What happens when a company goes into administration?

Understanding the Company Administration process and business rescue options

Company administration is often seen as the end for a business, but it is in fact, a procedure that allows for its restructure or sale as a going concern. Initially, the main advantage of entering administration is the moratorium period provided, that allows time and space for the right decisions to be made.

A licensed insolvency practitioner (IP) is appointed to deal with the process, which is guided by the Insolvency Act, 1986, and control is taken away from the company’s directors at this point. There may be talks with staff around future plans for the business, and possible redundancies, but the principal aim of the process is business recovery.

The administrator must be a licensed insolvency practitioner. Begbies Traynor specialises in insolvency and corporate recovery, and are available for appointment as administrators.

Eight-week moratorium period

This eight-week period protects the company from creditor legal action. The IP contacts creditors about their appointment, and places a public notice in the Gazette. During this time the administrator will consider the company’s situation, and must present a plan/proposal to creditors, employees, and Companies House for exiting administration.  

There may be a number of options available, including a Company Voluntary Arrangement (CVA), selling the business as a ‘going concern,’ or voluntary liquidation.

Purpose of administration

Insolvency legislation sets out three potential objectives, or purposes, of a company entering administration:

• Rescue the company as a going concern – if this is not possible:
• Achieve a better result for company creditors as a whole than would be possible if the company was liquidated – or if that is not possible:
• Realise company property  for the benefit of one or more secured or preferential creditors

Sale as a ‘going concern’

The business may be sold as a going concern if circumstances allow, either by placing it on the open market, or using what is termed a ‘pre-packaged’ sale. ‘Pre pack’ involves marketing the business prior to officially appointing administrators, and selling it on quickly to minimise loss of trade.

Members of staff may be transferred over to the ‘new co’ under TUPE – the Transfer of Undertakings (Protection of Employment) regulations, which protect their terms and conditions, and maintains a continuous term of employment.

Restructuring

If the business owns valuable hard assets, such as machinery or equipment, the IP may decide that selling one or more of these would provide sufficient working capital to turn business around.

They also have the power to make redundancies to reduce the company’s outgoings, and will consult with staff if this is a possibility. They have 12 months in which carry out plans for restructuring, which could also include renegotiating contracts and/or lease arrangements to free up additional monies.

It is this release of funds held within the company’s assets that is the catalyst for recovery over the longer-term. Not only is working capital generated, but ongoing costs are also reduced by renegotiating contracts.

Company Voluntary Arrangement (CVA)

If a company is deemed viable in the long-term, the administrator may decide that a Company Voluntary Arrangement is the best way out of administration. This involves a single monthly repayment being made to the administrator, who distributes it to each creditor as agreed in the CVA.

This option provides further protection for the company while it recovers financially. Once administration ends, directors regain control with the intention of trading their way out of financial difficulty.

Creditors’ Voluntary Liquidation (CVL)

If there is no potential for rescuing the business, or selling it as a going concern, the administrator may decide that a CVL offers the best return for creditors. This option can also be advantageous for directors as by maximising creditor returns, the chances of wrongful trading allegations being made is also reduced.  

When does administration end?

Administration ends when its purpose has been achieved – when assets have been restructured and the company is on a more secure footing, or if creditors have agreed the administrator’s proposal for a CVA.

An administrator’s contract automatically ends after 12 months, but it can be renewed if more time is needed to finalise arrangements.

Begbies Traynor can provide more professional advice about company administration, or any other aspect of corporate insolvency. We operate from over 70 offices around the country, and offer a free same-day consultation in complete confidence.