Administration is an insolvency procedure that protects your company against legal pressure from its creditors while an Insolvency Practitioner acts as administrator.
Entering into administration allows a company to protect itself against compulsory liquidation. During the administration period, a company can restructure under the leadership of an expert Insolvency Practitioner.
There are several reasons for a company to enter into administration. Companies that have major structural and financial issues can restructure and refocus to free up cash flow and ensure creditors are paid.
In the event of a pre-pack administration, the company’s creditors receive cash that is raised from the sale of the company’s assets, while the company’s directors get a chance to purchase certain assets and continue the business.
Not all companies can enter into administration. In some cases, there are also better options available than administration. However, the benefits of administration make it a popular and effective option for insolvent and financially struggling companies.
Are you interested in entering into administration to protect your company against creditor action? Read on to learn more about the administration process, the major advantages and disadvantages of administration, and much more.
Administration quick facts
- When your company enters into administration, it becomes protected from legal action by its creditors. Creditors can’t file a winding up petition against a company that’s in administration.
- During administration, control of your company is handed from its directors to an Insolvency Practitioner. The Insolvency Practitioner acts to ensure the creditors’ interests are maximized while helping the company recover.
- Administration doesn’t guarantee financial recovery. In certain cases, your company’s administrator may determine that the best course of action is to enter the company into voluntary liquidation.
- Your company can propose a Company Voluntary Arrangement while it’s in administration. This is an effective option for companies that are viable and capable of recovering over the long term.
- Your company needs to be viable in order to enter into administration. For companies that have no chance of recovering financially, alternative options such as voluntary liquidation may produce a better outcome for creditors.
What is administration?
Administration is an insolvency procedure that provides struggling companies with a practical means to restructure and recover. Entering into administration provides protection for an insolvent company against legal action pursued by its creditors.
The administration process begins with your company’s directors choosing to enter the company into administration. In certain cases, a lender may be able to enter the company into administration if it holds a debenture.
Because administration protects a company against legal action, creditors can’t use a winding up petition to liquidate your business.
Entering into administration requires your company’s directors to give control of the company to an Insolvency Practitioner. They will act as administrator during your company’s administration period, which can last for several months.
During administration, the administrator will work to pay creditors by whichever means is most effective. The process of repaying creditors could involve the sale of company assets or the proposal of a Company Voluntary Arrangement.
Since the administrator’s job is to ensure the interests of creditors are prioritised, a company with steady cash flow and the potential to recover may enter into a formal agreement with its creditors during administration and continue trading.
In some cases, the administrator may determine that the most effective option for the company’s creditors is to sell assets through a pre-pack administration sale, or “pre-pack administration”.
Although administration is a very effective insolvency solution for some insolvent companies, it isn’t the best solution for every business. Contact us to discover the most effective option for helping your insolvent company recover.
Is your company eligible to enter into administration?
Not all insolvent companies can enter into administration. If your company just isn’t viable and is unlikely to be able to recover, entering into administration is extremely unlikely to produce any type of recovery.
Do you think administration is an effective option for your company? The following characteristics indicate a company may benefit from administration:
- The company needs to be insolvent, either by cash flow or its balance sheet, and have a history of steady cash flow that allows the administrator to work out its potential to repay creditors over time.
- The company needs to have a reasonable amount of assets to make entering into administration an effective option in insolvency. Companies with few or no significant assets will likely benefit more from voluntary liquidation.
- The company should be under pressure from its creditors and have received a statutory demand.
What happens after your company enters into administration?
Since there are several outcomes of administration, it’s difficult to predict exactly what the process will look like for every company. In most cases, there are four major steps to the administration process:
- Your company faces pressure from one of several of its creditors, typically in the form of a statutory demand, to pay its debts. Your company’s directors realise that it is insolvent and that immediate action is required.
- You contact an Insolvency Practitioner to discuss the options available to your company. The Insolvency Practitioner determines that administration offers the greatest benefits to your company’s creditors.
- Your company enters into administration. Control over the business is given to the administrator. The administrator begins preparing a proposal for the company’s creditors outlining a plan for the administration period.
- The administrator’s plan is put into action. If the company is viable and can recover, the plan may involve a Company Voluntary Arrangement, financing solution or partial asset sale to raise cash and pay creditors.
If the company is not viable and can’t recover, the plan may involve the sale of company assets through voluntary liquidation.
During this period, the company may use pre-pack administration to create liquidity to pay creditors through a pre-packaged sale of company assets to directors via a new company.
If the administrator reaches an agreement with creditors – for example, through a Company Voluntary Arrangement – your company can exit administration to start trading and fulfilling the terms of the CVA.
What are the advantages of administration?
There are several benefits to entering your insolvent company into administration, ranging from short-term advantages such as the end of creditor pressure to longer-term advantages such as the potential to turn around the company’s finances.
Several of these benefits are unique to administration. Below are some of the most significant advantages of using administration as an insolvency procedure:
- When your company enters into administration, it’s protected against legal action from its creditors. This means that creditors can no longer liquidate your company using a winding up petition.
