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. 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 tend to have different outcomes for the business, directors, and creditors.
| Feature | Administration | Liquidation |
|---|---|---|
| Core Purpose | RESCUE & RESTRUCTURE. Aims to save the company as a going concern, or achieve a better return for creditors than immediate closure. | CLOSURE & DISSOLUTION. Aims to realise all company assets into cash, pay creditors, and formally remove the company from the register. |
| Business Viability | Appropriate when the business has cash flow problems but is fundamentally viable (i.e., the underlying business/brand is sound). | Appropriate when the business is no longer viable and cannot continue to trade without worsening the position of creditors. |
| Legal Protection | Immediate Statutory Moratorium (Protection). All legal actions (like Winding Up Petitions) are immediately stayed. | No immediate moratorium. A creditor can pursue legal action until the liquidator is formally appointed. |
| Director Control | Directors lose control. Control shifts entirely to the Licensed Insolvency Practitioner (Administrator). | Directors lose control. The Liquidator takes charge; directors’ duties shift to cooperating with the IP. |
| Cost & Complexity | High. It is a costly and complex process, generally suitable for larger businesses with significant value to protect. | Lower. It is a more straightforward and cost-effective procedure, 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.
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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.
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.
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.
