What is company administration?
Company administration is a formal process where an insolvency practitioner is appointed to be the administrator, who is licensed to undertake this activity. The administrator will oversee the process and take control of the company from the date they are appointed.
Going into administration can protect the company from legal action from its creditors who want to recover outstanding debts. Administration can give companies the breathing space to put together a restructuring plan that could ultimately save the company.
The administrators will assess the company to see whether there is any potential for the company to adapt and be able to trade again in the future. This could result in the company restructuring to become more efficient and viable.
If the assessment finds the company is not viable and the problems they face are too great then they can recommend that the company is liquidated.
What happens when a company goes into administration?
Going into administration does not mean the end of the company, just means that the company is being independently assessed to see whether it may be viable in the future and looks at the steps that need to be taken to for recovery. However, the end result could mean that the company is dissolved and liquidated, but this is normally the last resort.
Administration is more often than not a voluntary process that either directors or shareholders initiate due to operational or financial difficulties that the business is having. However, it can also be initiated by a bank or secured lender if they believe their capital is at risk.
During the administration process, the administrator will communicate with all the creditors about their appointment. They have an eight-week period to produce a statement about their intentions for the company which will be sent to all creditors, employees and Companies House, which the creditors will vote on.
During the administration process, the company can continue to operate, and the administrators will run the business. There are many outcomes from the administration process which could include allowing the company to continue to trade, selling the business, or closing the business and selling off the assets.
Who oversees an administration?
Company administration is undertaken by a professional insolvency practitioner that is appointed on behalf of the company. Once appointed they take control of the company and all of its assets. The administrator is paid for by the company or from the sale of its assets.
During the administration process, the administrator has control of the company including being able to renegotiate or cancel contracts and make redundancies. The administrator, however, must act in the best interest of the company’s creditors and they are held accountable to a number of bodies and they must demonstrate their reasonings and how they support the creditors.
Are there other alternatives to administration?
Yes, there are other alternatives that you can explore with an insolvency practitioner as they will guide you through the decision and help you to access which is the best option for your business and its creditors.
The outcome could be negotiating with your creditors using a Company Voluntary Arrangement (CVA), sourcing finance to assist you through your difficult period, or close the business, all of which they can support you with.
Whatever you plan to do, it is worth seeking advice from an insolvency practitioner sooner rather than later before you are forced into administration or liquidation. This could help save your business and will achieve the best outcome for all involved including employees and creditors.
What happens at the end of an administration?
What happens at the end of the administration process depends on the decisions made as administrators have a number of options open to them. This includes:
- Negotiating a Company Voluntary Arrangement (CVA) which can allow your company to continue trading.
- They can sell your business as going concern which will allow the business to continue under new ownership and can keep its employees and clients.
- They can sell off your assets to pay your creditors and close the company under a Creditor’s Voluntary Liquidation.
There is one other end to administration which is where the administrator’s contract runs out before the company administration is completed. This occurs automatically after a year, but the contract can be renewed to allow it to go for longer. If the company comes out of administration, it no longer has protection against legal action from your creditors.
How long can a company be in administration?
The administration process can take from a few weeks to a year or longer, depending on the business and its circumstances. The administrators are obligated to complete their role as soon as possible, so it is unlikely to be a long drawn-out process.
Initially, administrators have eight weeks to send out proposals for the company to the creditors. This normally details what has happened, plan for the next steps and what they think the outcome might be.
Being under administration is not a long-term solution, but a way of getting some breathing space to assess the options and put a plan in place. Therefore, the length of the administration process varies depending on the individual company’s circumstances.
When a company goes into administration who gets paid first?
The order in which people and creditors are paid when a company goes into administration depends on the type of creditor. Secured creditors will be paid first and these are those that have a legal right over the company’s property such as buildings, vehicles or equipment. These will always be paid first.
Next are preferential creditors which include employees for any arrears of wages and holiday pay, and it also includes the HMRC since 1st December 2020 for PAYE Scheme and VAT.
Unsecured creditors are next, and these include HMRC for corporation tax, suppliers and some employees’ claims. There are also connected unsecured creditors which refer to directors, employees or family members who have provided unsecured loans to the business and can be known as associate creditors. Connected or associate creditors may not get a dividend in all circumstances.
