Protection from Creditors using a company administration

Company Administration

Company Administration. Author: John A Waller. Consultant. Revised: July 19th, 2024.

What Does Going into Company Administration Mean?

When a company goes into administration, it has entered into an insolvency procedure (under the Insolvency Act 1986) providing a business rescue procedure. It must be a viable business to achieve one of the statutory objectives of an administration:

  1. Rescue the company as a going concern.
  2. Entering administration to secure a better result, rather than closure, for the company’s creditors.
  3. Realising property within the company to distribute to secured or preferential creditors.

However, recent changes during the Coronavirus Pandemic have affected the above:

  • From December 1st, 2020, preferential creditors debts owed to HMRC, where a deduction has been made, will now be treated as secondary classes of preferential creditors. For example, VAT, PAYE, NIC and CIS tax.
  • Furthermore, does point three above not refer to how an administrator can pay unsecured creditors? Clause 65 (3) of the Insolvency Act 1986 permits an administrator to distribute dividends to the company’s unsecured creditors if the court grants permission. The court could grant permission if it means higher dividend pay to creditors.

Administration – when a company or LLP becomes insolvent and is put under the management of a licensed Insolvency Practitioner.

An administration is ideal for protecting a company from debt pressures, and an IP must be appointed for this insolvency procedure.

Once appointed, the administrator must provide copies of their proposals to all creditors within eight weeks. The proposals must then be considered within ten weeks of the start of the administration.

You may view notices on websites or letterheads showing the phrase ‘In Admin’ or ‘In Administration’. Usually, the word refers to the company having administrators appointed, as detailed above.

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Who may appoint an Administrator?

An administrator may be appointed by a:

  • court.
  • Holder of a qualifying floating charge.
  • Company or its directors.

The administration must have a purpose and not be abused to avoid paying specific creditors.

The above applies to limited companies incorporated in England and Wales.

So:

If the company cannot be saved, the administrator will aim to achieve a better return for creditors than would be possible if the company was wound up (without first being in administration).  For example, the company can continue to trade while seeking a sale of the company or assets, such as:

  • goodwill;
  • trademarks;
  • patents;
  • equipment;
  • the customer database;
  • software;
  • content or websites.

Also, entering administration allows another insolvency procedure to liquidate the company’s assets and then distribute the proceeds to secured or preferential creditors, where neither of the first two objectives above is feasible.

What happens to staff when a company goes into Administration?

Employees must be particularly vigilant during the initial 14 days of a company’s Administration. If an employee is made redundant during this period, they become an ‘ordinary creditor’ and are last in line to receive owed monies. However, they will still retain entitlement to redundancy payments and outstanding wages.

In cases where a company has been profitable but is currently facing financial difficulties, administrators may be able to rescue the business and restore its profitability. If the Company is turned around and remains solvent, all parties involved—you vending business owners, creditors, administrators, and employees—stand to benefit, which can be a source of hope and motivation for employees.

Conversely, if a company has been experiencing a consistent decline in sales and profits over the past few years, this could signal the end of the business. If administrators cannot revitalise the business within a reasonable timeframe, the Company will likely face liquidation. For employees, this means the termination of their employment and the unfortunate loss of their jobs.

Despite the challenges, employees who have worked through the Administration remain entitled to their rights. While facing liquidation is harsh, employees can rest assured that the Administrator is committed to protecting employees’ entitlements, which should reassure them and build trust.

Preferential Creditors

If you can keep your job for more than two weeks, you will become a ‘preferred creditor,’ which offers better protection in the event of job loss. Preferential creditors have more substantial rights and priority over ordinary creditors simply by surpassing the initial 14-day period.

As a preferential creditor, you have the entitlement to the following claims:

– Up to £800 for any outstanding salary and commissions for the four months preceding the insolvency.

– Accrued holiday pay for up to six weeks.

– Some of your occupational pension payments.

If the Company liquidates after the administration period without a successful turnaround, preferential creditors may need to pursue owed payments. Treatment of payments owed before four months remains as if you were an ordinary creditor. At the same time, the Administrator will prioritise payments owed during that period, providing a financial advantage and a safety net while seeking new employment.

What If There Aren’t Enough Funds from Liquidation to Pay Redundant Employees?

In the event of a company liquidation, not all employees may receive their full redundancy pay if insufficient funds exist. In such cases, redundant employees should seek help from their insolvency practitioners. The national insurance funds provide a safety net to prevent such situations. You can claim any shortfall if you are owed money by contacting the insolvency practitioner and the Redundancy Payments Service (RPS).

The National Insurance fund pays a maximum weekly payment of £700, covering up to:

  • eight weeks’ pay and
  • six weeks’ holiday pay.

