Going into Administration
What are the implications for a limited company going into a Company Administration?
Administrations help companies recover from financial issues, which may then lead to its insolvency.
They are associated with medium to larger companies due to cost and scale.
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Purpose of the Administrator
The purpose of appointing an Administrator to a company remains to achieve one of three objectives:-
- Rescue the company as a going concern;
- Obtain a better realisation for companies creditors for distribution when compared to a company voluntary liquidation;
- Realise property belonging to a company, so to distribute monies to the creditors of the company who are preferential & secured creditors.
Company Administration process?
A company entering Administration, therefore, indicates operating of the business transfers legally to an appointed Administrator.
Legally in the UK, an Administrator must be a licensed insolvency practitioner. The courts instigate the appointment, your company’s creditors, or the directors of the company.
Administration insolvency law requires before any such procedure is agreed. Secured creditors of the company require informing, and their approval gained to then continue with the Administration.
Floating charge holders then require five days notice before an Administration Order is approved.
For further in-depth reading on the company administration process, please read ‘company administration process explained‘
Moratoriums commence once the Court receives ‘Notice of Intention to appoint an Administrator’, is filed and approved. Once filed and approved, all creditor actions cease legally without the expressed consent of a court ruling or the appointed company administrator in office.
Why Should a Company Go into Administration?
Reasons to appoint an Administrator:
- Qualifying Floating Charge holders have the power to appoint an Administrator. Associated with a material breach of the terms agreed within either a loan agreement or a covenant.
- Company directors concerned company creditors may move legally to secure company assets, exposing the company while trading. Directors who appoint an Administrator to mean that a Moratorium protects Company assets until the business sale completes.
- Company shareholders may have conflicting opinions to individual directors, and with no option to resolve the dispute, may contemplate appointing an Administrator.
- Pre-Pack Administrations allow the sale of a business while securing a seamless execution and continuity of the trade. The main result is the preservation of the companies perceived value associated with the purchase of one company by another.
How may you avoid Administration?
When your company remains under financial pressure, creditors or others may require the company to have an Administrator appointed. Directors who then are under pressure to proceed with an appointment need to act sooner than later. Early action may allow the opportunity of a pre-pack Administration allowing a new entity, operated by the former directors, to purchase assets of the former company, enabling continuity.
The appointment of the Administrator then means it is impossible to prevent the process. Stopping Administration entirely through knowledge of the initial warning signs of insolvency remains the best recommendation. Therefore, seeking professional Insolvency advice remains paramount and keeps options open.
Administration Process in Simple Steps
1 The process of placing a Company into Administration;
2 Prepare to sell the business;
3 Administrator’s Plan;
4 What happens during the Administration?
5. Exit Tactics.
Going into Administration and Implications on Employees?
The Administration often leads to redundancy implication for the companies employees and directors. Appointed Administrators remain responsible for realising the best outcome financially for the company’s creditors. However, this objective for the Administrator requires a cost reduction strategy to achieve the objective, meaning redundancies along with other non-essential operating expenses.
Company employees, appointed redundant with fourteen days of an administrator appointment, remain as ordinary creditors of the company. Employees retained past fourteen days are deemed preferential creditors if made redundant later. The status of ‘Preferential’ ranks before ‘Ordinary! When being paid out.
However, exiting an Administration into a liquidation procedure allows an opportunity to make a claim for redundancy utilising the redundancy pay scheme.
Distinction Between an Administration and Liquidation?
Both Insolvency procedures involve a licensed Insolvency Practitioner. They as procedures strive to ensure the best financial outcome of the company’s creditors.
- An Administration remains part of the “Rescue” family, allowing companies to be a business rather than face closure.
- Administrations are typically linked to larger companies and avoid the stigma of a liquidation for high profile brands.
- Administration requires restructuring and sight of a distinct ‘exit strategy’ on how the company moves back to normal trading status out of Administration.
- Liquidation entails issuing redundancy notices to former employees of the company, along with the company’s directors. Then the closure for the good of the limited company, along with selling its assets to pay the company’s creditors. Then, the final act is to strike the company of the register at Companies House.