What Does It Mean When a Company Goes Into Administration?
What Does It Mean When a Company Goes Into Administration?
When a company experiences serious financial difficulties, administration may provide a way to protect the business while its financial position is assessed and a solution is explored.
You may hear that a company has “gone into administration”, particularly when a well-known business is experiencing financial problems. But what does administration actually mean? Does the company immediately stop trading? What happens to its directors and employees? And can a company recover after entering administration?
This guide explains how company administration works in the UK, why it may be considered and the possible outcomes for the business.
What Does It Mean When a Company Goes Into Administration?
When a company goes into administration, a licensed insolvency practitioner is appointed as administrator to take control of the company while options for rescuing the business, achieving a better result for creditors or realising assets are considered. Administration also provides the company with legal protection from certain creditor actions while the process is underway.
Administration does not automatically mean that a company will close.
In some cases, the business may continue trading while the administrator looks for a buyer, restructures the company or explores another solution to its financial difficulties.
Why Would a Company Go Into Administration?
A company may enter administration when it is insolvent or likely to become insolvent and administration offers an appropriate way forward.
There are many reasons a previously viable business can encounter financial problems, including:
- Falling sales or loss of major customers
- Cash flow difficulties
- Increasing operating costs
- High levels of borrowing
- HMRC arrears
- Pressure from suppliers and other creditors
- Unexpected financial liabilities
- Poor financial planning
- Economic changes affecting demand
- Rapid expansion without sufficient working capital
Financial distress does not necessarily mean the underlying business is unviable.
A company might have a healthy order book or valuable customer relationships but be unable to meet its immediate financial obligations. Administration can provide an opportunity to assess whether all or part of the business can be preserved.
Directors concerned about their company’s financial position should seek professional advice as early as possible. Purnells provides advice on a range of company insolvency solutions for businesses experiencing financial difficulties.
Who Can Put a Company Into Administration?
There are several routes through which a company may enter administration.
The company’s directors can initiate the process if they believe administration is appropriate. In some circumstances, the company itself or a qualifying floating charge holder, often a secured lender, may appoint an administrator.
A creditor can also apply to the court for an administration order.
The appropriate route depends on the company’s circumstances, its creditor position and the security held over its assets.
Professional advice is important because administration is a formal insolvency procedure and directors need to understand whether it is appropriate for the business.
What Does an Administrator Do?
The administrator is a licensed insolvency practitioner appointed to manage the company’s affairs, business and property during administration.
Once appointed, the administrator assumes significant control over the company’s operations and must act in accordance with their statutory duties.
Their first priority is to determine what outcome can realistically be achieved.
This may involve reviewing the company’s finances, assets, contracts, employees, customers, liabilities and trading prospects.
The administrator may decide to continue trading the business while a buyer is sought. Alternatively, parts of the business may be sold, operations may be restructured or another formal insolvency procedure may eventually be recommended.
What Is the Purpose of Administration?
UK company administration has a statutory hierarchy of objectives.
The primary objective is normally to rescue the company as a going concern where this is reasonably practicable.
If that cannot be achieved, administration may instead aim to produce a better result for creditors as a whole than would be likely if the company were immediately wound up.
If neither of those objectives is reasonably practicable, the administrator may seek to realise property to make a distribution to secured or preferential creditors.
This means administration is not simply about closing a struggling company. The procedure can be used to protect and preserve value where possible.
Does a Company Continue Trading During Administration?
Yes, a company can continue trading while it is in administration.
Whether this happens depends on the administrator’s assessment of the business.
Continued trading may be appropriate where maintaining operations could preserve the value of the company, protect customer relationships or provide time for a buyer to be found.
For example, closing a business immediately could significantly reduce the value of its assets, contracts or goodwill. Continuing to trade for a limited period may therefore produce a better outcome.
However, continued trading is not guaranteed. If the administrator determines that trading is no longer viable or would worsen the position of creditors, some or all operations may cease.
What Happens to Directors When a Company Goes Into Administration?
When an administrator is appointed, the existing directors do not automatically cease to be directors.
However, their ability to manage the company’s affairs becomes significantly restricted.
The administrator takes control of the company and directors cannot exercise management powers without the administrator’s consent.
Directors are expected to cooperate with the administrator and provide information about the company’s finances, assets, liabilities and previous activities.
The administrator will also examine the circumstances leading to the company’s insolvency and the conduct of its directors.
For directors, seeking professional insolvency advice before financial difficulties become critical can be extremely important. Acting early can provide more time to understand the available options.
What Happens to Employees During Administration?
Entering administration does not automatically mean that every employee will lose their job.
If the company continues trading, some or all employees may remain employed while the administrator assesses the business or seeks a buyer.
However, redundancies can occur if the administrator needs to reduce costs, close parts of the business or cease trading.
The outcome therefore depends heavily on the company’s circumstances and the administrator’s strategy.
Where employment is transferred as part of a sale of the business, additional employment law considerations may apply.
