Entering administration can be a lifeline for insolvent companies struggling to meet the demands of their creditors.
If your business is drowning in a sea of debt, going into administration could help you to prevent your financial position from worsening, pay off your creditors, and ultimately rescue your business.
It does however mean putting the management of your business into the hands of an administrator and can be a very daunting decision to make.
Make sure you’re well informed about the process to help you decide if it is the right option for your business.
What does it mean to go into administration?
A company may go into administration if it falls into debt and cannot pay the money it owes.
If a company becomes insolvent, going into administration is usually preferable to liquidation as it may allow the company to continue to trade and employ its existing employees. Whilst in administration a company is also protected against further legal action from creditors.
The aim of administration is to help the company to recover a healthy cashflow, retain their existing business agreements, and pay off their debts with their creditors. If administration is successful, then a company may be able to get back on its feet and continue trading after administration has ended. If it is not successful, then it may be forced into liquidation.
A company that is in administration is no longer under the control of its directors, instead, it is put under the management of an administrator. The administrator, usually a licensed insolvency practitioner, takes over management of the company with the aim to act in the best interests of the creditors and return the company to profitability. During this time, the company’s directors will be required to cooperate with and assist the administrator.
In order to be considered for administration, a company should be able to prove insolvency, but still be in good standing. Companies with poor cash flow and few assets may not be eligible for administration and may instead by required to go into liquidation.
What are the alternatives to going into administration?
Before applying to go into administration, it’s important to be sure that it is the best option for your business.
The most suitable route for your business will depend on your individual circumstances and your business’ financial position.
Insolvent businesses generally have three options: administration, CVA, or liquidation.
Company Voluntary Arrangement (CVA)
A CVA gives a company struggling with insolvency the opportunity to prevent their financial position from worsening, resolve debts with their creditors, and recover their profitability.
It is a formal agreement between a company and its creditors for repayment of debts owed. An insolvency practitioner must be appointed as the nominee to implement the CVA.
Once the repayment proposal has been made to creditors, a vote is held. For the CVA to go ahead, 75% of the creditors must agree the proposal.
During a CVA, all the company’s debts are consolidated into one payment which is made to the insolvency practitioner. The company can continue to trade as normal whilst going through a CVA, and once a CVA has been accepted it prevents any further or existing legal action from creditors from taking effect.
Liquidation is the process of realising a company’s assets to help pay off creditors before the company is dissolved.
There are three different types of liquidation:
- Creditors’ voluntary liquidation (CVL)
A creditor’s voluntary liquidation, also sometimes referred to as a ‘voluntary winding-up’, is when liquidation is initiated by the company’s own directors and shareholders. A CVL is usually entered into when a company becomes insolvent and there is no way it can pay its creditors.
During a CVL, a licensed insolvency practitioner is appointed to act as a liquidator. The liquidator then sells the company’s assets and distributes the profits fairly amongst the creditors. It is also the liquidator’s job to collect outstanding debts, handle employee claims, and issue reports throughout the liquidation process.
- Members’ voluntary liquidation (MVL)
A members’ voluntary liquidation is used to end a solvent company when the shareholders no longer need the company, wish to retire, or realise their investment. An MVL cannot be entered into unless the company is solvent and able to pay off its debts in full.
A compulsory liquidation, sometimes referred to as a ‘winding-up by the court’, is ordered by the court, usually as a result of a petition by one or more of the company’s creditors.
In order to petition to the court for the compulsory liquidation of a company, a creditor must be able to prove that the company has been unable to pay their debts and that their winding-up is the best course of action.
If the petition is successful, then the court will order for the company’s compulsory liquidation and a liquidator will be appointed to value, market, and sell the company’s assets. Once complete, employees will be dismissed, and the company will cease to exist.
What is the difference between going into administration and liquidation?
If you’re trying to decide the best course of action for your insolvent company, then you may be weighing up the pros and cons of administration and liquidation.
Administration and liquidation are both common solutions for insolvent businesses but provide quite different results. The option most suitable for your business will depend on your company’s current circumstances and financial position.
The key difference between the two options is that administration gives a company a chance to recover from insolvency, whereas liquidation signals the end of the company.
Companies are accepted for administration when, despite their current cashflow problems, it is believed that there is still hope of rescuing the business. When a company enters liquidation, it is accepted that this is the end of the road for the business and once the process is complete the company will cease to exist.
Liquidation is simply the process of selling off an insolvent business’ assets before its closure, whereas administration seeks to help a company pay off its debts and regain profitability.
If a company is not eligible for administration because the business is no longer believed to be viable, then they may have no choice but to enter liquidation instead.
Even if a company is accepted for administration, if the process is unsuccessful then it may still end with the liquidation of the company.
Can a company go straight into liquidation?
Sometimes, the most sensible and cost-effective option for an insolvent business is to go straight into liquidation. If this decision is made by the directors, then the company may enter straight into creditors’ voluntary liquidation.
