What is Trading Administration?

How does trading administration work?

Trading administration is a specific form of company management where the business remains active during the administration period. Not every company is apt for trading administration; it is usually reserved for situations where recovery is probable, and sustaining trade is advantageous for the business’s ongoing viability.

 

Trading Administration- What Does It Mean By?

Administration is a formal insolvency process aimed at aiding companies facing severe financial challenges. Once a company is in administration, there is a moratorium period, essentially a legal safeguard. This provides a window for devising and executing restructuring plans without the risk of legal actions from creditors.

Administration is a short-term solution for a company in difficulty to regain stability. Several exit options from the administration exist, including a return to trading, entering an alternative restructuring procedure like a CVA, or ultimately closing the company if financial challenges are too great. 

The process can be initiated by the company, its directors, or creditors, providing a break to reorganise efficiently for the future.

 

Is the administration and a trading administration the same? [Explore the key differences]

As implied by the name, in a trading administration, the company keeps functioning while under administration. This approach is commonly employed in the administration of retail chains or situations where business recovery is probable. 

If the ultimate goal is to sell the company as an ongoing concern, a trading administration is more likely to be used, as companies typically preserve more value by continuing to trade.

The administrator appointed will assess whether the company should persist in trading during the administration, taking into account its status and prospects for recovery. This differs from a company director deciding to trade while knowingly insolvent, which constitutes a violation of duties as a limited company director.

 

Eligibility criteria for company administration

Typically, for qualification for administration:

• Creditors must have issued or be in the process of issuing court threats.
• There should be a reasonable level of cash flow and profitability.
• The company should be insolvent.
• The company must possess valuable assets potentially deployable in the restructuring process.

 

The focus on asset value and dependable cash flows determines eligibility for trading administration. Without consistent cash inflows, the company is at risk of breaching the agreement and facing immediate liquidation.

Now the query remains what is the timeframe for this process, and what does it entail?

 

The administration process

When a company enters administration, a licensed insolvency practitioner (IP) assumes temporary control of the business. In the context of trading administration, their aim is to restructure the company’s affairs while operations persist, providing the best opportunity for trading out of financial difficulty.

While the IP typically seeks input from directors during this process, they have the authority to negotiate or terminate existing contracts. If deemed necessary for the company’s survival, they can also make staff redundant.

After eight weeks, the administrator is required to generate a formal statement outlining the forthcoming actions. Copies are distributed to creditors, staff members, and Companies House. Additionally, a creditors’ meeting is scheduled to address all matters related to the company’s situation.

Implementing approved plans can often take several months, but the entire administration process may extend for up to a year, with the possibility of further extension if necessary.

 

Company Voluntary Arrangement (CVA) and a trading administration

A possible route to conclude a successful trading administration is through a Company Voluntary Arrangement. In this process, debts are settled at a manageable rate. As long as the terms are adhered to, it enables the company to trade its way back to profitability.

Creditors need to agree on Company Voluntary Arrangements before they become legally binding. If the business has a viable future, creditors usually stand to receive more through a CVA than if the company were liquidated. Demonstrating to creditors that the company has a realistic chance of improving its fortunes increases the likelihood of CVA acceptance.

 

The Key Advantages and potential drawbacks of a trading administration

I. Advantages

• Trading administration provides qualifying companies with the optimal opportunity to regain profitability by restructuring their affairs and distributing debt repayments. 
• While directors temporarily relinquish control during the administration period, it is reinstated once the period concludes.
• Legal proceedings are paused throughout the moratorium period, providing a window for solid business rescue plans. 
• Under the guidance of a licensed insolvency practitioner, all statutory obligations are fulfilled, eliminating the risk of non-compliance by directors. 
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II. Disadvantages

• If the business is deemed unlikely to transform into a profitable entity, it may proceed to a formal liquidation process called Creditors’ Voluntary Liquidation (CVL), resulting in the cessation of all operations. 
• The administration details will become publicly known.
• The bank or holders of a floating charge might appoint their own administrator. 

 

Read More: 

• What is a moratorium in company administration
• What is a Special Administration for a limited company

• What Is Company Administration

• Employee Rights During Company Administration

• How long can a company stay in administration

 

Vanguard Insolvency can assist if your company is facing financial distress. Director advice from Vanguard Insolvency is available online, over the phone, or at a location convenient for you.