What Does Going Into Administration Mean?

• The content on this page has been written by Keith Steven and approved by Chris Ferguson Licensed Insolvency Practitioner and Managing Director of RMT KSA

What Is Going Into Administration?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator, and this places a moratorium around the company which stops all legal actions.

The 3 Purposes of Administration

The administration must have a purpose, and the Government encourages the use of company rescue mechanisms after administration. The three purposes, or objectives, of administration are:

1. Rescuing the company as a going concern. This is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days.
2. Achieving a better result for the company’s creditors as a whole. This is obtained by selling the BUSINESS as a going concern to one or more buyers, leaving the old company and its debts behind. This better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets.
3. Controlling and then selling property/debtors. This is called realising assets. The administrator makes a distribution to secured or preferential creditors in order of priority. This option is only used if the first two options are deemed unattainable.

The Administration Process and Timeline

Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court. However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and will need to give permission for the process to go ahead. Five days’ clear notice is required. A secured lender can appoint administrators over a company without notice if it thinks its money is at risk, so communication with them is essential. The administrators take on the employment contracts of the company after 14 days so it is desirable that the business is sold out of administration before that date. The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off.

The duration of an administration depends on the circumstances. If there are large amounts of money to collect in or substantial realiseable assets, then the administrators may trade for longer periods. During this time they will need to report to the creditors at regular intervals.

Alternatives for Directors

Pre-Pack Administration

The pre packaged administration sale used to be a very popular method of rescuing a business. However, there has been much media coverage of creditors’ dismay at seeing their “debt dumped” by a former customer. In response, there is now much increased regulation. This is a very powerful, far-reaching process that can protect the BUSINESS and be a form of business rescue, but usually the old company is liquidated afterwards. The company prepares itself to enter administration and sell its assets to a new company (“newco”) or to an existing 3rd party company.

A Company Voluntary Arrangement (CVA)

A CVA is a legally binding agreement with your company’s creditors which allows a proportion of its debts to be paid back over time. It is hugely powerful for restructuring costs, reducing employment numbers, reducing overhead costs, and improving cashflow. The directors remain in control, and shareholders are not diluted and do not lose ownership. A CVA can be a powerful alternative to administration.

Administration Followed by a CVA

The company can enter administration to get protection from creditors. The administrator then works with the company’s directors to produce his/her administration proposals. Once these are accepted, the administrator hands control back to the company’s board using a CVA. This is a powerful tool despite the fact that it is expensive and directors are not in control during the administration period.

Advantages and Disadvantages of Administration

Advantages

• All legal actions are stayed by the process.
• It stops the financial position getting worse and putting directors at further risk.
• It can be very quick and cost effective if a pre-pack is used properly.
• All unsecured debt is removed.

Disadvantages

• The directors are not in control of the business and an offer from a third party may lead to their removal as directors.
• Tax losses can be lost if no CVA is proposed.
• It is a public event, all creditors and all correspondence must say XYZ Co Ltd (In Administration).
• The directors have no powers to run the company.
• Costs are high, so it is most suitable for large companies.