Legal action ceases – If your company is being chased by creditors for debts that it cannot afford to pay then you may be facing legal action. Once a company enters into liquidation, all existing legal action is stopped, and creditors are unable to take further action against the company.
Debts are written off – Going straight into liquidation can help to minimise your losses and get your creditors the best possible outcome. All debts are written off once a company enters liquidation and liquidation costs, including creditor repayments, are then funded through the sale of the company’s assets.
Leases can be cancelled – Once a company goes into liquidation, all existing lease arrangements are usually automatically terminated, regardless of the terms of the initial arrangement. This prevents any further debts from accruing.
Employees can claim redundancy – When accompany goes into liquidation, the appointed insolvency practitioner will help to handle employee redundancies. Employees will then receive help claiming redundancy pay, and any wages or holiday pay owed to them. Redundancy pay is usually paid using the proceeds made by selling the liquidated company’s assets.
Although liquidation is never the outcome any company director hopes for, sometimes bringing a swift end to a company in financial crisis can help directors to minimise their losses and offer some much needed relief from mounting debts and legal action.
What happens when a company goes into administration?
Entering the administration process is a big decision for any company to make, so it’s important to make sure that you’re going into it with your eyes wide open.
There are two primary objectives of the administration process; paying off debts owed to creditors and regaining profitability to rescue the insolvent company.
The process can vary depending on your company’s individual circumstances, but these are the general steps it will follow.
A licensed insolvency practitioner is appointed as administrator – Usually it is either the company’s director or shareholders that appoint an administrator. It is however also possible for some secured creditors to appoint an administrator.
The administrator is provided with a ‘Statement of Affairs’ – The Statement of Affairs is a very important document that should be collated by a current or former director or company officer and provided to the administrator. The statement should provide a detailed overview of the company’s assets and liabilities, including any fixed or floating charges.
The administrator assesses the business’ position – The administrator then has 8 weeks to assess the company’s position and formulate a way to repay the creditors.
Administrative proposals are sent out to all creditors – The administrator’s proposal tells creditors how they plan to deal with the company in order to repay their debts. The proposal should include the following:
- A copy of the statement of affairs.
- The plan of action to repay the debts owed.
- The administrator’s fees.
- The proposed administration exit route.
- The expected outcome.
The proposals are then either accepted or rejected – If the proposals are accepted, the administrator then continues to manage the company’s affairs in accordance with the proposals. If the proposals are rejected, the administrator must report this to the court and await further instruction.
The administrator makes internal changes – Whilst managing the company, the administrator may make internal changes to try to get the best possible outcome for creditors and provide the company with the best chances of recovering. This could include any of the following actions:
- Restructuring the company.
- Dismissing directors and employees.
- Shutting down outlets.
- Selling assets.
- Entering into a CVA.
- Selling the business to another company.
Administrator sends regular progress reports – If the proposals are accepted and administration goes ahead, the administrator will continue to manage the company and send the creditors and court regular progress reports.
Administration ends – Unless an extension is granted, administration last no longer than 12 months. What happens next will depend on the exit route sought and the outcome of the administration process.
Who can put a company into administration?
In most cases, either the directors or shareholders of a company instigate the administration process.
However, whilst less common, it is also possible for a company to be forced into administration by a floating charge holder such as a bank.
Depending on the company’s circumstances and whether they are voluntarily applying to go into administration or being forced, it will then either be the company, a floating charge holder, or the court that appoints the administrator.
Directors and shareholders
Once a company becomes insolvent and begins experiencing threats of legal action from its creditors, many directors choose to go into administration to prevent their financial situation worsening and to protect themselves from winding-up orders and the liquidation of their company.
Appointing an administrator for your own company is usually a relatively quick and simple process as there is no need to apply for a court order. Instead, the company should seek the advice of an insolvency practitioner.
The insolvency practitioner will then establish that the company is insolvent and assess whether administration is the right course of action. If they believe that going into administration would provide a better result for the company’s creditors than liquidation, then an administrator can be appointed.
However, if the company in question is already in a CVA or going through the process of liquidation, then they must first apply to the court to be appointed an administrator.
Floating charge holder
Although unusual, it is possible for a secured creditor like a qualified floating charge holder, usually a bank, to force a company into administration by appointing an administrator.
This is only applicable if the bank holds a qualifying floating charge under debentures issued after 15th September 2003. Any administrator appointed by the bank has a duty to act in the interests of all creditors, not just the bank in question.
This is the only instance where a creditor can force a company into administration. Other creditors cannot appoint an administrator, but instead may choose to issue the company with a winding-up order in order to try to retrieve money owed to them.
Who can be appointed as an administrator?
When a company enters administration, it will need to be appointed an administrator.
The administrator should be a licensed insolvency practitioner who has passed the insolvency (JIEB) examinations, has real-world experience working in insolvency, and has been authorised to work as an insolvency practitioner by a governing body.
An insolvency practitioner should be a highly trained and qualified professional, and it’s important to ensure that a reputable individual is being appointed to ensure that you receive the best possible outcome and advice.
