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What Does Going Into Administration Mean?

5th October, 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
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  • Going Into Administration – A Simple Guide
  • The 3 purposes (or objectives) of Administration
  • How long does going into administration last?
  • What is a pre-pack administration or administration pre-pack sale?
  • Alternatives to Administration
  • What is administration followed by CVA?

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.

 

 

How long does going into administration last?

It depends very much on the circumstances.  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.  The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off.   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.

Who gets paid first if a business goes into administration?

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

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.

How does it work?

The company prepares itself to enter administration and sell its assets to a new company (“newco”) or to an existing 3rd party company. This is a very powerful, far reaching process that can protect the BUSINESS and be a form of business rescue, however usually the old company (oldco) is liquidated afterwards. See our guide on Pre Pack Administration for more information. Alternatively call Keith Steven on 07974 086779 to discuss how a pre-pack administration may or may not work for your company?

Alternatives to Administration

As the principal purpose of administration is to rescue the business, the main alternatives are:

Refinancing

The shareholders, wanting to protect their investment, might be persuaded to provide further loans, equity or investment to the company to avoid administration, or new lending/refinancing/debt products may be required. Of course, raising new capital in the current markets may be extremely difficult, especially if the business cannot, over time, be returned to profitability and without fundamental changes.

A Company Voluntary Arrangement

A company voluntary arrangement or CVA for short is a legally binding agreement with your company’s creditors which allows a proportion of its preferential (HMRC) and unsecured debts to be paid back over time.

The CVA period can be 6 months to 5-6 years. Once prepared the CVA proposal is put to all creditors and 75% of the preferential and unsecured creditors, by value, must vote in favour to ensure a successful approval of this voluntary scheme. It is hugely powerful too, for restructuring costs, reducing employment numbers, reducing overhead costs and improving cashflow. Once the proposal has been approved then all HMRC and unsecured creditors are bound by the arrangement. The company can carry on trading as usual, and the directors remain in control. Shareholders are not diluted and do not lose ownership. CVA can be a powerful alternative to administration and the process leaves the directors in control. Got questions on administration versus CVA and how each may work for your business? Speak to us free of charge now 0800 9700539

What is administration followed by CVA?

Basically the company enters 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 powerful tool despite the fact that it is expensive and directors are not in control during the administration period.  If you want to read more about the process then please see this page here

Got questions? For answers to all these questions read our guides or call us now on 08009700539. Our trained, high quality advisors will help you.

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