What you need to know
Company administration is a legal process that gives short term protection to a company that is insolvent. Then, it can be completely sold, just the profitable parts sold or wound down in a more organised manner than liquidation. In Administration, a Licensed Insolvency Practitioner (“IP”) is appointed by the Court to oversee the company finances.
Often the IP is chosen by the directors (and sometimes a secured lender such as a bank) and continues to work with the directors to achieve a better outcome.
An Administration Order can be obtained very quickly and can happen on the same day if there is no debenture. If a lender has a debenture (you can find out if you have one by checking Companies House) they must be given five business days notice of your intention to appoint an Administrator.
In addition, a qualifying floating charge holder (usually a bank with a debenture) can appoint an Administrator immediately with no notice to the company. Although in most cases the directors will be given some warning this is about to happen. In most cases, the bank would serve a final demand for repayment of the loan first.
Administration is usually used when companies are under severe financial pressure and need time to consider their options.
There are three statutory purposes to go into Administration. In fact, if you do not satisfy one or more of these the company can not go into Administration. The reasons are:
1. To rescue the company as a going concern (this is rarer).
2. To give a better return to the creditors as a whole than going into Liquidation first.
3. To realise assets to pay a secured or preferential creditor.
Moreover, the outcome may also be a Pre-Pack Administration where the business and assets are sold day one of the Administration.
The board of directors can apply for this.
A creditor can also apply to Court to put a company into Administration. This can be done quite quickly in and usually within a few days. This is sometimes used to resolve shareholder deadlock as one shareholder maybe a creditor.
A secured lender with a Debenture can force a company into Administration.
However, in smaller cases an easier option is to just close and liquidate. The business can still be sold and transferred to a new owner.
One issue is that normally all employees rights transfer to the new business owner under TUPE. This can certainly have a major impact on the price a buyer is willing to pay as they will take on the employee’s as they are.
Employees can now be furloughed during the period of Administration – so can be retained on 80% salaries using the Covid Job Retention Scheme if there is a reasonable prospect of a business sale.
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Licensed Insolvency Practitioner