What does 'going into administration' actually mean?

28 May 2015

We are often asked, 'one of our customers' or 'my employer' is going into administration, but what does it actually mean when this happens? 

When a company goes into administration, control will be taken over from directors and given to the appointed administrators. The business is in this position because it is insolvent and cannot meet payment demands from creditors (which can include lenders, HMRC and suppliers). A lack of capital, poor cash flow and/or legal actions may be threatening to stop the business from trading. 

Unfortunately, unsecured creditors of the business (trade creditors) are unlikely to get much back from the administrator - see our infographic on who gets paid when a company goes bust.  

What about employees?

When a company goes into administration, the law states that administrators must take on the employee's rights and contracts after 14 days of being in office (as administrator). As such, the administrators want to sell or close the business before they take on that risk. This will mean employees are likely to face redundancy.

As shown in the infographic, employees rank above unsecured creditors but below lenders and the banks when owed money. Very rarely can administrators sell the assets and the business to generate sufficient monies to pay the bank (usually the secured creditors) in full, let alone employees and unsecured creditors. What's more, insolvency practitioners provide a legal service to oversee the process, take control of the company and to work with creditors so they need to be paid their fee. 

The administrator(s) will look at which parts of the business are viable and which should be closed. Often there is no other choice but to make the employees, who are surplus to requirements, redundant as quickly as possible.