The process is often associated with businesses going through insolvency. Going into administration is a legal process where an insolvency practitioner takes control of a company to try and rescue it while also finding ways to recoup as much value for creditors as possible.
When an administrator steps in to save a business from collapse, they usually attempt to do so by restructuring it or selling some assets; however, this doesn’t always work and it may take time.
What happens when a company goes into administration?
Administratorship of a company occurs when its directors no longer possess sufficient control to run it effectively, leaving only its administrators to try and find ways of getting back on their feet. Depending on their strategy and creditors’ demands, administrators may restructure, pay off debts or wind it down completely before moving onto the next phase.
Administrators of businesses need to assess its finances and decide on an optimal course of action. Once this decision has been made, they must send out reports to creditors, employees and Companies House that outline its current state and any plans moving forward – this report is known as an administration proposal and must be approved by at least 75% of creditors before continuing with work.
Once a proposal has been accepted, an administrator works to ensure the company abides by it. They will compile a list of creditors and their debts, making sure payments to creditors as agreed in the proposal are being made accordingly. They may also petition court or company creditors for an extension if necessary.
Administrators have full authority to alter any contracts of the company in administration, such as cutting wages or shortening working hours, while employees will likely be made redundant – however, this will still be protected under TUPE (Transfer of Undertakings (Protection of Employment Act 2003)).
Once a company enters administration, their administrators will complete their work and a decision has been made to either sell it off or dissolve it altogether. If sold off, its assets will be sold off in order to pay back creditors.
Once a sale takes place, creditors of the business will receive their share of any profits it makes. If unable to meet its payments to its creditors, liquidation and full dissolution will follow suit.
Administrators will look for ways to restore profitability to the company’s finances and return it to profitability, such as by negotiating with creditors to agree upon proposals which can help them recoup their money and pay back their loans more easily. They may also look into creating a company voluntary arrangement (CVA), although 75% of creditors must approve such schemes before being implemented.
What happens to the company’s assets?
As soon as a company is going into administration, an administrator takes over management with the aim of utilising its assets to pay creditors as efficiently and quickly as possible. They typically have eight weeks in which to create an action plan for their clients before ending the administration process and proceeding further with it.
Assets belonging to a company will be liquidated and used to pay creditors in full or part, depending on their value, as long as their statutory purpose of administration has been achieved. This could include selling property owned by the company as well as purchasing or hiring equipment during administration. Furthermore, administration can extend beyond 12 months with the approval of secured creditors (debenture holders) or by court order from creditors themselves.
Administrators appointed by licensed insolvency practitioners take control of a company and place it into a moratorium state, stopping all legal actions such as lenders, landlords or HMRC from proceeding against it.
Once appointed, an administrator will develop an extensive proposal for all creditors that outlines their goals, strategy and any relevant information that may be of use to them. They should present this to creditors within eight weeks and will keep them apprised on progress regularly.
Administrators must also strive to realize the assets owned by their company in order to release cash for creditors’ benefit, which typically means selling off any properties owned by it and other assets it holds such as vehicles and machinery.
If a company’s assets can be sold for more than they’re worth, an administrator can initiate liquidation proceedings and pay creditors with the proceeds. This process typically happens faster than administration but may still take months or years.
What happens to the company’s employees?
The administration is a legal process wherein a licensed insolvency practitioner takes over the running of an insolvent company to try to rescue it or, if that isn’t possible, realise assets and pay off creditors who owe debts. Although hearing news of administration can be frightening for employees, remember this doesn’t necessarily mean losing your job!
Administrators usually work to save the business at hand and continue trading as much as possible to protect jobs, however, if this proves unsuccessful and an agreement cannot be reached between creditors, then all staff may be made redundant and their jobs lost.
Employees play a key role in any successful business. Employees made redundant during this period will become “ordinary creditors”, while those staying on will become preferential creditors, receiving greater priority in regard to payment of wages due for four months prior to insolvency.
Although this may provide employees with an excellent opportunity to secure redundancy payments and outstanding wages, this process may come with its own set of issues. First and foremost is waiting until funds from the sale of company business/assets become available to pay employee preferential claims.
Money from these sales must first go towards covering liquidation costs and fees as well as priority creditors who hold claims against the company before entering liquidation – leaving little or no funds left over for paying employees their outstanding wages.
If you believe you may have a claim against your former employer, it is crucial that you seek expert advice as soon as possible. Many local professionals are specialised to provide extensive corporate recovery experience and can help provide free same-day consultation to discuss your case.
What happens to the company’s creditors?
As soon as a company enters administration, an administrator (also referred to as an insolvency practitioner) takes control of it. They use its assets quickly to pay creditors while investigating it’s finances and developing plans to bring creditors back into profit.
As a creditor, you will receive a letter from an administrator informing you about what’s happening with your debts and the amounts due. You can respond to this letter by providing details of your debt or claim. Responses must be sent back within 15 business days from receiving this notice from them administrator.
At a creditors’ meeting, an administrator will present their recommendation on which option would best benefit creditors of your company – CVA, liquidation or return to creditors.
During an administration period, there is an eight-week moratorium on any legal actions taken against a company. This provides administrators and the insolvency practitioner time to formulate a plan that can get it out of trouble.
Administrators work to preserve companies, realising any assets or company property which could help pay secured and preferential creditors, including selling part or all of the company off to interested buyers.
Once they have successfully rescued their company, the remaining cash will be distributed among secured and preferential creditors based on priority. Votes will then take place to approve proposed distributions which should typically follow in line with creditor priorities.
Alternatively, creditors who cannot attend can submit details about their debt or claim and complete a voting form in advance of a creditors’ meeting. If the majority in number and value who responded voted “yes”, the resolution passes; otherwise if less than 25% responded with “no”, proposal is not accepted by administrator and must be replaced with another plan.
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