However, this fund does not cover sick pay and maternity leave pay. Individuals must contact the Department of Work and Pensions or HMRC to claim these or similar entitlements.

Seeking assistance from an insolvency practitioner can streamline the claims process and help calculate your entitlements, providing you with the necessary support and guidance during this challenging time.

Continued Employment During Administration

If the administrators retain you beyond the initial 14-day days, you will continue accumulating your entitlements during the administration tenure. At this point, the Administrator assumes the role of your employer. Throughout this employment phase, the Administrator might request a reduction in your wages or even a complete deferral of your wages. If this occurs, you will again be required to pursue these outstanding payments after the administration period if the Company liquidates. However, it’s important to note that you are entitled to receive the outstanding amounts owed.

The potential sale of the Company by the Administrator

Following the initial 14-day period and the subsequent administration phase, employees may face a situation where the Company changes ownership or another entity buys it. In such an event, it is essential to note that your rights under the Transfer of Undertakings (Protection of Employment) remain protected. Regulations safeguard your employment entitlements and provide a framework for transferring employees to the new employer, ensuring security and peace of mind during these changes.

Doing so presents a favourable outcome for employees, as the new employers must retain existing staff per government regulations. Therefore, it safeguards the receipt of any outstanding wages, holiday pay, or other remuneration owed to the employees. Furthermore, as the new proprietors reestablish the enterprise’s operations, employees are entitled to recover any previously forfeited remuneration. This provision upholds employees’ rights during a change in ownership.

When a company changes ownership, the new owners may find it necessary to change existing employment contracts. These changes can impact various aspects of the contract, including the pay rate, holiday allowance, sick pay, and employee pension funds. While this may not be an ideal situation for the employees, it is allowable under the concept of ‘Permitted Variation.’ Accordingly, the Administrator can make changes to employment contracts if they are considered essential for the overall viability and survivability of the business. Unfortunately, employees may have limited options in these circumstances and may be required to ‘accept the changes or face losing their jobs.

New Owners

When new owners take over a business, they may change the operations to ensure its survival and profitability. However, if the new owners decide that specific roles are no longer necessary, this could lead to job redundancies for employees. In such cases, affected employees have particular rights to redundancy payments, and they should be able to claim the payments owed to them.

Employees facing the possibility of redundancy should be mindful that the amount they receive is contingent on various factors. The most significant factor to take into account is their length of service. For most companies, employees must have completed two years of service to be eligible for redundancy pay.

Arrange a free, confidential meeting with HBG Advisory regarding protecting your Company with a Company Administration.

The team at HBG Advisory provides company directors with expert advice on how to proceed for staff members concerned about their Company’s Administration. Our emphatic, experienced team supports employees in achieving the best claims.

Who is in Administration?

A daily listing of companies in Administration may be viewed at the Gazette.

How can Insolvency Practitioners stop creditors and HMRC from taking further action? 

The Insolvency Act 1986, amended in 2003 and 2010, promotes the rescue of companies in the UK. It allows the Company to keep running if creditors want to shut it down.

In the UK, the law relating to freezing VAT, PAYE, tax and other creditors’ actions is set out in Schedule B1 of the Insolvency Act 1986 and Part 2 of the Insolvency Rules 1986. 

HBG Advisory uses the Insolvency Act 1986 and the Insolvency Rules 1986 to freeze creditors’ actions within 24 hours. 

Creditor pressure issues and HMRC enforcement issues can be immediately frozen.

Purpose of an Administration

The statutory objectives to put your Company into Administration remain to:-

  • Rescue a company as a going concern, or
  • achieve a better result for the Company’s creditors than if the Company remained wound up without entering Administration first or
  • realising the Company’s property will be distributed to one or more secured or preferential creditors.

However, the Administrator should aim to rescue the Company as a going concern unless it is not feasible or a better result could be obtained for creditors by not doing so.

HBG Insolvency, based in Liverpool, Merseyside, recently sold a building as part of the Norfolk Street Hotel’s Administration.

What does it mean when a company goes into Administration?

A limited company experiencing financial difficulties (uncontrolled company debt) and being threatened by a winding-up petition may lead to a company going into Administration (A form of company rescue and support). The Administration is when an administrator, a licensed insolvency practitioner, manages a company’s affairs and assets. All legal actions, however, cease upon appointment. However, depending on the situation, they may sell all or part of the business as a going concern. They, therefore, may sell the assets or close the business.

How does Administration affect a director of a company?

Once a limited company goes into Administration, the directors ‘ powers are restricted. Therefore, those directors in office at the time of Administration may not carry out any management decisions or control without the authority of the appointed Administrator.

Only when the Administration concludes should directors resume control.

An officer of the Company, along with other persons involved, may be required to provide:

  • A statement of affairs; 
  • Details of the Company’s: 
    • assets;
    • liabilities; 
    • creditors.

