What Is Voluntary Administration?
Voluntary administration is a type of insolvency procedure where an external administrator is appointed to a company in financial difficulty. Although it involves handing over control to a third party, it could be an unexpected solution for businesses struggling to stay afloat and it might be the key to keeping your company intact. Given that it is voluntary administration, company directors can choose to access this solution as they see fit. However, it’s not a decision to be entered into lightly. This article explores the nature of voluntary administration and whether it’s right for your company.
What Does It Mean to Go into Voluntary Administration?
When a company goes into administration, it has accumulated more debt than it’s able to pay back, and it needs a repayment solution. Under voluntary administration, the company, off its own initiative, hires an administrator to resolve the debt. During voluntary administration, control of the company is transferred to the administrator. The administrator will examine the company’s finances, searching for ways to keep the company’s operations running. At the same time, the administrator will negotiate with creditors on how the company can repay its debts. Ultimately, the goal of voluntary administration is to recover a company’s finances to a place of stability and keep the business running, while also satisfying its debts.
Why Would a Business Go into Voluntary Administration?
A company experiencing financial hardship could benefit greatly from voluntary administration. Following significant financial losses, a string of overdue payments or other ongoing money problems, the company may be approaching or in the midst of insolvency. As a result, its directors may be faced with liquidation and dissolution. However, voluntary administration is a more favourable solution. Primarily, entering voluntary administration halts any action being taken against the company by creditors, known as a moratorium, allowing time to assess and devise plans for recovery and repayment.
With voluntary administration, a business also has the expertise of a trained professional at their disposal to help the company out of its financial situation. Voluntary administration requires the appointment of a third-party administrator by the company’s directors, normally a licensed insolvency practitioner. Following their appointment, the administrator will appraise the company’s operations and accounts, then propose and implement solutions that the directors of the company may not have considered.
At the same time the administrator, as a neutral third party, is in a better position to negotiate a mutually beneficial debt solution to creditors, than the directors of the company. Following a resolution, the administrator gives control of the company back to its directors. In this way, voluntary administration allows businesses to access expert advice, settle debts, and continue to operate their business.
What Is the Procedure for Voluntary Administration?
Voluntary administration is just that, voluntary. The process starts with the directors of a company voting to appoint an administrator of their choice to carry out the process. Once an administrator is appointed, a notice is filed in court, stating the company’s appointment of an administrator, and requesting a moratorium. A moratorium is a legal hold on debts or action being taken against a company. It persists throughout the administration period until an agreement has been reached between the administrator and creditors. Creditors must also be made aware of the administrator’s appointment, as the administrator will report to them.
When an administrator is appointed, they’ll be given total control of the company so they can perform their role effectively. Technically, they have the power to call meetings with directors, restructure the company, dismiss employees, and manage and sell assets. However, their primary role is to examine the company’s operations and finances. Over the course of several weeks, the administrator prepares a report discussing the company’s financial state and proposing possible solutions for debt repayment. Based on this report, the administrator and creditors agree on which course of action the company must undertake in order to repay its debts.
On one hand, this could result in a company entering an agreement to repay the majority of its debt in periodic installments, before control of the company is handed back to the directors. Alternatively, it may be decided that the best course of action is to dissolve the company and liquidate its assets. This step can be taken with or without the approval of the directors and shareholders of the company. In either case, a liquidator is appointed to oversee the sale of assets and repayment of creditors, in order of priority. Following liquidation, the company is removed from the Companies House register and will cease to exist.
What Are the Likely Outcomes of Voluntary Administration?
When partaking in voluntary administration, the administrator will examine the company and propose tailored solutions for debt repayment based on that company’s financial situation. This can lead to a variety of outcomes, such as entering a company voluntary arrangement also known as a CVA, conducting a pre-packaged administration also known as ‘pre-pack’, or pursuing liquidation.
Company Voluntary Arrangement (CVA)
Following an inspection, the administrator may determine that the company has the capacity to recover from its debts and continue operations after administration. Such a conclusion can be evidenced by consistent transactions and cash flow or healthy asset management. As a result, the administrator may propose a company voluntary arrangement (CVA) to the creditors. Under such an agreement, the company would repay most of its debt within an agreed period of time. Although it may require the company to restructure or put a temporary strain on company assets, this arrangement would allow the company to continue operations. The goal is to enter and implement a mutually beneficial CVA as soon as possible, so the administrator can hand back control of the company to its directors.
