Administration is a formal insolvency procedure that protects a company from its creditors while an Administrator, a licensed Insolvency Practitioner, reviews and considers the company’s financial position to decide whether it can be rescued. If rescuing the Company is not an option, the Administrator may decide to trade the company with a view to selling its business and/or assets as a going concern. Administration is suitable for a company that is struggling financially but has a potentially viable business.
Administration could be a suitable option if your company is insolvent. Insolvency arises where a company has insufficient assets to pay its debts, known as the “balance sheet test”, or is unable to pay its debts when they fall due, known as the “cash-flow test”. The balance sheet test will be satisfied where a company has insufficient assets to be able to meet all of its liabilities, including prospective and contingent liabilities, as and when they eventually fall due.
An Administrator must perform his functions with the objective of achieving one or more of the statutory purposes of the Administration. These are rescuing the company as a going concern, achieving a better result for the company’s creditors as a whole than would be likely if the company were to be wound up (without first being in Administration), or realising property in order to make a distribution to one or more secured or preferential creditors.
If your company is being threatened by a creditor such as a landlord, HM Revenue & Customs or your bank, or is being threatened with legal action such as winding-up proceedings, Administration could prevent creditors from taking any further action against you.
Appointing an Administrator
An Administrator can be appointed by the directors of a company – however, the directors must give five business days’ notice to each floating charge holder (“secured creditor”) of the company. Upon receiving notice, the secured creditor can consent to the appointment of the Administrator chosen by the directors or appoint their own. If the secured creditor does not respond to the notice following a period of five business days’, the directors will be entitled to appoint their choice of Administrator. This is an out of Court procedure.
An Administrator can also be appointed by a secured creditor of the company – however, the secured creditor must give two business days’ notice to any prior charge holder. The prior charge holder can consent to the appointment of the Administrator chosen by the secured creditor or appoint their own. If the prior charge holder does not respond to the notice following a period of two business days’, the secured creditor will be entitled to appoint their choice of Administrator. This is an out of Court procedure.
An application to the Court for an Administration Order can also be made by a company itself, its directors or a creditor. Unlike the out of Court procedures detailed above, the application will formally be considered by the Court at a hearing. The Court will then determine whether to make an Administration Order, dismiss the application or make a winding-up order. The Court is likely to make an Administration Order where a company is or is likely to become unable to pay its debts, and where the Administration Order is reasonably likely to achieve the purpose of the Administration (see below).
A pre-packaged Administration (or “pre-pack”) is an arrangement where a sale of an insolvent company’s business and assets is negotiated with a purchaser prior to the appointment of an Administrator. In most cases, the Administrator will effect a sale immediately on, or shortly after his appointment.
A pre-pack allows a new company (“newco”), or a third party, to purchase the business and assets of an insolvent company before creditors are informed of the Administration. It is often used to preserve the business, maintain customer relationships, maximise the value of goodwill and save jobs. Staff and customers are usually unaware of any change. The purchaser can even trade under a simple variation of the original business name.
A pre-pack procedure is different from the standard Administration process where an Administrator will market the business and/or assets for sale following their appointment.
Administration Followed by a Company Voluntary Arrangement (“CVA”)
It can take several weeks to prepare a viable CVA proposal for creditors to consider. It may be necessary to place a company into Administration to protect it whilst a detailed CVA proposal is prepared. This will also give the Administrator an opportunity of discussing the proposed CVA with the company’s bankers and other major creditors. The Administrator will outline in his proposals that a CVA will be the proposed exit route of the Administration.
A CVA must be approved by a majority of 75% of creditors voting in favour of the CVA proposal. Once approved, all creditors are legally bound under the terms of the arrangement, including all non-voting creditors, or creditors that did not receive notice of the meeting required to approve the CVA. The directors will also regain control of the company from the Administrator following approval.
Contact Our Team
If your company is experiencing financial difficulties, we can work with you to identify the most appropriate solution. We have helped companies of all sizes across many different sectors. We understand that being pursued for unpaid debts is a hugely stressful time. If you believe your business is potentially viable but is struggling financially, Administration may be the most appropriate solution. Contact us on 0800 061 4002.