However, any individual who fails to comply may face prosecution.

Going into company administration – Administration, meaning.

However, a trading administration may be plausible if unofficial discussions with the Company’s creditors enable the Company to trade while in Administration. Maybe allowing the sale of assets to fund or raising funding ensures cash flow begins, reducing and possibly paying the outstanding debts. The Company can then trade out of difficulty once confidence restores.

Liquidation and Administration

If a company enters a creditor’s voluntary liquidation or compulsory liquidation, the liquidator may apply only for an administration; the only exception is a company mandatory liquidation. A qualifying floating charge holder can appeal to the court for an administration order. Therefore, the issuing of an administration causes the court to dismiss the winding-up order with such additional provisions as it sees fit.

It is important to understand the difference between liquidation and Administration.

When to consider a Company Administration

If you identify any of the issues highlighted below? Consider contacting HBG Advisory regarding considering Going into Administration:-

  • Landlords threatening to take possession;
  • HMRC is pressing hard for arrears of PAYE, VAT, & Corporation tax;
  • The bank threatening account closure;
  • Creditor pressure chasing forceful threats of legal action;
  • Wrongful trading concerns and personal liabilities;
  • Your Company holds excessive obligations, property, and employees and is dropping down the ranks in the market;
  • Customers migrating elsewhere

What does business recovery mean?

A company going into Administration?

What does going into Administration mean? 

Going into Administration refers to an insolvent company placed under the control of licensed Insolvency Practitioners. Often appointed by the company directors themselves, though secured lenders may appoint to ensure their monies lent remain secure and may be repaid once sanctioned by the courts to appoint.

Once the Company goes into Administration, an IP must be appointed. The Company then remains ring-fenced from creditors threatening to commence or in the process of any legal action to recover outstanding monies.

Is an Administration free?

Costs vary depending on the complexity of the process, but a pre-packaged administration remains highly regulated, as a sale should produce the best value for the Company’s creditors.

Who may then opt to place a limited company into Administration?

Normally. The directors initiate a voluntary process. May the business experience financial difficulties? However, a Qualifying Floating Charge Holder may also prompt an Administration (Banks, Secured Lenders) if they feel their monies remain at risk. This is referred to as an Administrative Receiver, the appointed Administrator.

Notice of Intention to Appoint an Administrator?

A notice of intention to appoint administrators begins when the Company files Form 2.8B with the court to register its intention to enter Administration. This signifies that the Company is attempting to resolve its financial issues. It is usually used when a company tries a pre-pack administration process. The notice is then registered at the Company’s house.

Responsibility for its filing

  • Appointed company directors;
  • Any floating charge holder.

What’s the Administration of a company? (Considered a Company Rescue)

Companies enter Administration (an insolvency rescue procedure) that a company may enter if insolvent (usually when facing Compulsory Liquidation). The prospective Administrator, however, must demonstrate they may achieve one or more of the following:-

  • The rescue of the Company as a trading concern;
  • Achieving a better result for the Company’s creditors as a whole than would be likely if the Company were wound up (without first being in Administration);
  • Realising property to the dividend to one or more of the “secured” or “preferential creditors;”
  • Placing a company in Administration can be complicated. The procedure for considering your options remains dependent on the Company’s circumstances.

Please contact HBG Advisory for more information and advice regarding the process.

The objective?

The first objective of an administration, however, remains to continue trading as a “going concern” (paragraph 3(1)(a), Schedule B1, Insolvency Act 1986).

Why enter Administration?

Administration protects a company experiencing insolvency from creditors. Therefore, it is frequently used to rescue the Company from entering liquidation and closing down.

A business may enter Administration for other equally important reasons, such as enabling the Company to plan and implement a restructuring and recovery plan.
Therefore, they demonstrate to creditors the best practice to protect their position and have extra time to sell assets to pay creditors. However, as directors, they cannot perform. Indeed, though, an administrator can.

Thus, administrations have many advantages and disadvantages. Hence, those companies hindered by extreme debt or significant litigation may be the most beneficial decision for buying time to restructure and recover.

Disadvantages of an Administration?

Does your Company maintain stable cash flow and assets? Then, an administration may be best suited for recovery.

However, a business with unstable cash flow and few assets may not suit an administration. Therefore, a company voluntary(CVA) arrangement may be better suited to the Company.

Therefore, an administration demonstrates you agree to surrender the day-to-day control of your Company to a licensed insolvency practitioner.

The administration process remains known to the public domain. Therefore, your Company’s creditors, staff and customers may see the Company’s financial predicament. However, you remain legally obliged to notify them of your Company’s circumstances. It is usual for many owner-managed companies not to yield control of the business provisionally. As with liquidation, the Administration again requires advertising in the public domain.