Pre-Packaged Administration (‘Pre-Pack’)
Pre-packaged administration or ‘pre-pack’ is a procedure whereby the insolvent company’s assets are sold to another company in a ‘pre-packaged sale’, either before an administrator is appointed or within days of the administrator’s appointment. The company to which these assets are sold may be an unrelated third party, or a new company formed under the management of the insolvent company’s directors. Such an arrangement is beneficial for several reasons. Pre-pack guarantees increased cash flow and a swift sale, allowing creditors to recover their money as soon as possible. Furthermore, if the purchasing company has the same directors as the insolvent company, a status quo is maintained during the transition. Employees are less likely to lose their jobs due to the company restructuring, and the company’s operations are maintained, although it operates under a different name. In the event that the company’s assets are sold to an unrelated company, this gives the insolvent company a fresh start and the same benefits for the company’s employees and operations. Following such an agreement, it’s the administrator’s role to ensure that this sale is in the best interests of both the company and its creditors.
Another possible outcome is that the administrator determines that the company cannot overcome its debts and doesn’t have prospects for long-term viability. As a result, the best way to repay its debts would be to liquidate or sell company assets and ultimately cease operations. There are two types of liquidation that can occur following voluntary administration, namely creditors’ voluntary liquidation known as CVL, and compulsory liquidation. During a CVL, the directors or shareholders of an insolvent company opt to liquidate the company’s assets, while a compulsory liquidation is initiated by creditors and court-ordered against the will of the company’s directors and shareholders. In both scenarios, a liquidator is appointed to oversee the process before the company is dissolved and struck off the Companies House register.
How Long Is Voluntary Administration?
Due to the different phases of the process, the length of time to complete voluntary administration will vary. After being appointed to control the company and assess its operations, the administrator has up to eight weeks to compile a report and make proposals to creditors on resolving the company’s debt. The creditors then accept or reject the proposals, and a plan is put in place to carry out the accepted proposal.
Voluntary administration can last just a couple of weeks if a company voluntary agreement (CVA) is agreed on by the majority of creditors. However voluntary administration can last for up to one year, which is the legally stipulated deadline, although it can be extended in certain circumstances, prolonging the period of voluntary administration beyond a year.
Can a Company Continue Trading During Voluntary Administration
At the onset of voluntary administration, there are few changes regarding the operation of the company, aside from who is controlling it. Therefore, a company can reasonably be expected to continue operating as normal, save for instruction to the contrary from the administrator. The administrator has the authority to downsize or restructure the company and dismiss employees, although their initial goal is to observe how the company functions and examine financial records. Halting trading is not a primary concern.
However, once the administrator has concluded their investigation and given their report to the creditors, they’ll determine the future of the company, which in turn determines whether the company can continue trading. If the administrator finds that the company can recover from its financial difficulties and maintain profitability in the long term, creditors may agree to enter into a CVA to resolve the debts. It would in turn be suitable for the company to continue trading so that it maintains a steady cash flow to repay those debts.
Conversely, if the administrator finds that the company is unable to recover and the creditors order the company to liquidate its assets and dissolve, it can no longer continue to trade. Not only would it not have the funds to pay employees or cover operational costs after selling its assets, but the company would also no longer exist, so it can’t trade.
However, if the company is sold in a ‘pre-pack’ sale, it can continue trading under the name of the new company, under the instruction of its directors. Therefore, the resolution at the end of voluntary administration and the company’s subsequent future will indicate whether or not a company can continue trading.
What Is the Difference Between Voluntary Administration and Liquidation?
Both voluntary administration and liquidation are procedures with the same goal in mind: repaying debts. However, there are notable differences between them that yield different outcomes. A company chooses to enter voluntary administration whereby an administrator will determine the best course of action for debt repayment. When a company enters into voluntary administration, it’s still in operation and can probably be salvaged.
Liquidation is the last resort after administration or voluntary administration has failed to yield any other resolution. It involves selling the company’s assets in order to meet its financial obligations, and results in the company ceasing to trade. Liquidation can be pursued following a failure with voluntary administration or directly if there is no chance of resuscitating the company’s finances. However, if there is a chance that the company can be recovered, it may be worth exploring voluntary administration before choosing liquidation.
What Happens If Voluntary Administration Is Unsuccessful?
Following several weeks or months of proposals without a conclusion, it’s likely that voluntary administration will be unsuccessful if no agreement is reached between the administrator and creditors. Unfortunately in such an event, the company’s assets must be sold to repay its debts. This procedure is known as liquidation, and can either be voluntary or compulsory. Following liquidation, the company will cease operations and be dissolved.
Contact Irwin Insolvency for More Information on Voluntary Administration
At Irwin Insolvency, we understand that entering administration and choosing an administrator is a daunting task. Our team of qualified and licensed insolvency professionals has been helping businesses endure financial difficulties for more than two decades. You can trust that we’ll bring the same level of professionalism and expertise to your business.
Our team is ready to provide assistance to individuals, businesses, and creditors. To speak to one of our experts about voluntary administration, give us a call today at 0800 254 5122.