What Is Company Administration?

What is the process of company administration?

Company administration is a formal insolvency process aimed at salvaging viable components of a struggling business or enhancing returns for outstanding creditors before dissolution. An insolvency practitioner is appointed to oversee the process, taking control of the company while it remains in administration.

If your company is under threat from creditors, including landlords, HMRC, banks, or suppliers, and you are concerned about potential legal actions that could jeopardise your business, read on to discover how the administration could safeguard your company from closure.

When Should a Company Enter Administration?

Before delving into the details of the process, consider the following points to determine if administration is suitable for your company:

1. Insolvency Status: The business should be insolvent or contingently insolvent but possess a significant amount of assets and/or value. Cash flow and profitability should be reasonably predictable.

2. Creditor Pressure: Creditor pressure is evident, and there is a concern about potential legal actions in the near future. Creditors may have already threatened compulsory liquidation through a winding-up petition to recover owed amounts.

3. Company Viability: If the company has minimal assets and faces increasingly constrained cash flow, a Creditors’ Voluntary Liquidation (CVL) might be a more suitable solution, especially if long-term viability is doubtful. If you believe your company has a reasonable chance of long-term success despite current challenges, a Company Voluntary Arrangement (CVA) could be considered to negotiate terms with creditors and enhance cash flow.

What are the benefits and Drawbacks of Administration?

Advantages of company administration:

• Any legal actions initiated by creditors are immediately halted through a moratorium. This shields the company from the threat of compulsory liquidation or other adverse legal actions during the administration.
• Places the company under the control of a licensed insolvency practitioner who takes charge of running the business throughout the administration. This ensures that all actions undertaken during this period prioritise the interests of the company’s creditors.
• Grants the administrator the time to communicate a transparent financial overview of the company to its creditors. It also allows for outlining the strategies and intentions for conducting the administration, along with plans to realise funds for creditors.
• If a pre-pack is arranged, it enables the protection of business continuity by allowing for the seamless transition of assets or operations to a new entity.
• This prevents the financial position of creditors from worsening during the administration process.

Disadvantages of administration:

• Directors no longer have control over the company’s affairs during the administration period.
• Administration becomes public knowledge, and all correspondence with creditors and clients must include a note specifying that the company is “in administration” next to its name.
• The bank or a creditor may have the right to appoint their administrator during the administration process.
• In a Pre-Pack administration, Transfer of Undertakings (Protection of Employment) regulations (TUPE) applies. This means transferring employees and their contracts to the new entity (“newco”). However, this can pose challenges if the new company’s budget cannot cover the payroll of the old company.
• Due to the potentially high costs, administration is typically recommended for companies with good cash flow facing aggressive creditor actions.

Who Has the Ability to Assign an Administrator?

The company’s leaders can choose to willingly enter administration with the help of a licensed insolvency practitioner. Alternatively, if a floating charge holder has a debenture issued after 15th September 2003, they can initiate administration.

For debentures granted before that date, the charge holder can opt for administrative receivership. Remember, even if the company’s directors start the administration process, the bank or another floating charge holder can appoint their own administrator if they wish.

How long can a company be in administration?

A company cannot stay in administration indefinitely; eventually, it must exit administration, whether through a sale to a connected or unconnected party, entering an alternative insolvency process like a CVA, or continuing its trade.

Within 8 weeks of starting administration, the administrator must present proposals to creditors. After approval, the administrator may take several months to execute the administration plan. In general, the administration aims to conclude within 12 months, but the Court or the company’s creditors may extend this timeframe. Pre-pack administration can be organised in 1-2 weeks.

Our experienced insolvency practitioners handle all aspects of company administration. For free advice, email or call us today at 0121 769 1915, and we’ll assist you in devising a plan to get back on track. Vanguard Insolvency provides director advice online, over the phone, or in-person at one of our 100 UK offices or a location convenient for you.

Read More:

• Employee Rights During Company Administration

• How long can a company stay in administration

• Can a limited company change its name during administration

• What is Administrative Receivership

• Receivership Advantages and Disadvantages

Frequently Asked Questions

I. What is the main objective of company administration?

The primary aim of company administration is business rescue, contrasting with liquidation, which is solely meant to shut down a company due to irrecoverable circumstances.

Companies usually enter administration when facing persistent pressure from creditors. The process provides an eight-week moratorium, shielding the business from forced closure by a creditor.

In contrast, liquidation marks the end for a company. It involves selling the business’ assets, distributing the proceeds to creditors, and ultimately striking the company name from the register at Companies House.

Another notable distinction between administration and liquidation is that the administrator works on behalf of both the company and its creditors. In liquidation, the office-holder operates solely in the best interests of creditors to maximise returns.

II. Is admin only for big companies? 

Administration is most suitable for companies with valuable assets and/or reasonably predictable cash flows or profits. It is commonly employed for larger companies requiring a respite from creditor pressure.

In recent times, administration has been utilised to safeguard prominent retail businesses from liquidation, providing the administrator crucial time to negotiate new rental agreements or chart the best course forward.

This doesn’t imply that administration is exclusively for large companies. It can now be a cost-effective option for some smaller companies grappling with unmanageable debt, given they meet the basic criteria and the process is deemed appropriate by a licensed Insolvency Practitioner. 

III. How long does the administration process take? 

Typically, company administration lasts up to a year, but for larger businesses with intricate affairs, it can extend beyond. The court has the authority to prolong the administration period, and some administrations endure for several years.

A moratorium of eight weeks commences when a company goes into administration, allowing the office-holder to strategise for the business’s future and gather necessary information for creditors.

Throughout the process, specific deadlines must be met, including the initial creditors’ meeting, scheduled within 10 weeks of entering administration. Creditors should receive a two-week notice for this meeting, often conducted virtually now.

The duration of company administration is also influenced by the intended outcome. For instance, a business sale through pre-pack administration, a swift process, can significantly reduce the overall timescale.

IV. What happens to staff when a company goes into administration?

The initial 14 days after entering administration hold significant implications for the company’s employees. Those who retain their positions during this period have a higher chance of recovering any owed payroll arrears, as they become ‘preferential creditors.’

This elevated status places them higher in the payment hierarchy in insolvency. Employees retained beyond the first two weeks of administration can also undergo a Transfer of Undertakings (Protection of Employment) or TUPE if the business is sold.

Under these regulations, their employment rights and contractual terms and conditions, including working hours, rates of pay, and holiday allowances, are safeguarded when transferring to a new employer.

Employees made redundant in the initial 14 days of administration become unsecured creditors and may have a lower likelihood of receiving owed payments. However, if eligible, they can claim redundancy pay and other statutory entitlements.

V. Differences between an admin and a CVA?

Company administration and Company Voluntary Arrangement (CVA) are both processes for rescuing businesses. However, unlike CVA, entering administration entails directors losing control of their business.

An appointed administrator takes charge, determining the company’s future, which, ironically, can sometimes result in a Company Voluntary Arrangement. A CVA aims to allow a company to trade its way out of financial difficulty while repaying creditors at an affordable rate.

Although trading administrations are occasionally permitted, entering administration typically requires ceasing trade while a plan is devised and implemented. Another distinction, crucial for directors, is that directors of a company in administration may face investigation, whereas no investigation occurs when a company enters a CVA.