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What does 'going into administration' actually mean?

We are often asked, 'one of our customers' or 'my employer' is going into administration, but what does it actually mean when this happens? 

When a company goes into administration, control will be taken over from directors and given to the appointed administrators. The business is in this position because it is insolvent and cannot meet payment demands from creditors (which can include lenders, HMRC and suppliers). A lack of capital, poor cash flow and/or legal actions may be threatening to stop the business from trading. 

Unfortunately, unsecured creditors of the business (trade creditors) are unlikely to get much back from the administrator - see our infographic on who gets paid when a company goes bust.  

What about employees?

When a company goes into administration, the law states that administrators must take on the employee's rights and contracts after 14 days of being in office (as administrator). As such, the administrators want to sell or close the business before they take on that risk. This will mean employees are likely to face redundancy.

As shown in the infographic, employees rank above unsecured creditors but below lenders and the banks when owed money. Very rarely can administrators sell the assets and the business to generate sufficient monies to pay the bank (usually the secured creditors) in full, let alone employees and unsecured creditors. What's more, insolvency practitioners provide a legal service to oversee the process, take control of the company and to work with creditors so they need to be paid their fee. 

The administrator(s) will look at which parts of the business are viable and which should be closed. Often there is no other choice but to make the employees, who are surplus to requirements, redundant as quickly as possible.

Insolvency Service infographic: reasons for director disqualifications

The Insolvency Service has published a new infographic (see below) highlighting the number of director disqualifications over the last year and the reasons behind them. 

The most common reason was 'unfair treatment of the crown', meaning late or non-payment of business tax to HMRC or paying other creditors before HMRC. The second reason also refers to directors mistreating creditors by deliberately hiding assets and monies owed at the cost of the company's creditors.  

It's a stark warning to directors to ensure they are aware of their duties when running an insolvent company. See our pages, director disqualifications and director duties, for more information.

Lloyds and KPMG accused of forcing property firm into administration via the bank’s restructuring division

A court case due to take place this year involves Halifax Bank of Scotland – HBOS (now part of Lloyds Banking Group) and one of its previous business customers, Angel Group. The property development firm was put into administration in 2012 by KPMG. 

Founder of the company, Julie Ann Davey, is now applying to remove the joint administrators (who were appointed by HBOS) because she believes the bank forced her business into their ‘turnaround’ division, resulting in high costs and fees. This led to the firm having no other option but to go into administration. Davey now wants independent insolvency practitioners to oversee the process and investigate the reasons why Angel Group was transferred to the business support unit. 

The lawyer representing Davey’s case, Stephen Davies QC, highlighted the pressure surrounding the banks after the financial crisis and the desperation to claw back money into the organisation. 

KPMG administrators deny any wrongdoing on their part while Lloyds Banking Group state their Business Support Unit is not used for profit and focuses on turning around as many businesses as it can.

In 2013, Lawrence Tomlinson accused RBS of their support division, Global Restructuring Group (GRG), and its treatment of struggling business customers. Tomlinson believed RBS had deliberately put distressed companies into GRG, knowing full well the high fees and repayments would cripple them, leading to administration. It was alleged the bank could then buy the business and assets cheaply and sell them on for a profit.   

It will be very interesting to see the outcome of the court case later this year. 

Options for a struggling business

It can be a very stressful and worrying time when a business is suffering financially. Often it’s difficult to know what to do next or what the right strategy is. Creditors may be threatening legal action, accounts may be in a mess or staff could be worried about their jobs. Depending on the severity of the situation, there will be various actions directors can take in order to avoid further problems.  

There has been a strong turnaround culture for years now and usually creditors, like HMRC, favour rescue methods over insolvency procedures, like liquidation, because creditors generally see a better return in the long run.  It’s important to seek professional advice and consider all the options available and whether each one is suitable for the business. 

Below is an explanation of the most common turnaround and insolvency procedures:

Time to Pay 

This is an informal arrangement with HMRC to pay back VAT, PAYE or Corporation tax debt over a few months up to a year. A deal can be negotiated directly with the Business Payment Support Service or through us. We speak to HMRC daily and can advise on the most suitable proposal for your business by using our own financial forecasts. 

Company Voluntary Arrangement (CVA)

This is a formal turnaround deal between the company and its creditors whereby a proportion of debt is paid back over a set period of time, usually three to five years (some debt is written off at the beginning). The company is protected from legal action while directors continue to stay in control of the company. Unsecured creditors cannot take action for debts incurred prior to the CVA.

