What Are the Pros and Cons of Administration?
For many directors of insolvent companies seeking to avoid closure, administration appears to be the answer they’ve been looking for. The procedure can restructure a company and its inner workings, ironing out any issues and improving cash flow.
While administration is an excellent recovery option for businesses, there’s a variety of positive and negative factors to consider.
So what are the advantages and disadvantages of administration? And is it the right choice for your business?
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What Are the Advantages of Administration?
Offers the Potential to Save the Business
When entering administration, the goal of the administrator – typically – is to save the business as a going concern. Only when this is not possible will they default to selling or liquidating the company.
Alternatively, the company may be entered into a CVA. The administration allows time for this arrangement to be made, whilst also getting the company into a position where it is feasible.
The business may also be saved through a pre-pack administration.
A Company Voluntary Arrangement – or CVA – functions as a payment plan, protecting your company from being wound up by creditors, as long as your company makes its allotted monthly payments.
Pre-pack administration is where a buyer for the business is allocated before the administrator is officially appointed. Once appointed, the buyer will immediately purchase the business and its assets.
Offers a Moratorium Period
Of all the various corporate insolvency procedures, administration is the only one to provide a moratorium period prior to it formally taking effect.
This can be achieved by filing a notice of intention to appoint an administrator, following which a 10 business day moratorium applies.
A moratorium period offers respite from financial pressure on the company, preventing creditors from taking any legal action to wind up the company or collect debts while it’s in effect.
This offers the business a valuable opportunity to take stock of its situation and regroup, safe from the threat of closure.
Offers a Better Outcome for Creditors
In situations where the business can be saved, creditors can expect to see full repayment of their lendings. In others, where it appears the business is in a state of terminal insolvency, the administrator will seek to get the best possible outcome for creditors, more than what they would receive if the company were to be wound up.
Creditor Approval Isn’t Needed
Unlike other insolvency procedures, you won’t need to gain the formal backing of your creditors to enter into the process.
Once you’ve appointed an administrator, creditors cannot object or take recovery action against the business. This can make administration your strongest option if you wish to save your company but you cannot get the supporting votes of your creditors.
The Disadvantages of Administration
Administration Doesn’t Guarantee Business Rescue
While administration can result in the rescue of a business as a going concern, it’s important not to forget the other potential outcomes: the business may be liquidated, or it may be sold to another buyer.
Administration Can Be Very Expensive
Administration is a very involved and intensive procedure for the appointed office-holder, so fees can quickly stack up.
Some administrations take up to a year in length, incurring costs and fees for their entire duration. As a result, administration is typically sought by larger companies that have more working capital and assets.
Pre-pack administrations are also highly expensive, as creditors will need to be assured they’re getting the best possible returns on debts owed – this means you’ll probably have to buy all company assets back at full market value.
Administration Can Damage Your Reputation
You’ll also have to ensure you advertise your administration on all company correspondence. This can negatively impact your brand image with customers and clients.
Be prepared to rebuild relationships and repair any fractures in the company’s image.
You Won’t Maintain Control Over the Company
While the process does offer a breathing space, you won’t be the one taking advantage of it.
As soon as the administration is filed in court, you’ll surrender control of the company to the appointed administrator. You’ll have to place your trust in them to turn things around on your behalf.
However, this isn’t necessarily a disadvantage – having a fresh pair of eyes can be critical in achieving a successful turnaround, as a new approach will always be needed.
Investigation into Director Conduct
Much like liquidators, the administrator must investigate the conduct of the company’s directors.
This investigation will cover activity from the past 2 years, looking out for any evidence of misfeasance, wrongful trading, or fraudulent trading.
These charges can carry heavy penalties: you may be made personally liable for company debts, issued large fines, disqualified from future directorship, or even imprisoned.
However, it is rare anything comes from such investigations. Directors who have been honest and forthcoming with company creditors and customers are unlikely to encounter any issues.
Employee Contracts Can Be Expensive
If you “phoenix” your company via a pre-pack administration as a means of saving the business, there is some employment legislation you should bear in mind.
TUPE – Transfer of Undertakings (Protection of Employment) 2006 – protects employee rights and their interests during a business sale. This means that any staff who were not made redundant prior to the buyout will have protections allotted to their employment contracts.
TUPE states that all undertaken staff must have their pre-existing contract terms met. This can be challenging after an expensive administration. Contracts can be changed on economic, technical or organisational grounds, but if the justifications are flimsy or insufficient, you could end up on the receiving end of an employment tribunal.
Is Administration Right for Me?
With so many factors to consider, it’s easy to feel overwhelmed. It can be hard to know if your company can afford the expense, or if the process will be worthwhile.
Our expert insolvency practitioners can guide you as to what is the best option for your business. If we think administration can offer you a path to a financial turnaround, we’ll let you know. If not, we’ll suggest something that might be more appropriate for your situation, whether that be a CVA or a CVL.
Get in touch to arrange a free consultation today.
