RE: Administration30 Oct 2023 04:26
It’s a common misconception that any insolvent company can enter into administration – it can’t. Administration is only an option if the business is insolvent but remains viable. That is:
It’s a reasonable size
It generates a consistent level of cash-flow
It has the potential to return to profitability
Although the immediate goal of the administration process is to ensure the company’s creditors receive the best possible return, it also gives the business the chance to make changes to its core operations in a bid to return to profitability. To achieve this goal, the administrator can sell assets, reduce staff and negotiate a Company Voluntary Arrangement (CVA) to repay its debts without the threat of legal action from creditors.
If a business has no assets of value, no ongoing cash-flow and no real prospect of returning to profitability, administration would not be appropriate. In that case, the only option is to liquidate the company.
How Long Does Going into Administration Take?
The process of going into administration can take anything from just a few hours to several weeks depending on your circumstances and the size of your business. Once the process has begun, it typically lasts for 12 months, although it can be extended with agreement from the courts. The business will not usually be run by the administrator for this length of time. Typically, the administrator will only be in control of the business for a period of around six weeks.
Can a Company Still Trade When it Goes into Administration?
Yes. If the administrator decides that’s in the best interests of the creditors, then a company can continue to trade during the period of administration. This is known as a ‘trading administration’, and is often used when the administrator believes the business is still viable and its recovery is likely.
If the eventual plan is for the company to be sold as a going concern, the administrator may also allow the business to continue to trade. Trading companies typically preserve more of their value. That would increase the return for the creditors when the company is sold.
What are the Potential Outcomes of Administration?
There are three potential outcomes of administration. The administrator must achieve one of these outcomes when the period of administration comes to an end:
Rescue the company as a going concern so it can continue to trade
Achieve a better return for the creditors than if the company had been liquidated
Repay one or more secured or preferential creditors
To achieve one of these outcomes, there are a number of different steps the administrator can take. That includes:
Negotiate a Company Voluntary Arrangement (CVA) so the company can continue to trade and pay its debts over time.
Sell the business as a going concern to another company, either via a pre-pack administration or an open market sale. The business will be able to keep its clients, its workforce and order
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