- Administration involves an Insolvency Practitioner taking over as company administrator. This can reduce the stress involved with running a struggling company as its director.
- While in administration, your company can propose a Company Voluntary Arrangement to its creditors, creating a path towards long-term recovery that involves partial or complete repayment of its debts.
- Using pre-pack administration, you can create continuity and preserve jobs by purchasing company assets via a new company (often called a “Newco” or “Phoenix company”) in order to create liquidity for creditors.
- Since the administrator will run your company with the goal of making sure creditors are repaid as much as possible, there’s no chance of your creditors getting a worse outcome from administration than other solutions.
Not all of these advantages are unique to administration – for example, companies are also protected against legal action from creditors while filing a CVA – but most other insolvency procedures do not offer the flexibility of administration.
Would you like to learn more about the advantages of administration? Learn more about the advantages and disadvantages of using administration on our Advantages and Disadvantages of Administration page.
What are the disadvantages of administration?
Administration is a powerful and effective option, but it isn’t suitable for every type of company. There are several disadvantages to administration compared to other insolvency procedures.
While the unique advantages of administration make it an excellent option for some companies, it’s important to consider its disadvantages:
- When you enter your company into administration, you (and other company directors) give up control of the company.
- There is no guarantee your company will exit administration. If it’s the best option for creditors, your company could enter into voluntary liquidation.
- Your company will need to inform its customers that it’s in administration, which could affect trust in the company or damage its reputation.
- Employees may lose confidence in your company after learning that it’s in administration, causing problems retaining staff.
- If your company is entered into administration by a creditor, such as a bank which holds a debenture, the creditors can appoint the administrator.
- Administration can be an expensive process, particularly if the administrator requires several months to implement changes to your company.
What are the alternatives to administration?
There are several alternatives to administration that could be more suitable for your company. These include entering into a Company Voluntary Arrangement, voluntary liquidation and raising cash to pay creditors through a loan or invoice factoring.
Company Voluntary Arrangement
A Company Voluntary Arrangement, better known as a CVA, is an agreement that’s made between your company and its creditors. As part of a CVA, your company will make a monthly payment to gradually pay off its debts over time.
Proposing a CVA is a common alternative to entering into administration that’s used by companies that have predictable cash flow and the means to recover if the strain on their cash flow created by debt repayments is eased.
Like entering into administration, proposing a CVA to your company’s creditors will protect it against legal action such as a winding up petition.
Creditors Voluntary Liquidation
Creditors Voluntary Liquidation, also referred to as a CVL, is a voluntary liquidation procedure that results in the closure of your company and the sale of its assets by a liquidator in order to raise funds and repay creditors.
In some cases, administration could lead to your company entering into liquidation voluntarily. If your company isn’t viable and lacks any means or recovering, the CVL process could be the most effective option for ensuring creditors are repaid.
If your company doesn’t take any action after receiving a statutory demand, it could be wound up by one of its creditors. Compulsory liquidation is the end result of one of your company’s creditors receiving a winding up order.
Although compulsory liquidation typically produces the same outcome as voluntary liquidation, it’s a risky option that could result in your company’s directors facing a charge of wrongful trading and being held personally liable for company debts.
Emergency loans and financing
If your company only has short-term cash flow issues and can realistically repay its creditors with some extra liquidity, raising cash using a short-term loan or financing solution is a good way to avoid insolvency.
There are several financing options available for struggling companies, ranging from loans to invoice factoring. These solutions can provide a financial bridge that can be used to repay creditors in the short term and kick-start steady long-term cash flow.
What is pre-pack administration?
Pre-pack administration is an insolvency procedure that allows you to sell assets in a pre-packaged sale as soon as your company enters into administration. This leads to the preservation of certain aspects of the business in the form of a new company.
In a pre-pack administration sale, your company’s directors can purchase some or all company assets to transfer to a new company. This company can then continue trading, protecting jobs and preventing your viable business from ending.
Selling assets via a pre-pack sale can increase the amount of cash available to repay creditors while allowing your business to continue. This makes it a good option for both creditors and your company’s directors alike.
There are several requirements for using pre-pack administration. Your company needs to be incapable of recovering in its current form, and you’ll need to pay the market price when purchasing company assets to use in a new company.
There are also certain regulations, particularly the TUPE regulations, that you need to follow during a pre-pack administration sale.
Are you interested in preserving your business through a pre-pack sale? Learn more about pre-pack administration.
Get expert financial help
Is your company insolvent and under pressure from its creditors? If your company’s creditors are threatening to wind up the company through compulsory liquidation, it may be possible to save your business by entering into administration.
Administration offers a range of powerful advantages for your company, including protection against legal action from creditors. If your company is viable, it may be possible to turn its financial condition around during the administration period.
We can review your company’s financial situation and provide the advice you need to make an informed decision. If administration is the best option for your company, we can begin the process and protect your company against action from creditors.
Contact us to speak to an insolvency expert and learn more about the options that are available for your company. We can help you make the right decision for your company’s future and maximise its chance of recovering.