When to Consider Administration?
If a company is facing financial difficulty, there are a number of options available. One option is to enter into Administration. This is a process where a licensed practitioner is appointed to manage the affairs of the company. The aim of Administration is to maximise the value of the company for the benefit of its creditors.
This can be done by restructuring the company’s debt, negotiating with creditors, and arranging the terms to pay off creditors. Administration can be a favourable alternative to compulsory liquidation, as it gives the company time to try and recover from its financial difficulties.
However, it is important to note that there are risks associated with Administration, and it is not always successful. Consequently, it is important to seek professional advice before making any decisions about entering into Administration.
While Administration can result in liquidation, it doesn’t always. One of the advantages of this process is that any legal action against your company is frozen during the process. This is because an Administrator is appointed and takes full control over the business operations with a legal obligation to act in the best interest of the creditors.
The Administrator will outline a new recovery plan which involves repaying as many debts as possible and identifying any opportunities to save money with the goal of saving the company. Within ten weeks of entering into Administration, a creditors’ meeting will be held – either in person or by other correspondence. The purpose of these meetings is to outline the new administrative proposals. Consequently, there’s potential for your company to be saved through this process despite initial concerns about liquidation.
The administration process can be long and complicated, and the sad reality is that most companies who go into administration end up failing. In England and Wales, two-thirds of companies that enter into administration fail, according to Company Watch (2016). This is borne out by the data in the graph below, which shows that of the 4581 administrations that took place between 2012 and 2016, only 263 companies remain active.
Of the failed companies, it’s estimated that 513 had a successful outcome through a Pre-pack sale and were able to continue operating. But even with those successes included, the overall picture is one of failure, with only a small minority of companies surviving administration. For most companies, administration is the beginning of the end.
Administration often ends one of four ways depending on the findings.
- CVA – Often the most favourable outcome, the Administrator works with the directors to draw up a plan for company voluntary arrangement, if the creditors agreed, then the company is handed back to the directors who continue to trade.
- Pre-pack Administration – The insolvency practitioner prepares the business and its assets for a sale to a new owner and most things are agreed in advance of the formal insolvency.
- Liquidation – If agreements are not met and debts still to pay after Administration, the company will enter into liquidation and come to an end
- Dissolution – dissolution negates the need to enter into liquidation and usually happens if the company has no money to pay off creditors or no assets to sell.
If you think that Administration could be the right procedure to take, or if you are facing liquidation, talk to one of our business rescue experts today.