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What is administration?
Administration is an insolvency process involving the management of an insolvent, or going to be insolvent, company that is being given a licenced insolvency practitioner acting as an administrator. Administration helps an insolvent company by giving it the time and legal protection to keep the business on a steady ground, pushing away the threats of winding-up and creditors.
A company is granted a moratorium when it is in administration. This means it is protected against any legal action from creditors or landlords. Bailiffs are not able to take any assets of the company while it is in administration; nobody is able to take possession of company property without the administrator’s permission.
After they have been appointed, the administrator will take responsibility for the management of the company. They will work out a plan in place for the company moving forward, potentially selling the company out of administration or continuing to trade after the restructuring of the company. You only enter administration:
▪️ As a method of rescue for the company
▪️ If administration would create a better result for the company’s outstanding
creditors than other options
▪️ You are able to realise any property or substantial assets in order to make a
deal towards creditors
The insolvency practitioner (IP), must ask you which of the three above objectives that you wish to pursue. If you cannot meet any of them then administration will not be recommended and your IP will discuss other alternative solutions for you and your business.
Who can put a company into administration?
A company can be put into administration in two ways: through voluntary measures or through the pressure of exterior secured lenders. Either way, a licensed IP will be needed to act as an administrator. They will control the running of the company and they will work out a route for the future, as discussed in the previous question.
In a voluntary liquidation, its directors can appoint an IP of their choosing to be the administrator. However, when the company is forced into administration by a lender, the courts are likely to appoint their own IP – ordinarily down to the lender’s preferred/requested IP.
What is pre-pack administration?
A pre-pack administration is a method of administration that sees the sale of the company and any assets negotiated before the appointment of the administrators. This is different to the standard process that sees administrators start the marketing of the business after their appointment.
A pre-pack sale process will involve a third-party company or a new company altogether. This will have been set up for the transaction. The new company will usually have links to the existing (or previous) company.
One key advantage to pre-pack administration is the ease of movement between old and new owners. Because a sale has already been agreed, it means that disruption going forward is minimised.
After the sale has been completed via the pre-pack process, the old company is
usually liquidated quickly afterwards. At this point, a distribution can be made to unsecured creditors.
What do the administrators do first?
The designated administrators will review the position of the company and collect information about it. They will judge whether there is a level of support for the business to continue trading. This could be employees, suppliers, customers or funders.
What is the difference between administration and liquidation?
While they do have similarities but liquidation and administration are NOT the same thing; they are two separate and distinct insolvency processes. Liquidation through a CVL creates the end of an insolvent company, however, administration offers a chance of rescuing the business through restructure and refinance.
Companies can be put into administration if there is a fair chance that the business – or sections of the business – can be rescued, or if an MVL looks like being a better solution for creditors than a CVL.
Administrations can provide a level of protection for a company that is distressed and faces the possibility of facing legal threats from frustrated creditors. A company is granted a moratorium when it enters administration, bringing any ongoing litigation to a halt while preventing any new legal action from being undertaken. At this moment, the appointed administrator should be a licensed insolvency practitioner, who will work to restructure the business in the best possible way – allowing it to continue trading.
It’s worth noting that administration is not a long-term position for a company to be in; it will have to exit administration at some stage. This could be through a sale, a continuation of trade, or through a different insolvency process. That process could be a CVL or a CVA if the business cannot be saved from its plight.
What happens to employees in administration?
Administrators will temporarily take control of a business’ employees when they take responsibility for the business from the top. Administrators automatically take on employment contracts for employees working for that company after a period of 14 days. The way that a company comes out of administration is the most significant factor for employees.
Administration is never a long-term option of sustainability for any business. It is a stop-gap solution that is designed to help the company to find a better route for the rest of their future. Over time, the company will have to come out of administration and that could go one of several ways: a continuation of trade under the current owners, the sale of the business to a third-party, or shifting alternative insolvency procedures.
A company that is sold through a pre-pack administration process will transfer all employment contracts to the new company. This process is called the Transfer of Undertakings (Protection of Employment) (TUPE). Employees are able to keep hold of all existing terms and conditions that they were handed in their initial contracts of employment.
On the other hand, if a company ends up going into a Company Voluntary Arrangement (CVA), the future of employees is less than certain. CVAs need restructuring to cut costs where possible, potentially leading to redundancies.
Equally, if a company is not able to continue trading or it cannot find a suitable buyer, it may go into an insolvent liquidation procedure. Employees will be made redundant as part of the process. Depending on your time with the company, some employees might be eligible to claim redundancy after the termination of their contracts. The liquidator of the company will be able to provide more concrete information on that matter.
What is the solvent liquidation process?
▪️ Ideally, the company will have ceased to trade and final accounts will have been prepared by the company’s accountant and signed off by the directors. Additionally, it is beneficial in most cases for all tax (and other) liabilities to have been settled, otherwise, interest at 8% per year begins to accrue from the date of liquidation.
▪️ A formal Declaration of Solvency must be produced. This document will provide details on the company’s assets and liabilities, which will prove that the company is both solvent and has the ability to repay its creditors, with statutory interest, in a maximum of 12 months. The company’s directors must swear the documents in front of a solicitor, confirming they believe its content to be true.
▪️ A board meeting is held at which the decision is made to recommend to the shareholders that the company be placed into a solvent liquidation, the directors will sign off all relevant notices required to commence the MVL procedure.
▪️ A General Meeting of shareholders is held at which shareholders will resolve to place the company into a solvent liquidation, so long as 75% of shareholders are in favor, as well as other resolutions relating to the distribution of the company’s assets.
▪️ It is the role of the appointed liquidator to settle any outstanding debts with creditors (if any) before distributing the company’s assets amongst the shareholders.
▪️ The liquidator must obtain clearance from government departments to confirm that they have no objection to the liquidation being completed.
▪️ Following the filing of the liquidator’s final report at Companies House, the company is removed from the register three months later and is dissolved.
How long does an administration order last?
It will usually last 12 months but this period can be extended by the consent of the creditor(s) or the court.
Who takes charge of the company during administration?
The administrators will take charge of the company during the period of administration.
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Administrators will notify all known creditors of the company as soon as it is practically reasonable to do so.
They will then send a report to all creditors within 8 weeks of their appointment. This will outline the administrator’s aims for the business going forward.
The administrators are also expected to provide a written update on administration to all known creditors every 6 months. The report will also be sent within a month of every 6 month period, although this could be earlier if an administrator leaves their position or the administration period is extended.
You will still have a debt to pay. If you use a direct payment method then the administrators will set up new bank accounts for the company and you will have to operate through those.
Business owners with ongoing or outstanding orders or contracts will be contacted by a representative of the administrators, who will update them on the ongoing situation.
All amounts that the company owes will be frozen on the date of the administration. The company’s assets will be realised and proceeds will be distributed out to creditors, depending on the type of creditor.
There are four main types of creditor. The order of preference, from most important to least important, is listed down below:
1st Secured (split into security via fixed and floating charges);
4th Shareholders /members