Pre-pack administration 

Pre-pack administration is where a company is sold to a third party or new company (newco) upon immediate appointment of administrators. This ensures the business continues to run (even though the company itself dissolves) and staff can be transferred to the new company by TUPE

Creditors Voluntary Liquidation (CVL)

This is considered to be the last resort for companies in financial distress. The company and its assets are sold and turned into cash, then distributed equally to creditors. Only a creditor can appoint a liquidator to liquidate the company, however a director can initiate the process and hold a creditors meeting with the assistance of an Insolvency Practitioner.

If you’re unsure of the right action to take, speak to one of our advisors on 0800 9700539 who can talk you through the options for your business, free of charge. 

Buying the right commercial property

Finding suitable premises is a vital factor in the success of any business. Here we look at the initial considerations to take into account when looking for a commercial property.

The latest quarterly Commercial Market Survey from the Royal Institute of Chartered Surveyors (RICS) shows that demand for commercial properties has risen for ten consecutive quarters. It’s not just investors who are buying, either – RICS observes that occupier activity is at its highest in 17 years.[1]      

It would seem, then, that more and more businesses are making the crucial decision to purchase their own premises. But just as important as making the decision to buy is ensuring that you choose the right commercial property.

Initial considerations

What do you need from your premises?

Broadly, there are two things that your commercial property should do: enable your business to operate as effectively as possible, and keep costs down.

You therefore need to draw up as specific a list as possible that will outline how you can best achieve this. To do so, you need to think about your business requirements:

  • Accessibility. Can your workforce easily access the premises, and is there adequate parking? If customers will be visiting the property, are you accessible and visible to them? If you will be shipping and/or receiving goods, will you be close to transport links?

  • Comfort and sanitation. Are there adequate kitchens, toilets and break areas for your staff? Do you need sanitation facilities and waiting areas for customers?

  • Layout and space. Under UK law, a room in a commercial building should be sufficiently spacious that every staff member is allowed a minimum of 11 cubic metres[2]. This refers to unoccupied space, so businesses with more equipment will naturally need more space per employee. You may also have special requirements; many manufacturing businesses require open-plan premises and high ceilings, for instance. Your property will need to be well-ventilated and, ideally in most cases, well-lit by natural light.

  • Utilities. You will need to consider drainage, power and water, as well as telecommunications and IT networks. Ensure that the supply is sufficient for your premises and that the cost is within acceptable margins. (You should always be shown an Energy Performance Certificate (EPC) by a prospective seller.)

As an owner-occupier, you may have more scope to alter your property to suit your needs – though bear in mind that many changes will require planning permission. Always find out if you will need to get planning permission before making a purchase.

Will your needs change?

Over time, your business needs may change. Perhaps you will wish to expand, or maybe your business model will change to adapt to market shifts and changing customer needs.

This eventuality is possibly the biggest downside of owning, rather than renting, commercial property. Your long-term flexibility will be hindered by the fact that you have equity tied up in your property.

It might be possible that you can make alterations to your property to accommodate your changing business needs. If you envisage this happening, try to find a property subject to as few planning restrictions as possible. Subject to the terms of your commercial mortgage and depending on tenant demand, you might also be able to rent out part of the property that you no longer use, eliminating wasted space and generating an income on the side.

Finally, you might be able to sell your property or rent it out in its entirety.

What are the initial costs?

When buying your property, you will incur some or all of the following costs:

  • Building and contents insurance;
  • Decoration and refurbishment;
  • Initial structural alterations, including those needed to bring your workplace in line with current regulations (building, fire and health and safety);
  • Purchase costs, including your commercial mortgage deposit, building surveys and conveyancing fees

Chances are that you will need to fund the acquisition with a commercial mortgage; however, you will still need to put down some capital of your own. You will need to meet most costs outside of the purchase itself, plus a deposit worth at least 25% of the property value.

A healthy market means that a wide variety of commercial mortgages are available, with competitive annual interest rates, flexible terms and repayment options and broad lower and upper lending limits. Do be aware, however, that a mortgage is a binding agreement, and that if you don’t keep up repayments your property may be repossessed.

For help choosing from a wide range of options that will suit your immediate and long-term business needs, consider contacting a professional commercial broker.


Written by Ben Gosling for Commercial Trust Limited


References
1. Rubinsohn, S. “Surge in real estate investment and tenant demand points to strengthening economy”. RICS. 28 Apr 2015.
2. The Workplace (Health, Safety and Welfare) Regulations 1992, SI 1992/3004 Sch 1 para 3


Your property may be repossessed if you do not keep up repayments on a mortgage secured against it.

Some commercial mortgages are not regulated by the Financial Conduct Authority (FCA).

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