The final person to get from the administration are the shareholders as all creditors must be satisfied before shareholders can receive anything. This is because shareholders invest at their own risk.
What are the business administration costs?
The cost of business administration can vary depending on the agreement made with the insolvency practitioner. It can be based on a percentage, a fixed amount or combination of both of these. The creditors’ committee will determine the bases of this, not the company or the administrator.
When the administrator puts together their proposals they will include an estimate of their costs and a proposal for their remuneration. It will take into account the complexity of the case, their responsibilities, the company’s assets and how they will carry out their duties. This estimate will be reviewed by the creditors’ committee and they can ask for amendments.
The administration fee will be paid out of the assets before the creditors are paid.
What is the pre-pack administration?
Pre-pack administration is a process where the company and its assets are packed up for sale to another company. This may in some circumstances be sold to existing directors or employees of the company. The new company owners will take on the company with a clean slate in terms of the finances as the sale would be used to pay the creditors.
In order to agree to a pre-pack administration, the administrators would need to ensure that it was in the best interest of the creditors and that it would be a better result than pursuing other options.
What happens to employees when a company goes into administration?
When a company goes into administration, the administrator takes on the employment rights during the period that they oversee the company. Generally, companies in administration will continue to operate in some form whilst the administrators assess the business’ potential and therefore the employees are required to continue to work as normal under the guidance of the administrators, not the directors.
If an administrator takes over the company and its employees for over two weeks they have to adopt their employment rights. If the company goes on to be sold, the employees can be TUPE or transferred to the new owner and the employment rights will be transferred or negotiated at this point.
If you are not a direct employee of the company, such as a contractor, you will need to contact the administrator to find out about whether your services are being retained. However, it is likely any outstanding invoices will not be paid until the administration process is resolved and you will be one of the creditors.
What happens to directors when a company goes into administration?
When a company goes into administration they will take over the running of the company from the directors. The directors can stay in place, but they must do what the administrator says, and they won’t be able to make their own decisions anymore. In most cases, the directors will stand down, be made redundant or dismissed.
If the company is sold and the directors are still in post they can be transferred or TUPE over as employees are. If the company is liquidated and the directors are still in post the liquidator will dismiss the directors. If directors are made redundant it will depend on company finances to whether they receive a redundancy payment.
If the company is liquidated, the liquidator will produce a report that looks at the conduct of the directors which will be submitted to the Insolvency Service and further investigation may be undertaken if wrongdoing is suspected.
Being a director of a company that has gone through administration or liquidation doesn’t prevent them from being a director of another company now or in the future unless it was found that they acted improperly, and a Court Order was sought to ban them. A ban could prevent them from being a director for two to 15 years.
How do you claim redundancy when a company goes into administration?
If you are made redundant during administration, you may receive redundancy from the business if there are sufficient funds to pay it. In a lot of cases, this may not possible and employees will need to make a claim from the National Insurance fund which will cover redundancy, any unpaid wages, accrued holiday pay and contracted notice pay. These claims need to be made through the Insolvency Service and more details on how to do this can be found here.
What are the benefits of going into administration?
- The main benefit of going to administration is that it can protect the company from legal action from its creditors.
- It offers a breathing period to assess the options and an opportunity to recover the business.
- Allows the business to continue to trade.
- Benefit from an external set of eyes in helping guide your business back into health.
- Can save jobs.
- In long term be a better solution for all concerned.
What are the disadvantages of going into administration?
- As a director, you will lose control of your business to the administrators.
- The company could be sold or liquidated.
- Entering administration can tarnish the company name with customers and suppliers.
- There are charges to factor in from the administrator.
What is the difference between liquidation and administration?
Liquidation and administration are both types of insolvency. Administration is an insolvency process although it has the aim of trying to rescue the company rather than dissolve the company. Liquidation, however, will on the whole end up with the company being dissolved.
Administration companies can be going through financial difficulties but can still be viable whereas companies going through liquidation tend to be no longer viable. When a company goes into liquidation creditors can take legal action, whereas a company in administration is protected from legal action from creditors.