Begbies Traynor Group

Company Administration

Understanding Company Administration - an alternative to Company Liquidation

What is Administration?

Administration is an insolvency process which involves management of an insolvent – or contingently insolvent – company being transferred to a licensed insolvency practitioner acting as administrator. Administration gives an indebted company valuable time and legal protection to help steady the business, keeping it safe from creditor pressure and threats of winding-up action.

Once a company is in administration it is granted protection by way of a moratorium; this means legal action by creditors or landlords cannot be started nor ongoing litigation continued; bailiffs are not able to seize any assets of the company whilst it is in administration, nor can asset-based lenders or hire purchase companies take possession of company property without the permission of the administrator.

Once appointed, the appointed administrators will assume responsibility for the management of the company while they work to put a plan in place for moving the company forwards; this may involve the company being sold out of administration, or continuing to trade following restructuring. The exception to this is in a light touch administration whereby the company’s current directors remain in control of running the business throughout the process.

Administration is a powerful tool, but only when the conditions are right and it has been ascertained that this is the best solution to take for all parties involved, including creditors. Administration can only be entered into if it is to achieve one of the three statutory purposes of administration, which are:

  1. To rescue the company as a going concern
  2. If administration would achieve a better result for the company’s outstanding creditors than would be possible if the company was wound up and placed into liquidation without first being in administration
  3. If neither of the first two objectives is possible, the third objective is to realise any property or substantial assets in order to make a distribution to secured and/or preferential creditors

The insolvency practitioner, acting as the company’s administrator, must state which of the three objectives is behind the decision to place the company into administration. If it is determined that none of these objectives can be met, administration will not be recommended and your insolvency practitioner will talk you through the alternative solutions which may be more appropriate.

Who can put a company in administration?

There are two main ways a company can be put into administration; this can either be done voluntarily by the directors and/or shareholders of the company, or alternatively, secured lenders can appoint administrators through the courts.

Regardless of who petitions for the company to be placed into administration, a licensed insolvency practitioner will need to be appointed to act as administrator. They will take over the running of the company once appointed and will work to either rescue the business as a going concern, facilitate a sale to a connected or unconnected buyer, or else maximise returns for creditors.

When a company voluntarily enters administration, its directors are able to appoint an insolvency practitioner of their choice to act as administrator; when the company is forced into administration by a lender, the court is likely to appoint the insolvency practitioner themselves - ordinarily the lender’s preferred/requested insolvency practitioner.

What is a pre-pack administration?

Pre-pack administration is a form of administration whereby the sale of the company and any assets, is negotiated prior to the appointment of the administrators, with the sale completing upon – or shortly following – the appointment. This differs from the standard process where administrators commence marketing of the business after being formally appointed.

A sale via a pre-pack process involves either a third-party company or a new company (“newco”) which has been set up specifically for the transaction; the newco often has links to the existing company (or “oldco”).

One of the advantages of a pre-pack administration is the often-seamless transition between old and new owners which can be achieved. This is because a sale has already been agreed ahead of time, meaning disruption to ongoing trade, customers, and employees is minimised.

Following the completion of the sale via the pre-pack process, the oldco is typically liquidated soon after, where a distribution can be made to unsecured creditors.

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What is a Trading Administration?

A trading administration is when the company continues to trade through the term of administration which can help to preserve the value and reputation of the company during this time. This is a particularly important consideration if a sale of the company is planned as part of the exit route out of administration.

With a trading administration, directors regain control of the company and can use prior knowledge and practical experience to trade their way back to profitability. The company is also protected from legal action by creditors during the period of the administration. 

A company may not always be in a position to carry on trading, but when it is, the administrator will reorganise the company’s affairs whilst it continues with trade, restructuring in a way that offers the business the best chance of success. This could include a number of cost-saving and cash-generating measures, such as redundancies, selling assets of value, and cancelling onerous contracts that would have a negative impact on the company moving forward.

Administration vs Liquidation

Although liquidation and administration are both formal insolvency proceedings, they are in fact very different processes, with each serving a very different function to the company they are applied to.

Liquidation is the process of shutting down a company and having its name removed from the register held at Companies House. Although solvent companies can be liquidated (through a Members' Voluntary Liquidation) if they have outlived their useful purpose, the liquidation process is more commonly used to bring about the end of an insolvent business. Insolvent liquidation is achieved through a Creditors’ Voluntary Liquidation (CVL).

While liquidation always means the end of a company, administration does not. Administration, however, does give a company the breathing space and legal protection needed to formulate a workable plan for the future. In order for a company to enter administration there must be a realistic chance of rescuing the business as a going concern, or else achieving a better return for creditors than would be possible if the company went straight into liquidation.

If the company in question is insolvent, has few assets, mounting liabilities, and no realistic chance of effecting a successful turnaround, it is likely that a Creditors’ Voluntary Liquidation to bring the company to an orderly shutdown will be more appropriate than administration. A licensed insolvency practitioner will be able to assess your company and advice whether liquidation, administration, or an alternative approach is the most suitable for you and your company.

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What happens to employees in administration?

When the administrator assumes control of the company, this also includes temporarily adopting any employees of the business during the administration. A key point to note here is that after a period of 14 days, the administrators automatically take on the employment contracts of those working for the company.

Ultimately, how the company exits administration is more significant for employees. 

Administration is not in itself a long-term solution to company financial distress issues. It functions more as a holding stage from which the company and its administrators can devise a viable route forward. Sooner or later the company will have to exit administration; this may involve a continuation of trade under the current owners, a sale of the business to a third party, or entry into an alternative insolvency procedure.

If the company is sold through a pre-pack administration process, all employment contracts will transfer to the new company by way of a process known as the Transfer of Undertakings (Protection of Employment) (TUPE). Employees retain all existing terms and conditions of employment including length of service.

If the company subsequently exits administration and enters into an alternative insolvency process such as a Company Voluntary Arrangement (CVA), the status of employees is less certain. This is because a CVA may involve an element of restructuring in order to cut costs; this could lead to redundancies in some instances.

If the company is not able to continue trading, or a suitable buying cannot be found, it may enter an insolvent liquidation procedure; employees will be made redundant as part of the process. Depending on your length of service with the company, employees may be entitled to claim redundancy following their employment contract being terminated; the company’s subsequent liquidator will be able to provide additional details at the time.

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