Employees affected by administration should receive information from the administrator regarding their position and any claims they may be entitled to make.
What Happens to Company Debts During Administration?
One of the important features of administration is the legal protection it can provide.
When a company enters administration, a statutory moratorium generally prevents creditors from beginning or continuing certain legal actions against the company without the administrator’s consent or permission from the court.
This can temporarily reduce immediate creditor pressure while the administrator assesses the business.
However, administration does not simply erase the company’s debts.
Creditors may be asked to submit details of the amounts they are owed, and distributions will depend on the outcome of the administration, available assets and the statutory order of priority.
Can Creditors Still Chase a Company in Administration?
The administration moratorium restricts many forms of enforcement action.
This protection is one reason administration can be useful when a viable business is under severe creditor pressure.
Rather than individual creditors taking separate enforcement action against the company’s assets, the administrator can assess the position as a whole and determine the most appropriate course of action.
Creditors can still communicate with the administrator and submit claims for money owed.
What Is a Pre-Pack Administration?
A pre-pack administration involves arranging the sale of some or all of a company’s business and assets before the administrator is formally appointed, with the transaction completed shortly after the administration begins.
This approach can sometimes help preserve the value of a business by allowing operations to continue with minimal disruption.
However, pre-pack administrations are subject to specific rules, scrutiny and disclosure requirements, particularly where the purchaser is connected to the previous company.
A pre-pack is not suitable for every insolvent business and professional advice is essential.
Can a Company Recover From Administration?
Yes. Entering administration does not necessarily mean a company will permanently close.
One of the statutory objectives of administration is to rescue the company as a going concern where reasonably practicable.
The company could potentially be restructured and eventually exit administration.
In other cases, the underlying business may survive even if the original company does not. For example, the business and its assets could be sold to another company, protecting some jobs, customers and commercial activity.
The outcome depends on the company’s finances and whether a viable solution can be achieved.
What Are the Possible Outcomes of Administration?
There is no single outcome for a company entering administration.
Possible outcomes include:
- The company being rescued as a going concern
- The business or assets being sold
- A restructuring of the company’s operations
- A Company Voluntary Arrangement (CVA)
- The company moving into liquidation
- The company eventually being dissolved
A CVA can be particularly relevant where a viable company needs an agreement with its unsecured creditors regarding the repayment of debts.
Under the right circumstances, a Company Voluntary Arrangement can allow a company to continue trading while making agreed payments towards its debts over a specified period.
Which route is appropriate will depend entirely on the individual circumstances of the company.
What Is the Difference Between Administration and a CVA?
Administration and a Company Voluntary Arrangement are both formal insolvency procedures, but they operate differently.
Administration places the company under the control of an administrator and provides a moratorium against certain creditor action. A CVA is an agreement between a company and its unsecured creditors that typically allows the existing directors to remain in control while the company makes agreed repayments.
A CVA may therefore be suitable where the underlying business remains viable but needs to restructure its unsecured debts.
Administration may be considered where greater protection from creditors or a more substantial restructuring process is required.
You can learn more about how a Company Voluntary Arrangement works and when it may be appropriate for a struggling business.
Is Administration the Same as Liquidation?
No. Administration and liquidation have different objectives.
Administration can be used to attempt to rescue a company, achieve a better result for creditors or realise assets for secured or preferential creditors.
Liquidation is focused on winding up the company’s affairs, realising its assets and distributing available funds to creditors before the company is ultimately dissolved.
While administration can eventually lead to liquidation, entering administration does not automatically mean that liquidation will follow.
How Long Does Company Administration Last?
Administration normally ends automatically after 12 months unless it is extended.
However, an administration can finish earlier if its purpose has been achieved or the administrator determines that another procedure is appropriate.
In more complicated cases, an extension may be required.
The length of time therefore depends on factors including the size of the company, the complexity of its affairs, whether it continues trading and whether a sale or restructuring is being pursued.
What Should Directors Do If Their Company Is Struggling?
Directors should not wait until creditor pressure becomes overwhelming before seeking professional advice.
Warning signs can include difficulty paying suppliers, increasing HMRC arrears, missed loan repayments, persistent cash flow shortages, County Court Judgments and regularly delaying payments because sufficient funds are unavailable.
The earlier these problems are addressed, the more options may remain available.
Depending on the company’s circumstances, administration may not be the only solution. Alternatives such as refinancing, restructuring, a CVA or another formal insolvency process may be more appropriate.
Getting Advice About Company Financial Difficulties
Administration can sound like the end of a business, but that is not necessarily the case.
The procedure is designed to provide a structured way of dealing with serious financial difficulties while considering whether the company can be rescued, its business sold or a better outcome achieved for creditors.
For company directors, the most important step is often recognising financial difficulties early and obtaining appropriate professional advice before the company’s options become more limited.
If your company is struggling to meet its financial obligations, Purnells can help you understand the available options, including whether a Company Voluntary Arrangement (CVA) or another insolvency solution may be appropriate.