Administration remains an expensive process for a company to go through. Therefore, those companies with severe cash flow issues tend to shy away from this insolvency process.

The Administrator

Qualified Insolvency Practitioners act as Administrators. Usually, in addition to the initial person appointed, two or more administrators are assigned, acting as “Joint and Several Administrators.”
An administrator, however, acts as an agent of the Company (paragraph 69, Schedule B1, IA 1986) and as an officer of the court (paragraph 5, Schedule B1). They must ensure they act in good faith and be independent and impartial in managing the Company and any property it holds.

Who can appoint an Administrator?

There are three distinct ways a licensed insolvency practitioner can act as an administrator of a company.

  • Only one needs to apply:
  • One or more board directors;

As an Administrative Receiver:

  • A registered charge-holder;
  • A creditor via a court application.

Will Creditors receive any money?

Whether creditors receive payments for outstanding debt depends on the amount realised within the Administration. Therefore, an order of preference exists when paying out funds to creditors. Unsecured creditors rank last behind preferential creditors (e.g. employees) and those who hold the security. Therefore, the Administrator sends their administration proposals to creditors within eight weeks of the appointment. The report will contain information about the prospects of payment to creditors. Unsecured creditors often do not receive funds in full for outstanding balances from the Company.

Will creditors still chase me for repayments?

No. Administration provides a moratorium stopping creditors from taking further enforcement action, 

What is the difference between Secured and Unsecured Creditors?

An “unsecured creditor” is a creditor with no security protecting the outstanding amount.

A “secured creditor” retains a charge over an asset if defaulted.

Can the new Company then have the same directors and shareholders?

Yes, they can. The best offer for an insolvent company’s business or assets may be from the existing directors or management team. No law prevents a director of an insolvent company from forming a new company. However, disqualified directors may no longer act as directors while banned. Bankruptcy or those subject to a bankruptcy restriction order or undertaking may also not act.

What are the Timescales?

Putting a company into Administration can take a few hours to 2 weeks or more. The size of the business and the complexities surrounding it may be complicated.

How long can a company be in Administration?

Once a company enters Administration, it remains in Administration for 12 months. However, depending on the Company’s circumstances, this could be shortened to 6 weeks or extended into multiple years.

Does an Administration differ from liquidation?

An administration rescues a viable business while liquidation permanently closes the Company. However, assets and brands may still be sold to interested parties.

Will the Administration be advertised?

A notice of a company entering Administration requires advertising in the Gazette. Furthermore, advertising remains at the discretion of the Administrator.

Let HBG Advisory help you. We can help your Administration with our no-obligation and expert advice from our experienced partners. Speak with someone TODAY!

Can I change a company name while in Administration?

YES.

It is typical for a company to consider changing the name of the Company before insolvency proceedings.

Voluntarily entering Administration requires a licensed insolvency practitioner (IP). The IP forms a plan for moving forward. You must discuss a name change with the Administrator, though this should usually not present any legal problems.

Exit from Administration and enter a CVA

A company in Administration has no time limit. However, an administrator remains obliged to carry out their duties as quickly as possible so that the Company may cease to be in Administration.

The exit may be by:-

Continuing to trade out of Administration

However, the moratorium may offer the company time to resolve its financial issues by selling assets, obtaining additional funding, or reaching an informal agreement with its creditors to repay its outstanding debt.

When convinced the Company remains in a viable position, the Administrator can release control, allowing the directors to resume their daily activities.

However, if not the case, then:

Company Voluntary Arrangement (CVA)

However, if the Company struggles to service historic creditors but the business remains trading well, a company voluntary arrangement (CVA) remains possible.

Therefore, a CVA allows a struggling business to trade while using current profits to stay afloat and pay off past debt.

A CVA is a formal payment plan for the Company to settle outstanding creditors.

A licensed insolvency practitioner drew a proposal for consideration by the Company’s creditors. To start, 75% (by value) of the Company’s creditors must agree with the CVA proposal. Once approved, this remains legally binding on all parties involved.

As per the agreement, the Company must make payments on time and in total, and creditors must adhere to the payment plan.

In most CVAs, however, a percentage of the outstanding debt is written off, along with reductions in operating costs to ensure the agreement’s viability.

Creditors’ Voluntary Liquidation (CVL)

A creditors’ voluntary liquidation (CVL) is used post-administration if the Company is no longer financially viable and will not be a profitable entity.

If a company’s creditor is in Administration, view the guide issued by R3: ‘ADMINISTRATION GUIDE TO CREDITORS.

If a shareholder of a company in Administration, view this guide:- UKSA

Between April 2021 and June 2021, 169 administrations filed at Companies House. 

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