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What happens when a company is going into administration

When a company is struggling to pay its debts and faces increasingly aggressive threats of legal action from creditors, company administration can provide a ‘safe haven’ in which to formulate a rescue plan.

An eight-week moratorium period begins after entering administration, during which the company receives protection from legal action. The administrator must work towards one of three fixed outcomes.

Begbies Traynor is the UK’s leading professional services firm. We are available for appointment as administrator, and operate from 44 offices nationwide.

Which businesses are eligible for this process?

Companies whose cash flow and profit levels can be predicted fairly accurately may be eligible for company administration. They must also have entered insolvency, or be contingently insolvent, which means that insolvency may occur depending on the outcome of an event in the future – usually a court case.

Additionally, directors must be concerned that the company is in jeopardy from one or more creditors, and under threat of an imminent winding-up petition. Generally speaking, companies that enter administration must have value, and own sizeable assets.

Who can place a company into administration?

The company can enter administration via one of three routes:

  • The company or its directors appoint a licensed insolvency practitioner to act as administrator
  • A qualifying floating charge holder, such as the bank, appoint their own administrator
  • By an order of the court

Company directors can appoint an administrator ‘out-of-court’ as long as a winding-up petition has not already been made by a creditor, and the company is not in liquidation. In other words, directors need to act quickly if they fear creditor action is imminent, otherwise they will have to go through court process to put the company into administration.

What are the possible outcomes when administration ends?

There are three fixed objectives for the end of company administration:

  • To rescue the company as a going concern, or if that is not possible:
  • Achieve a better result for company creditors as a whole than would have been likely had the company been liquidated without entering administration. Failing that:
  • Realise property for the benefit of one or more secured or preferential creditors

The administrator works in the interests of creditors as a whole, and takes over control from the directors. They assess the company’s situation with a view to potentially trading in the future, taking into account customers, suppliers and employee levels, and how this value can be preserved.

A process known as pre pack administration could be appropriate, or in some instances a Company Voluntary Arrangement may be the best option when the moratorium period comes to an end.

What is pre pack administration?

Pre pack administration involves the sale of underlying business assets to a ‘newco’ or phoenix company. The sale is arranged prior to the company entering insolvency, taking place quickly to preserve the value of its assets, and protect the brand from adverse publicity.

Employment contracts are transferred over to the new company via TUPE – the Transfer of Undertakings (Protection of Employment) Regulations – with employees’ start dates remaining the same, so there is no break in employment.

Sometimes existing directors are able to purchase the business using their own funds, and take over the new company without the additional debt situation previously experienced. Although it has received bad publicity in the past, pre pack administration must be shown to provide the best results for creditors.

If a Company Voluntary Arrangement (CVA) is suitable

A Company Voluntary Arrangement allows businesses to continue trading. An agreement is reached with unsecured creditors whereby a single repayment is made, and distributed to creditors in the agreed ratio.

The insolvency practitioner will propose a fixed affordable repayment, and creditors vote on whether to accept it – 75% of creditors (by value) must vote in favour.

As long as the company complies with the CVA terms, creditors cannot take any further legal action. If a single payment is missed, however, the company is likely to face compulsory liquidation.

If you are considering placing your company into administration, our licensed insolvency practitioners at Begbies Traynor can offer professional advice and insight. We will assess your options, and ensure you take the most suitable action according to your company’s situation. Call one of our expert team to arrange a free same-day consultation at over 40 offices nationwide.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland

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