If a business goes into administration what happens if it is sold?"
When a business goes into administration one often hears about the administrators putting a business on the market as they try and sell the business. This is mainly because the administrators are charged with getting the maximum return for creditors as quickly as possible. As such by putting the business up for sale then there is a possibility that a lump sum of cash is available.
The administrators are not allowed to trade the business at a loss and after 28 days they personally take on the liability of the employment contracts. Therefore a quick sale is the preferred option. Of course, the problem with a quick sale is that the urgency will mean that the valuation is likely to be depressed. Having said that if a business languishes too long in a period of limbo then the value of the business can be quickly eroded and staff are demoralised accelerating the decline. This is sometimes the justification of a pre pack administration which we discuss on other pages where the business is put into administration and then effectively sold at the same time.
Prior to a sale of the business the administrators will usually take drastic measures to reduce the costs. In the case of retail they will usually close down many stores and make people redundant.This is what is happening to the Birthdays stores at Clinton Cards.
Once the business has been put into administration then the directors lose control of the process and they will have no say in who the business is sold to or for how much. Unless of course they can raise funds to buy the business back.
Any employees who remain in the business throughout the administration and who subsequently work for the new owners will have their employment contracts transferred over via the TUPE Regulations. This means that they will be entitled to any redundancy pay if the new owner looks to make cuts to employment. This was decided in recent case law.
For the Buyer
The first priority of any purchaser will be to try and put the business onto a firm footing as soon as possible. Obviously the buyer will have done their due diligence and will know a fair bit about the business but it will be a steep learning curve as any deal is likely to have been done quickly.
To find out how to buy a business out of administration then please refer to our how to buy a business out of administration pages.