The administration period generally lasts for one year, but the court may extend it for another year, depending on the circumstances.
The administrator has three objectives.
- Rescue the company as a going concern.
- Achieve better results for the creditors as a whole than would be likely if the company were wound up
- In certain circumstances, realise the value of the property and distribute it to one or more secured or preferential creditors
Continuing to trade becomes vital to achieving the first two objectives. Administration can drag on, but a company cannot wait that long. When a company is already in crisis, it cannot afford to stop trading.
If a company ceases to trade, it wouldn’t even be able to preserve its existing value, and would lose its customers and reputation. Thus, it would be against the interests of its creditors, the company, and the objectives of its administrator.
A company usually trades for the whole administration period. If the administration period is a success, directors regain control of the company and trading continues.
When an administrator finds it’s no longer in the creditors’ best interests, it ceases the operation of the business, closing the company and liquidating its assets to repay the liabilities of its creditors.
So a company can trade in administration as long as it’s in the creditors’ best interest.
Trading in Administration: A Complex Decision With High Stakes
A company can still trade in administration. Indeed, it can be one of the most effective ways to revive a company. But it’s a complex process and can produce negative results if executed incorrectly. It could damage the current value of the company, thereby harming all parties involved.