What happens when a company goes into Administration?

Criteria for Going into Administration

A company may be eligible for going into administration if it meets specific criteria, primarily revolving around its financial status. The primary criterion is insolvency, which can manifest in two main ways:

• Cash-Flow Insolvency: This occurs when a company is unable to pay its debts as they fall due. It indicates a lack of liquidity, meaning the company cannot convert its assets into cash quickly enough to settle its immediate liabilities.
• Balance Sheet Insolvency: This is when a company’s liabilities exceed its assets. In this case, even if the company can pay its debts now, its overall financial health is compromised, leading to potential long-term insolvency.
• Legal Actions: If the company is facing significant legal threats from creditors, such as winding-up petitions, the administration can offer a protective shield to restructure and deal with these issues.
• Future Viability: The likelihood of the business being viable in the future, post-restructuring, can also be a factor. Administration is not just a means to close a business but a potential pathway to its recovery.
• Director’s Assessment: The directors must believe that entering into administration is in the best interest of the company and its creditors. This involves a careful assessment of all available options and their consequences.
• Creditor Pressure: The level of pressure from creditors, including the urgency and size of outstanding debts, plays a significant role in determining if administration is the appropriate path.

What is the order of debt repayment?

In administration, debts are repaid in a specific legal order to ensure fairness and transparency:

• Secured Creditors with Fixed Charges: These creditors have security over a particular asset of the company. They are paid first from the proceeds of selling that asset.
• Preferential Creditors: This category includes certain employee claims, like arrears of wages and pension contributions. These creditors are paid before those with floating charges.
• Secured Creditors with Floating Charges: These are creditors whose security is on general assets of the company rather than specific ones. Their repayment comes after preferential creditors.
• Unsecured Creditors: These creditors, which can include suppliers, customers, and some HMRC debts, are next in line.
• Shareholders: Finally, if any funds remain, they are distributed to shareholders.

Who can initiate Administration?

The process of entering into administration can be initiated by several parties, each with a vested interest in the company’s future:

The most common initiators of this process are the directors of the company themselves. When they foresee that the company is unable to continue its operations due to financial distress, they can choose administration as a step towards restructuring or salvaging the business.

Creditors, especially those with significant outstanding dues, can also initiate the administration process. This is often seen as a means to recover a higher percentage of the debt than would be possible if the company went directly into liquidation.

In certain situations, the court can order a company into administration. This usually occurs in response to a petition from creditors or, less commonly, from the company or its directors.

What is the protection offered by Administration?

The administration offers a pivotal form of protection for the company known as a ‘moratorium’. This moratorium is essentially a period during which creditors are legally barred from taking certain actions against the company. Key aspects of this protection include:

Halting Legal Proceedings: Creditors cannot commence or continue legal proceedings against the company without permission from either the court or the administrator.

Prevention of Asset Seizure: During the moratorium, creditors are restricted from seizing the company’s assets, giving the administrator a chance to assess the situation and decide on the best course of action.

How long does Administration take?

On average, the administration process lasts about one year. This period is often sufficient for the administrator to assess the situation, stabilize the business, negotiate with creditors, and implement a recovery or wind-down plan.

In cases where the administration is particularly complex, or if more time is needed to achieve the objectives of the administration, the period can be extended. This extension requires either the consent of the creditors or approval from the court.

How much does Administration cost?

The financial aspect of entering into administration is a significant consideration for any company. The cost varies greatly depending on the complexity and size of the business but generally includes:

• Administrator’s Fees: The largest expense is usually the fees charged by the administrator. These fees are for their professional services in managing and restructuring the company. The fee structure can be hourly or a fixed fee, depending on the nature of the work required.
• Legal and Professional Fees: Legal advice and services are often necessary during administration. These, along with other professional services like financial advisors or valuation experts, add to the cost.
• Operating Costs: Costs incurred in the day-to-day running of the business during the administration period, such as payroll, rent, utilities, and supplies, are also considered.

What are the advantages of Administration for your business?

• Legal Protection: The company is protected from legal action by creditors, which can be crucial for stability during financial distress.
• Rescue and Recovery: The administration offers a potential route to rescue the business, preserving jobs and the company’s legacy.
• Better Return for Creditors: Often, creditors receive a higher return compared to immediate liquidation, as the business can be restructured or sold as a going concern.

What are the disadvantages of Administration for your business?

• Cost and Complexity: The process can be expensive and complex, with costs reducing the final amount available for creditors.
• Loss of Control: Directors must relinquish control of the company to the administrator, which can be a difficult transition.
• Reputation Impact: The public perception of a company can be negatively impacted by entering into administration, potentially affecting future business opportunities.