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Administration or Pre-Pack Administration Guide for Law Firms

1st March, 2023
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven
  • What Does Going Into Administration Mean?
  • What happens when a company goes into administration?
  • How long does going into administration last?
  • What is a pre-pack administration or administration pre-pack sale?

If your law practice has severe cashflow problems and creditor or HMRC pressure is growing, it’s time to get support and advice on your options.

Its free to get initial advice from experts in turnaround and insolvency such as KSA Group who own this website. We have been rescuing, restructuring and selling law firms since 2003. Talking to experts (free) helps you understand this complex option and you will find it takes a lot of weight off your mind.

What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the management of Licensed Insolvency Practitioners who are appointed as administrators by the Court after an application (petition) to the Court.  The directors and or the secured lenders can appoint administrators through a Court process in order to protect the company, its assets and their position.

What happens when a company goes into administration?

Administration is a very powerful UK insolvency process for gaining control when a law firm, which can be a LLP or company has serious cashflow problems, is insolvent and facing possibly serious threats from creditors. For example HMRC may be threatening a winding up petition for non-payment of taxes, or failure to adhere to time to pay arrangements. Or a lender may be seeking to foreclose against the law firm. Finally, the SRA may be threatening to intervene in the law firms affairs.

The Court may appoint a licensed insolvency practitioner (usually at last 2 IPs are appointed) as an “administrator”. This places an immediate legal moratorium around the company and stops all creditors legal actions.

The administration must have a “purpose” and the Government encourages the use of company rescue mechanisms after administration.

The 3 purposes (or objectives) are as follows:

1). – Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)

Company rescue as a going concern – this is usually a  company voluntary arrangement. The company/LLP or partnership 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 than would be likely if the company was to be wound up (liquidation).  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The 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. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority LINK?. Usually the business ceases trading and employees are made redundant.

Only if the first two options are deemed unattainable, can the administrator use this third option.

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 the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint its own administrators over a company without notice if it thinks its money is at risk. Obviously a plan and good communication with the secured lender is essential.

How long does going into administration last?

It depends very much on the circumstances.  In a trading administration 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. Or, more usually, the employees are made redundant before 14 days have elapsed in adminisatrion.

The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off. They must pay PAYE, VAT, NIC, suppliers and rents for example, whilst the company is in administration   If there are large amounts of money to collect in or substantial realiseable assets then they may trade for longer periods.  During this time they will need to report to the creditors at regular intervals.

What is a pre-pack administration or administration pre-pack sale?

The company prepares itself to enter administration and sell its assets to a new company (“newco”) or to an existing 3rd party company. The directors engage advisors to run the sales process.

The proposed administrators engage chartered surveyors as agents to VALUE the business, goodwill and its assets, this may include, debtors, brand, work in progress in a  law firm for example. They also engage insolvency solicitors to draw up the required contracts for sale, applications to Court etc.

After the agents have marketed the BUSINESS for a period of 2-3 weeks they report the proposed bids to the proposed administrators. He, she or they then choose the best bid to achieve objective 2 above.

Within a day or two the COMPANY files a notice of intention to appoint administrators and serves notice on the bank or secured lenders. Once the notice ceases or if the lender consents, the BUSINESS is sold, the assets are turned into cash and the old debts stay with the old COMPANY.

What will the regulators think?

Obviously the SRA will need to be closely involved BEFORE the pre pack or any form of administration process is begun. Only solicitor insolvency practitioners can act as trading administrators. There are very few such qualified solicitor IPs.  However we can act as advisors and then administrators if the process of pre pack is used. At all times though close liaison with the SRA will be required.

“Informed Client Consent”.

Should any form of sale of a law firm be planned, either in administration or liquidation  (or even a MA& process) you must obtain informed client consent. We can discuss this with you as part of our overall advice on restructuring. Do not act until you have taken insolvency advice from experts in law firm restructuring.

Administration is a very powerful, far reaching process that can protect the BUSINESS and is a form of business rescue, however usually the old company (oldco) is liquidated afterwards. Call Keith Steven on 07974 086779 to discuss how administration may, or may not work for your law firm.

Pre pack: Checks, Controls and rules.

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 more regulation of the process particularly when a sale to connected [parties to the existing directors (or to the existing directors in a new company).

We can take you through the process of applications to the Pre Pack Pool and also introduce – pre pack evaluators to assist you with your bid. In addition we know the buyers of law firms who are active presently. They may or may not be interested in a purchase of the client files.

However, in advance of any meeting and issuance of engagement  letters our regulators and the Insolvency Service (part of HM Department of Business Energy and Industrial Strategy) require all insolvency practitioners to obtain know your client (KYC) and anti-money laundering (AML) identification documents for all directors and shareholders holding >25% of the shares to allow us to proceed to advise the company. We will require up to date ID information including a photographic ID, such as a passport or driving licence PLUS a home utility bill or bank statement for each person.

Got questions? For answers to all these questions read our guides or call us now on 08009700539.

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What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

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. Going Into Administration - A Simple Guide 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. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue 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. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.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 the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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