Going into administration is a powerful statutory process that occurs when a limited company becomes insolvent and is no longer able to pay its debts as they fall due. Unlike a final closure process, administration is designed to be a temporary lifeline, placing the company under the control of independent, Licensed Insolvency Practitioners (IPs).
The directors and secured lenders can appoint administrators through a court process. Once appointed, the IP immediately takes over the running of the company. The process establishes a statutory moratorium around the company. This powerful legal protection instantly stops all legal actions, including winding up petitions, bailiff visits, and other aggressive enforcement measures by creditors, allowing the IP the necessary breathing space to assess the company’s viability.
Administration is governed by the Insolvency Act 1986. The core purpose is not merely to shut the company down, but to pursue a path to recovery and secure the best possible outcome for the company’s creditors.
The administration must have a purpose, and the Government encourages the use of company rescue mechanisms after administration.
The process of formally placing a company into administration is strictly controlled by law, involving notice periods, secured creditors, and important internal deadlines.
It is possible for the company and its directors (or a creditor like the bank) to apply to the court for the administration order. However, the law requires that any finance provider with appropriate security must be contacted, and the aims of the administration discussed and approved.
The finance provider must hold a fixed and floating charge (usually under a debenture) and will typically need to grant permission for the process to proceed. A minimum of five days’ clear notice is legally required for this step.
Important Note: A secured lender can appoint administrators over a company without notice if they believe their money is at immediate risk, underscoring why open communication with lenders is essential.
Once appointed, the Administrators take control. They are legally prohibited from running the business at a loss or in a way that makes the creditors’ overall position worse.
Administrators take on the company’s employment contracts after 14 days. It is quite normal for administrators to make redundancies in the run-up to the 14 day period. After which time the administrator would take on the employment rights and costs of all remaining employees. This has to be balanced against the requirements for any purchaser who may want to retain the staff. Consequently, it is often desirable that the business is sold out of administration before this date to lower any risk to the administrators and lower costs.
The overall duration of the administration is dependent on the circumstances. If there are large amounts of money to collect or substantial assets to realise, administrators may trade for longer periods to maximise returns. During this time, they are legally required to report to creditors at regular intervals with updates on their proposals and progress.
While both Administration and Liquidation are formal insolvency procedures governed by the 1986 Insolvency Act, they serve fundamentally different purposes and have vastly different outcomes for the business, directors, and creditors.
Administration aims for rescue and restructure. The main objective is to save the company as a going concern, or achieve a better return for creditors than immediate closure.
Whereas liquidation aims for closure and dissolution. The process is designed to realise all company assets into cash, pay creditors, and formally remove the company from the register.
Administration is suitable when the company has severe cash flow problems but the underlying business is fundamentally viable and could be saved by restructuring.
Whereas liquidation is appropriate when the business is no longer viable and cannot continue to trade without worsening the position of creditors.
Administration provides an Immediate Statutory Moratorium, which stays all legal actions (e.g., Winding Up Petitions). Directors lose control, but the process is temporary.
Liquidation offers no immediate moratorium. Creditors can pursue legal action until the liquidator is formally appointed. The company is permanently closed, and directors have no future control over that entity.
Administration is typically higher in cost and more complex, best suited for larger businesses with significant assets or brand value to protect.
Whereas liquidation is lower in cost and more straightforward, making it the usual solution for smaller, non-viable businesses.
The single most important legal distinction lies in the duty of the Insolvency Practitioner. An IP cannot agree to an Administration unless they can demonstrate and are prepared to show that the process will achieve a better result for the company’s creditors as a whole than if the company were wound up (liquidated) immediately.
This “better result” is typically achieved through the continuation of the business, a strategic restructure, or the preservation of intangible value (like a brand) that would be destroyed in an immediate liquidation.
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 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.
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.
When a business supplying goods or services direct to the public enters administration, it creates immediate worry, especially regarding deposits for high-value items like kitchens or holidays (as seen with cases like Smallbone of Devizes). Unfortunately, consumers are typically at the back of the line for retrieving money, behind secured and trade creditors.
Your best chance for a refund is usually tied to your payment method:
Credit Cards (£100 – £30,000): Contact your credit card provider immediately. Under Section 75 of the Consumer Credit Act, the provider is jointly liable with the company for purchases valued at £100 or over, even if only part of the payment was made by credit card.
Debit Cards / Under £100: For smaller amounts or debit card payments, you may be able to claim a refund using the Chargeback system through your bank.
If you want a refund for an item you’ve already purchased, it’s highly unlikely you can return it under the usual company policy. Any refund claim will be treated like that of an unsecured creditor. Similarly, customers holding gift cards are treated as unsecured creditors.
The decision to honour gift cards is often a commercial one made by the administrators. They may honour them to preserve brand goodwill if they are negotiating a sale. If the business has no brand value, gift cards are usually not honoured (e.g., Maplin or ToysRUs).
You must find out who the administrators are and contact them directly. The company’s website is legally required to publish the administrator’s details, or you can check the official notices published in the London Gazette
When a valued customer enters administration, it creates immediate financial pressure and uncertainty for you as a supplier. Understanding your legal position and knowing how to respond is essential to protecting your own cash flow and business.
How to Safeguard Your Position and Spot Warning Signs
Firstly, effective risk management begins long before the formal insolvency process starts. You must know your industry and look for the tell-tale signs of a business in distress, which often appear before late payment begins. If a company is struggling, you must be ahead of the news, not just reacting to it. By understanding these warning signs, you put yourself in the best position to tighten credit terms or cease supply before major debts are incurred.
Once your debtor has formally gone into administration, you are owed all monies up until the date of appointment (the pre-administration debt). However, as an unsecured creditor, you may not receive much of this amount. Your immediate action must be to gather your invoices and provide proof of debt to the administrator. The administrator is legally obligated to contact all known creditors and inform them of the process and any creditors’ meetings—you should ensure you attend or have someone represent you.
Do not continue to supply or grant credit to the company under the old agreement. On paper, that company is effectively not trading, and any new credit extended risks non-payment.
If the administrators or the new management team ask you to continue supplying the business, you are dealing with a separate entity and a new opportunity. Because the main purpose of administration is rescue, it is often important for key suppliers to continue trading.
If you agree to supply, you must set up a new commercial agreement with the company in administration. Demand new terms such as payment up front (pro forma) or drastically reduced credit periods (e.g., seven days) until a new track record of payment is established.
If you are asked to supply the administrator while they run the business, you must ask for payment up front or a formal guarantee from the Administrator that your business will be paid for the new supply. This is crucial because the debt owed by the old company and the debt owed for the new supply are two distinct things.
If the business is sold via a pre-pack administration to a NewCo (often with similar management and a similar name), treat this as an opportunity to supply a potentially lucrative customer who has just shed its debt. However, you must still maintain a tight rein on credit. Negotiate the best terms possible—starting with pro forma until you are confident in their new financial stability.
Need to know where you stand in the payment queue? For a detailed breakdown of the legal distribution order of funds, please see our dedicated guide on who gets paid first when a company goes bust.
If the administration of a large customer places your own business under significant pressure, there is no harm in seeking advice. The sooner you understand your options, the better you can navigate the crisis.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT KSA Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
