Rather than putting an insolvent business into bankruptcy, it is often better to turn to an administration procedure so that the business is permitted to continue trading if it wishes to do so.
Often a company, despite having become insolvent, can be restructured and returned to health under the watchful eye of an administrator. However, it is generally important for the business to be allowed to carry on trading while this is being done.
Below we look at the administrative process and outline both its advantages and disadvantages.
What is meant by Administration?
Administration is a formal process of insolvency, in which a failing business is placed under the care of an administrator, who acts as the business’s temporary Chief Executive Officer.
Under the process of administration the business is permitted to continue to operate, as the administrator sees fit, while action is taken to put the business’s finances in order.
To achieve this, the administrator might raise money by selling off a portion of the business’s assets, or indeed by selling the entire operation to a third party buyer.
As an alternative, the administrator may use what is known as a “phoenix” pre-pack administration process which, as the name suggests, allows the sale of the business to the current directors so that a new company can rise from the ashes of the old company.
It is of course for the administrator to decide which course of action to take, although the law requires than, any path followed, must be in the best interests of the creditors.
When is it Best to use Administration?
The simple answer is that administration should always be seriously considered if it is felt that the business, despite its current predicament, has the potential to benefit from administration, and to return to normal operation.
In general, this means that the business must have at least some assets, a reasonable cash flow, and the ability to predict what is necessary to return it to profitability.
Administration can also be useful to a company when one of its major creditors is attempting to petition the court in order to recover the money it is owed. In this case, placing the company in administration can protect the company from being forced into receivership.
Who Appoints the Administrator?
An administrator, who must be a licensed insolvency practitioner under the terms of the Insolvency Act of 1986, can be called in by the owners of the business, if they recognize the need to do so before it is forced upon them. This is an easy process and can be done by simply appointing the administrator in writing, either by letter or by fax.
In many cases, however, a business will have attempted to solve the problem itself by means of a Company Voluntary Agreement (CVA), or will have already been placed in liquidation, before administration is considered.
Here, an administrator can still be called in, but a court order will be required. In the case of insolvency, it is not uncommon for the courts to appoint an administrator as part of the process of liquidation.
It is important to note that the court will not issue an order, without first giving those creditors who are holding qualifying floating charges at least five days notice of its intention to appoint an administrator.
This is done to provide qualifying creditors with the opportunity to appoint their own administrator if they wish to do so. Banks also have the power to appoint an administrator, if they are in possession of a qualifying charge, made under a debenture after September 2009. Where a debenture charge is dated before September 2009, a bank has the option of appointing an administrative receiver.
The Advantages of Administration
The principle advantage of placing a business under administration is that it protects it from its creditors, and provides it with the opportunity to get back on its feet. This protection does not last forever though, and the business has just 8 weeks before it loses its protective shield.
The 8 week administrative period should provide the company with sufficient time to do any one of a number of different things. For example, it may be sufficient for the company to negotiate a suitable CVA with its creditors.
Alternatively, in the case of a pre-pack administration, there should be enough time for the directors to form a new company, and transfer the company’s assets into the new “phoenix” company. It also provides the administrator with an opportunity to call in qualified professionals to help to restructure the business.
The Disadvantages of Administration
One significant disadvantage to administration is that it places the directors at risk, as they lose control of the business. Indeed, in some cases it is possible for third parties to effectively buy seats at the director’s table, and leave some directors out of a job. In just the same way, many of the company’s most valued assets can be snapped up by third party buyers, some of whom may even be competitors of the company.
Furthermore, if the company is not able to come up with a suitable CVA, and get it accepted by its creditors, it may lose the benefit of its tax losses. Finally, details of any insolvency are a matter of public record, and this means that they will be published in the London Gazette, as well as in a relevant local newspaper. This, of course, can be highly damaging to the reputation of the company.
Where an administrator is called in by a financial institution acting as a creditor, as opposed to by the company itself, it is very likely that the institution concerned will have little or no regard for the future of the business.
In the case of a pre-pack arrangement the directors’ hands are somewhat tied by the Transfer of Undertakings, Protection of Employment (TUPE) regulations. These regulations provide employment protection for the company’s employees and also require the new company to honour all contracts entered into by the old company.
This can present the “phoenix” company with difficulties and, as a result, pre-packed arrangements are normally only considered appropriate for medium sized and larger companies, where there is not only a good chance of recovery, but where the creditors are not pressing the company for immediate payment.
What is the Goal of Administration?
The object of administration is to clear as much of a business’s debt, and repay as many of the business’s creditors, as possible. It is also hoped that the business can be put back onto a sound footing.
This, however, is not always possible, and occasionally it will be necessary to sell off the assets of a business and wind it up, in order to clear its debts.
One final point to remember is that, while it is the goal of an administrator to save the business if he can, an administrator brought in at an early stage by the company itself it likely to be more inclined to do this, than an administrator appointed farther down the road by the court.