What Is Company Administration?
Administration is a business rescue procedure which places control of the business in the hands of an administrator. They’ll restructure the business with the aim of saving it from insolvency.
The solution is a solid choice for companies that are facing mounting pressure from creditors but wish to avoid dissolution:
- Protects company from legal action
- Allows time for restructuring to take place
- Offers a fresh perspective on company problems
In this guide, we’ll be explaining the advantages of administration, how the process works, and what alternative options are available.
Contents
How Do I Know if My Company Is Insolvent?
Your company must be insolvent to enter into administration. But how do you know if your business is insolvent?
You can test for insolvency by answering two simple questions:
- Can your business pay its debts when they are due?
- Are your company’s assets greater than its liabilities?
If the answer to either of these questions is no, your company is insolvent.
This is important, as it fundamentally changes your legal duties as a director; instead of promoting the interests of the company and its shareholders, you must protect the position of your creditors.
Failing to do so can result in misfeasance and wrongful trading charges. In order to save an insolvent business and meet your obligations, you need to use a formal insolvency solution, like administration.
What Are the Advantages of Administration?
Medium-to-large-sized companies often use administration as a way to overcome unaffordable debts.
Handing directorial control over to an experienced administrator offers a range of benefits for struggling businesses:
- Freezes all unsecured debt payments, interests, and charges
- Protects company from creditor legal action
- Offers a fresh perspective on the company’s issues
- Restructures the company to reduce overhead costs
- Creditor approval isn’t needed
- Potential to save the business from liquidation
When a company enters administration, it is placed into a ‘moratorium period’, during which its debts are put on hold, giving it the chance it needs to regroup and get back on its feet.
What Is the Company Administration Process?
To start the process, you must appoint an administrator. The administrator must be a licenced insolvency practitioner, like those of our team. We’ll help you complete the necessary forms and send them off to court.
Once the court has approved our appointment, the business is placed in a moratorium period, during which its debts are frozen, and it is protected from legal action. We’ll then identify the profitable areas of the business and restructure the company to improve its cash flow.
If we can save the company, we’ll hand control back to you. If not, we’ll look to sell the business to a new owner or liquidate its assets.
You can find out more about the administration process by exploring the tabs below.
The first step in any insolvency process is getting in touch with an insolvency practitioner.
We’ll assess your financial situation and let you know whether company administration is the right choice for you. If not, we’ll suggest an alternative solution that protects your legal and financial interests.
If administration is decided to be the best option for you, the first thing to do is to appoint an administrator. This is done by the company’s directors, generally without the need for a court order.
If the company has any secured charge holders, they must be given 5 days’ notice of your intent to appoint an administrator.
Once your administrator has been appointed, they’ll have 8 weeks to draft a proposal outlining what they intend to do with the business during the administration period.
The plan – legally – must seek to achieve at least one of the 3 following outcomes:
- Rescue the business as a going concern
- Achieve a better result for creditors than a liquidation
- Realise assets to make a return to secured or preferential creditors
The administrator will seek to save the company before defaulting to one of the other options.
Once the proposal is finished, the administrators will start working towards achieving the planned outcome.
Sometimes, due to unforeseen circumstances, they will have to deviate from the planned course of action and seek another outcome.
Administration ends when the aim has been achieved or when the contracted term comes to an end.
The exit strategy for the administration will have been outlined in the initial proposal. The usual plans are to:
- Hand back control of the company to its directors
- Enter the company into a CVA
- Sell the company
- Place the company into liquidation
Administration can take several months to complete. The maximum time is usually around 12 months, but this can be extended with a court order.
What Are the Potential Outcomes of Company Administration?
A proposal will be outlined at the start of the administration process, giving a detailed plan for how a certain outcome will be achieved, so you should know how things will turn out right at the start.
That being said, administration is a flexible procedure, and administrators must react to unexpected costs or income.
So, what kind of results can you expect?
If the company’s debts aren’t too severe, sometimes some simple restructuring work to reduce overheads and improve cash flow can be enough to bring it out of insolvency.
Once the liabilities have been addressed, the business will be handed back to directors, free to continue as normal.
This is a common, positive outcome for administrations.
