Imagine you owe a company money for stock or supplies, but that company has just become insolvent. The administrators have taken over, and you might be wondering whether you need to pay the last invoice they sent before the company went bust.
Unfortunately for debtors, the administrators will want that money back, and you’re obliged to pay the money you owe for services or goods. But are there ways around this if the company is going to be liquidated, and where do you stand in the eyes of insolvency laws if you chose not to pay?
With economic uncertainty causing more businesses than ever before to call in the administrators, we asked our expert team at Irwin Insolvency for a little advice. Do you need to pay a company if it goes into administration? Let’s find out.
What Is Administration?
Companies enter into administration when they are taken over by an insolvency practitioner after becoming insolvent. When a company can no longer pay the debts it owes, administrators are appointed to take over from the company directors. The same process applies to charities when they go into administration.
Administration is an alternative to liquidation, and as an insolvency measure it provides companies with an opportunity to be saved for the future. Administrators continue running the business and continue trading, but often bring in strict measures and restructuring to escape insolvency.
During the administration period, the company is protected from its creditors and no longer needs to pay back money it owes if it cannot afford to. This helps the business to re-establish its cash flow, although the process might still see the sale of assets or unavoidable job losses in order to raise money and cut costs.
Do I Need to Pay a Company in Administration?
Because a business in administration is protected against its creditors, you might think that this in turn applies to anyone who owes that business money for services or goods.
That’s simply not how things work. Insolvency laws are designed to protect the creditor (the entity owed money) rather than the debtor (the entity owing money). In fact, one of the ways that administrators can re-establish a positive cash flow is by calling in debts and chasing unpaid invoices. If the company is owed money by anyone, then the administrators want to know and they are going to chase!
If you or your business owes money, then you can expect the administrators to call it in as they are assigned to work in the best interests of the creditors. By chasing money owed, they can pay off the company’s debts and potentially escape insolvency.
But Do I Really Have to Pay?
Administrators take over a company and its assets, and if that company has kept financial records, receipts and invoices, then the administrators will be able to chase any payments owed to them.
As a debtor, it’s your obligation to pay the money you owe as well. Failure to do so can severely affect your credit rating and could see your business (or you as an individual) struggle to take out loans or receive credit from other companies or banks in the future.
Administrators can also take you to court in an effort to recuperate their money, although this is only likely if the money-owed is substantial enough to exceed legal costs. If this happens, then legally you have no real recourse if you’re the one owing money.
What If the Company Is Liquidated?
The ultimate end goal of administration is to see a company survive, save jobs, balance its books and recover profitability in the future. However, this isn’t always successful.
If insolvency is unavoidable, then administrators will eventually have to wind down the business, stop trading and liquidate the company. If this happens, the insolvency practitioner in charge of liquidation is there to look after the best interests of the creditors or people who are owed money by the failing business.
An insolvency practitioner raises money to pay creditors by selling off the company’s assets. If you still owe the company money when it’s being liquidated, then again, you can expect your money to be called in. The insolvency practitioner will use this to help pay off the company’s creditors.
If the company is liquidated, then you still owe them money. In most cases, this applies even once the company has been wound down, but the person or entity you owe the money to will change.
Money-owed is treated as an asset, and that means that the debt you owe can be bought and sold during the liquidation process. The company may have folded, but someone else (often a bank or broker) takes that debt up, including any interest. As the debtor, you have to continue repaying the new creditor.
Failure to do so can result in legal action through the courts which can severely affect your credit rating, so it’s in your best interest to continue paying the money you or your business owes.
What If the Company Owes Me Money?
If a company owes you money (and you’re a creditor), then the administrators will be working towards getting you the money that you’re owed.
However, there are no guarantees that you will get paid if the company is in administration. As funds are raised, administrators first need to pay themselves, then they need to pay off the secured debts (which are often owed to a bank in the form of loans or mortgages).
Smaller creditors, such as suppliers or contractors, are usually last in line to receive money.
Contact Irwin Insolvency Today for Your Free Consultation
With years of experience in the insolvency sector, Irwin Insolvency can provide the expert advice and analysis that your business needs to survive these trying times. We offer a range of insolvency services, including administration that could save your business from failure. Our insolvency practitioners are up to date on the latest news and advice, and are ready to help you. Contact Irwin Insolvency today for your free consultation.