What does it mean when a company is ‘going into administration?’

Updated: 2nd December 2021

Company administration is a formal insolvency procedure that offers protection from creditor legal action via an initial eight-week moratorium period. The process can be instigated by company directors, but is sometimes forced upon them by creditors via a court order.

A licensed insolvency practitioner (IP) is appointed as administrator, and they will analyse the company’s affairs to identify the best course of action going forward. In the first instance, the aim will be to rescue the company as a going concern.

Licensed insolvency practitioners at Begbies Traynor are available for appointment as administrator, and have in-depth practical experience across all industries.

Duty to company creditors

The IP’s duty is to creditors rather than the company or its directors, however, and they will aim to effect a solution that offers maximum returns. Although directors remain in office, they relinquish control of the company once an office-holder is appointed.

Directors can only act in management affairs with the administrator’s consent. They are required to cooperate throughout the process, by providing the requisite information and attending meetings with the IP whenever necessary.

Why would a company enter administration?

When a company experiences financial distress and becomes heavily delinquent on debt, creditors are likely to take legal action to recover their money. If the company enters insolvency it becomes exposed to the threat of winding up, as creditors owed £750 or more can apply for a winding up order to be granted by the courts. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022.

This would effectively mean liquidation and closure for the business, so entering company administration provides a ‘safe haven’ where plans can be made to rescue the business without the threat of legal action compromising progress.

Tax arrears prior to company administration

Companies with tax arrears often encounter an aggressive approach by HMRC when steps are taken to recover their debt. Entering company administration can relieve that type of pressure, and provide the best chance of recovery for an ailing business.

The company administration process is only available under certain circumstances, however, and directors must be able to predict cash flow and profit levels to a reasonable degree in order to be eligible.

The purpose of administration

The administration period generally lasts for up to 12 months, but it can be extended with agreement from the courts. The administrator must achieve one of three outcomes when the administration period ends:

  • Rescue the company as a going concern, or
  • Achieve a better return for creditors than if the company had been liquidated, or
  •  Repay one or more secured or preferential creditors

Rescuing the company as a going concern

Two potential exits from the administration period are pre pack administration and a Company Voluntary Arrangement (CVA):

Pre pack administration

The main goal of pre pack administration is to rescue the company, and this can involve selling parts or all of the business to new owners prior to entering full administration. Sometimes the existing directors choose to purchase these underlying business assets with their own funds, and start again with a new company. 

Company Voluntary Arrangement

The administrator may deem a Company Voluntary Arrangement to be the best outcome for creditors - under the rules of administration, it must provide a better return for creditors than liquidation.

A new repayment regime is negotiated with company creditors, and as long as repayments are met, interest and charges on the debt are stopped and the company is protected from further action.

Creditors' Voluntary Liquidation (CVL)

If there are sufficient funds to provide a dividend for unsecured creditors once secured creditors have been paid in full, the administrator may decide to realise assets via the Creditors’ Voluntary Liquidation procedure. Once a distribution has been made, the company is closed down.

Company administration concludes when the administrator has achieved their goal. The process can last for up to a year, but this timescale may be extended in some circumstances.

To find out more about company administration, call one of our licensed insolvency practitioners for a free same-day consultation. Begbies Traynor is the UK’s market leader in rescue and recovery, and can provide the professional guidance you need.

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