A Company Voluntary Arrangement is a repayment plan which allows you to stretch debts out across 2-5 years. This reduces your overhead and takes pressure off the day-to-day running of the business.
As long as you keep up with the payments, the business will be protected from closure.
You need the backing of 75% of your creditors – by value – to enter into a CVA. Administration is often used to make the company stable enough to support needed.
If a company’s debts are too great and its creditors are unwilling to agree to a CVA, the administrator may have to sell it to a new owner.
This involves the transfer of all remaining staff and assets.
A pre-pack administration buyer of a company is decided prior to the appointment of an administrator. The company is sold immediately or soon after they’re appointed.
Sometimes the former director is the buyer of the company. This allows them to carry on trading under a new name. This is known as a phoenix company.
Sometimes, the company cannot be rescued or attract a buyer. In this case, the administrator will liquidate the business, selling its assets to pay off creditors as much as possible. The remaining debts are then written off.
What Are the Alternatives to Administration?
Administration is a great option for medium-to-large companies that need to get on top of their debts.
However, the process doesn’t offer any guarantees, and it can be expensive for smaller companies. This means it isn’t an appropriate choice for every struggling business.
Fortunately, there are some other solutions for you to consider.
A Company Voluntary Arrangement is an attractive business rescue procedure which allows businesses to deal with their debts while avoiding closure.
It functions as a repayment plan, offering a range of benefits:
- Freezes interest and charges
- Spreads out debts over 2-5 years
- Protects company from closure
- Allows some debts to be written off
To enter into a CVA, you’ll need the backing of 75% of your creditors. Our team will help you create a proposal that is affordable for you and attractive to your creditors.
Although it might not seem attractive, voluntary liquidation is often the best way of protecting your personal legal and financial interests.
CVLs are the most common form of company closure in the UK, offering a range of benefits:
- Stops pressure from creditors in as little as 14 days
- Safeguards you against misfeasance and wrongful trading charges
- Allows directors to claim redundancy
- Cost of procedure usually covered by liquidation proceeds
Control of the company is handed over to a liquidator who sells the company’s assets to repay creditors. Any remaining debts are then written off, allowing you to move on with your future.
Pre-pack administration is where a buyer is selected before the administrator is appointed. Once the administration begins, the sale takes place immediately or soon after.
The company could be sold to:
- Current directors of the insolvent company
- Third-party buyers
Many directors use pre-pack administration to buy their own company and continue trading under a new name without the burden of their current debts. This is known as a phoenix company.
Speak to an Expert
If your business is struggling with debts it cannot repay, you should speak to an insolvency practitioner as soon as possible.
Early intervention keeps your options open and protects you from any unwanted legal or financial fallout down the line. Our experts can assess your situation and guide you towards the best solution for you.
Get in touch today to book a free, no-obligation consultation.
FAQs
Yes – there’s a good chance administration can return your business to profitability.
The process doesn’t offer any guarantees, and success varies on a case-by-case basis, but it helps many companies escape debt each year.
Following the appointment of an administrator, it can take up to 8 weeks to create a proposal.
The administration itself may then take several months. Administration can last up to 12 months, although extra time can be granted via court order.
Unfortunately, to make your business more cost-effective, your administrator will likely have to make some staff cutbacks.
If staff are made redundant, they can claim money from the government. They’ll be entitled to a redundancy package, unpaid wages, holiday pay, and any money they would have earned during their notice period.
You can view further information on employee rights during insolvency here.
The directors can voluntarily agree to place a company into administration. You don’t need the approval of your creditors or shareholders to do this.
A company creditor can also apply to the court for an administration order if they think it would be a better option than compulsory liquidation.
Control of the company is handed over to the administrators until the process is completed.
The administrators will act in the best interest of the company and its creditors. The company will be handed back to directors if administrators are able to turn things around.
Yes – but it’s important to seek advice quickly if a petition has been served on the company.
The Court will need to agree to the administration and an insolvency practitioner will need to explain why it would be a better route than liquidation.
You need to act quickly because once a winding-up petition has been served, you’ll only have 7 days before it is publicly advertised. This will result in your company accounts being frozen, effectively killing the business.