Due to the nature of an insolvency practitioner’s job, many IPs are also qualified accountants with ACA, ACCA, or CIMA qualifications.
Insolvency practitioners are trained to take on several different roles helping insolvent companies, including administrative receiver, liquidator, provisional liquidator, supervisor of a voluntary arrangement, and of course, administrator.
Can a company still trade when in administration?
When a company becomes insolvent, the director is legally obliged to cease trading immediately.
One of the primary aims of the administration process is to try to rescue the company from insolvency.
Once the company enters administration, an administrator is appointed to assess the company’s position and make a decision about whether the company can be rescued.
From here, they will decide which course of action is in the best interests of the creditors owed money.
If it is decided that the company has a good chance of recovery or that it is to be sold, then it is usually in everyone’s best interest that the company keeps trading to help it to retain its value.
The company is allowed to keep trading whilst in administration, but the directors will not have any control of the company during this time. The appointed administrator will be in control of the trading company whilst it is in administration, and the directors will not regain control until administration has ended.
What does it mean when a company goes into voluntary administration?
Voluntary administration refers to the process whereby a company’s directors or shareholders voluntarily place their business into administration.
Whilst going into administration means losing control of your company to an appointed administrator, for companies in severe financial distress there are still many benefits to going down this route.
Benefits of going into voluntary administration
- Prevents creditors from taking further legal or enforcement action against you.
- Receive professional support and advice.
- Gives your business the best chance of survival.
- Helps to prevent the company’s financial position from worsening.
- Can help to get the best outcome for your creditors.
- Your company may be able to keep trading, even whilst insolvent.
- If the company can be rescued, a CVA can be arranged whilst in administration.
If an administrator rescues a business, then control of the company will be passed back to its directors and shareholders once the administration process is complete.
How long can a business stay in administration?
The length of time that a company spends in administration can vary from one case to the next. The process can last anywhere from a few weeks to over a year.
Generally, administration should not last longer than one year, although in some circumstances this may be extended by up to six months. In order for administration to be extended, it must first be agreed by the court.
The total amount of time that the administration process lasts depends largely upon the complexity of the case and the exit route being sought.
What is pre-pack administration?
Pre-pack administration is an insolvency option that has become more popular and commonplace over recent years.
The process can be quite complex, and there are many rules and regulations surrounding it, so it may not always be a viable option. However, when the circumstances are right, pre-pack administration can provide a very fast solution for businesses in severe financial difficulty.
Pre-pack administration is the process of selling off all or part of your business or its assets to a pre-arranged buyer.
It may be possible to go down the route of pre-pack administration if you have a buyer lined up who wishes to buy all or part of the business or its assets before you have entered the administration process.
The buyer can be a completely new third party, or it can be an existing director or shareholder.
During pre-pack administration, the buyer must be pre-determined and the sale negotiated prior to the administrator being appointed. The buyer must also have funding in place ready to finance the acquisition.
Once the administrator has been appointed, the agreed sale takes place either on the same day or very shortly afterwards.
A pre-pack administration should only be considered if the administrator believes that it is the best option and the results it will achieve are in the best interests of the company’s creditors.
What happens when administration ends?
When the administrator sends out the initial proposals to creditors, they should specify in the proposal the company’s preferred exit route from administration.
What happens at the end of the administration process will depend on this proposal and whether the administration process has been successful.
Possible outcomes include:
- Company passes back to directors and enters a CVA
If the administrator believes that the company has been rescued and the company can pay off their debts, then they may propose that it enters a company voluntary arrangement (CVA). Once the CVA has been accepted, administration will end, and the company will be handed back to the directors.
- Pre-pack administration sale
If, prior to going into administration, there is an opportunity to sell all or part of the business or its assets, then this may be negotiated by the insolvency practitioner. The sale would then be completed shortly after the company enters administration. It is possible for the company’s existing directors or shareholders to buy these assets in order to start again under a new company name.
- The company enters voluntary liquidation
If, once the administrator’s job is complete, it is decided that the company cannot be rescued but there are still assets remaining, then the company may now enter voluntary liquidation.
Sometimes, it may be appropriate for the administrator to dissolve the company without first entering liquidation. This may be the case if the company no longer has any assets and there is nothing further to release to creditors.
The procedure of Administrative Receiverships involves the appointment of a licensed insolvency practitioner as an administrative receiver by a bank or other secured lending institution holding a floating charge debenture. The administrative receiver is appointed by the debenture holder when the business is deemed to be in default under the terms of the debenture.
Speak to Irwin Insolvency for further advice about the administration process
Here at Irwin Insolvency, we are a team of highly professional, qualified, and licensed insolvency practitioners with over 25 years’ experience helping businesses in financial crisis. Over the years, we have earnt an outstanding reputation for our professionalism, compassion, and high standards.
Whether you require corporate recovery advice or help and advice with going into administration, our team will provide a compassionate, professional and confidential service, helping you to achieve the best possible outcome for both your business and its creditors. To speak to one of our experts, give us a call today on 0800 2545122.
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