COMPANY ADMINISTRATION: WHAT YOU NEED TO KNOW
When a business is struggling financially, there are a number of options available for it to use in an attempt to save itself.
One option is to place the company into administration. This involves appointing an Administrator (who is a licensed insolvency practitioner). The aim of administration is to protect a business from its creditors whilst a restructuring plan is established. Once this has been completed, it may be possible to rescue the business.
Is Administration the Right Option for My Business?
In order for administration to be a viable option for your business, the business must be a reasonable size, be able to predict profitability and also have reasonably predictable cash flows. Additionally the directors must feel that hostile creditor(s) will have a significant impact on the company’s future. Once this process has begun, directors have no control over the future of the company. It is the Administrator who decides whether the company should be sold or liquidated. The company also receives the breathing space from its outstanding debts to look into the process of restructuring.
Creditors Voluntary Liquidation
If your business does not have the key requirements mentioned above, an alternative to administration could be a process known as creditors voluntary liquidation (also known as company voluntary liquidation or CVL). This process involves the winding down of the business. All the assets are liquidated (which means selling them for money to pay off outstanding debts and creditors). This option is normally the appropriate one to use if you believe the business is no longer viable.
Company Voluntary Agreement
Another option that is worth considering is a Company Voluntary Agreement (CVA). This is a process by which the company negotiates with its creditors regarding debt repayments. Creditors are often keen to consider a CVA rather than liquidation, as they are likely to receive higher returns/repayments. Under the CVA process, cash flow is likely to improve, directors can remain in control of the company (if they so desire), creditors can receive dividends (which means they receive payments and keep the company as a customer) and the company is protected from excessively aggressive action by its creditors. Administration fees can often be 5-10 times greater than the fees accumulated in a CVA process.
The Advantages of Administration
One of the main advantages of the administration process is that it prevents the financial position of the company from worsening. It is also a quick process (especially if an Administration pre pack is used), and is therefore relatively simple to carry out. An Administration pre pack involves selling the company either to a third party or to the existing directors. The business and assets are sold to the new purchasers, but the continuity of the company remains unchanged.
You should be aware that the Administration pre pack method can generate negative publicity if the purchasers are the existing directors of the company, as it could seem like they are just trying to avoid liability.
The Disadvantages of Administration
As has been mentioned, one of the main disadvantages of administration is that the directors lose control of the company. Additionally, costs can reach high levels depending on the length of the process. Another disadvantage is that administration is a public event. Correspondence will therefore be changed to read the company name followed by (in Administration). As a result, suppliers and customers are fully aware of the situation, and may become adopt a wary stance towards the company.
What Does the Administrator Do?
The Administrator’s role involves taking control of the management of the business, along with the responsibility required to restructure.
Who Appoints the Administrator?
If the correct forms are sent to the court, the business itself/its directors can appoint an administrator without having to obtain a Court Order. However, if the company has chosen to liquidate rather than go into administration, the Administrator must apply for a Court Order. It is important to note that no order will be successful if the floating charge holders (most of the time these are the banks), have been given 5 days notice of the company’s decision to appoint an Administrator. The floating charge holder still has the right to appoint an Administrator themselves should they so wish.