Your essential guide to company administration, including what administration is, how the company administration procedure process works, the advantages and disadvantages and other commonly asked questions.
What is company administration?
A company administration procedure essentially involves your business appointing a third party to act as an administrator with the end goal of paying your creditors and resuming trading. When a company is insolvent and facing serious threats from creditors, company administration is a very powerful process that enables a company to protect itself whilst a rescue plan is worked out.
When a business enters administration, control of the business is taken over by administrators and a moratorium is placed around it stopping all legal actions such as winding up orders and payment demands. Then, depending on the severity of the company’s situation, the administrators will look to either turn the business around or, if necessary, sell the business and its assets.
Although the thought of relinquishing control of your company can be stressful, the idea of administration is to try and prevent the company from entering liquidation. As such, entering administration could be a shrewd step that buys time, enabling you to restructure debts, find a way forward and ultimately leading to a new beginning.
When is company administration a suitable option?
Administrators are usually called in when a business is suffering significant financial problems. There are three main circumstances in which company administration might be the best way forward for your business: your business has reached a state of insolvency, you are facing the threat of being wound up, or you are struggling with overhead costs.
In order for a company to qualify for a company administration procedure, the company must be a reasonable size, have reasonably predictable cash flows and be able to predict profitability. What’s more, there must also be an insolvency position or contingently insolvent position and the directors should think that a hostile creditor will seriously affect future trading possibilities. Find out more about when to consider administration here.
When is company administration not suitable?
If a company has little in the way of assets, poor cash flow and no future, then a Creditors’ Voluntary Liquidation is probably more appropriate than administration.
What is the role of the administrator?
During the administration process, an appointed administrator will take full control of business operations with a legal obligation to act in the best interest of the creditors. The administration process requires a licensed insolvency practitioner to act as the administrator appointed by the court, and they will then take over the management of the company and take responsibility for restructuring it.
Who can appoint an administrator?
Companies and directors can appoint an administrator quickly with an insolvency practitioner’s guidance. However, no administration order will be granted unless the holders of all qualifying floating charges have been given five days notice of the company’s intention to appoint an administrator. This means that the floating charge holder will still retain the ability to step in and appoint their own choice of administrator should they so wish – so it is possible that whilst the board might decide to appoint one administrator, the bank could refuse and choose to appoint its own.
How can the bank appoint an administrator?
Banks are able to appoint an administrator for the company’s administration procedure if they hold a qualifying floating charge under new debentures granted after 15th September 2003. If the bank holds an older debenture, it can appoint an administrative receiver. However, it should be pointed out that the administrator has a duty to act in the interests of all creditors, not just on behalf of the bank or floating charge holders.
How long does the procedure last?
The company administration process can generally only last for up to one year, although this can be extended by the consent of the creditors or by the court. However, it’s important to note that the administrator is required to do everything as soon as reasonably practicable. For example, there is a time limit of eight weeks for getting proposals out to creditors and holding the initial creditors’ meeting. After 14 days in administration, the employment contacts of the company are taken on by the administrators, and within 10 weeks of entering into administration, a creditors’ meeting will be held to outline the administrative proposals
What are the advantages of administration?
Administration can be a very useful and powerful tool for insolvency practitioners to control the company, banks, and creditors to ensure the survival of the business. Some of the main advantages of company administration include:
- It stops the company’s financial position getting worse
- It prevents putting directors at further risk
- It can be very quick and cost-effective
- All unsecured debt is removed
- From the creditor’s perspective, the insolvency practitioner will ensure that all creditors’ positions are correctly considered
- Jobs and economic activity can be protected
What are the disadvantages of administration?
With company administration, one of the main disadvantages is that the directors are no longer in control – and an offer from a third party may lead to their removal:
- Tax losses can be lost if no CVA is proposed
- Another buyer may buy the assets
- It is a public event, so most customers and suppliers will be aware
- The directors have no powers to run the company
- Costs are often very high, so it is only suitable for larger companies where aggressive creditors threaten future viability
- Financing trade and other supplies can be difficult unless adequate resources are available and or new funds can be introduced in the administration period
Potential outcomes
Depending on the findings, administration often ends in one of four ways:
Company Voluntary Arrangement
A company voluntary arrangement or CVA is often the most favourable outcome. The administrator will work with the directors to draw up a company voluntary arrangement, and if the creditors agree, the company is handed back to the directors who continue to trade. Find out more here.
Pre-Pack Administration
In a pre-pack administration, the administrator will prepare the business and its assets for a sale to a new or related company that is often made up of the same directors. These directors can then hire existing employees and produce the same goods or services from the same premises. Discover more here.
Liquidation
If agreements aren’t met and there are still debts to pay, the company will enter liquidation and come to an end. It’s a quick and powerful way to end a company, and because everything is dealt with properly, the company directors can walk away and start over again. Find out more about the process here.
Dissolution
If the company has no money to pay off creditors or no assets to sell, it will be dissolved instead of liquidated. However, dissolution, also known as striking off, isn’t commonly used and is only permitted under certain specific circumstances. Discover more about how the dissolution procedure works here.
Next steps
If your business is facing financial difficulty, it can be a very worrying and stressful time. However, you don’t have to face your financial problems alone. Contact McAlister & Co today for a FREE, no-obligation chat – we don’t even need personal or company details to answer initial questions on your situation. Call us on 03300 563 600, or alternatively, download our worried directors guide here.
