With the coronavirus pandemic and associated lockdowns causing severe economic downturns, it is perhaps no surprise that many companies are struggling financially. In worst case scenarios, some firms will be staring down the barrel of insolvency and forced to enter into administration.
Administration is nothing new, of course, with huge household names having to go through the process in an attempt to salvage their business. But what happens when a company goes into administration?
What is Administration?
Administration is a process of insolvency whereby a company with serious cash flow issues, facing imminent insolvency, seeks to regain control of the situation. Should a firm wish to enter administration, they can appeal to the court, who will appoint a licensed insolvency practitioner to oversee the process.
Understanding what happens when a company goes into administration is vital, as it can seem complex to navigate and must be followed to the letter. The process is set out in The Insolvency Act 1986 and officially puts a moratorium on all current legal proceedings the firm is facing.
Administration acts as a way to give a business some breathing room away from creditors, to take stock of their operation, what is going wrong, and how best they can repay creditors.
For administration to be sanctioned, the court must feel it is justified, that it is the last resort for the business, and the best chance for creditors to receive their money.
What Does Administration Do?
Once a company enters administration:
- Creditors can no longer pursue a new court judgement against the company, or enforce one already obtained.
- Winding up petitions cannot be issued
- Bailiffs are unable to seize any company assets to pay off a debt
- No assets of any kind are able to be recovered from the business
What Happens to Staff When a Company Goes into Administration?
The impact of administration on employees generally depends on their role in the business, their status, and, in the event of redundancies, when and if they are let go during the administration process. The timeframe of the redundancy will dictate which bracket of creditor an employee ends up in.
Understanding the impact the process has on staff is a crucial part of learning what happens when a company goes into administration, as there are various things to consider depending on each employee’s circumstances.
An ordinary creditor is a staff member who is made redundant within the first 14 days after the administration process begins.
People made redundant during this period are in the lowest bracket of creditors, meaning they are the lowest priority to receive owed money. That being said, they do still retain the same entitlement to any redundancy payments and any outstanding wage they may be owed.
Due to the relatively low priority, ordinary creditors may be forced to take a realistic outlook to the money they feel owed.
The preferential creditor is an employee who is retained beyond the initial two week period. As the name suggests, it is a significantly preferential position to be in, particularly should they face redundancy during the remainder of the administration process.
Any money owed prior to the four months before insolvency will be paid on an ‘ordinary creditor’ basis, but anything owed during that four month spell will be given preference. This should give them some money to fall back on in a search for a new job.
The Company Administration Process
The act of placing a company into administration is actually incredibly quick, it can take a matter of hours if circumstances allow. All it requires is for company directors to fill out the required forms, which then must be sworn at a solicitors office. Any sworn forms must then be filed in court, and once that step is done, a company will officially have entered administration.
It is a common misconception that for a company to enter administration, their case needs to be handled and overseen by a judge. In reality, forms only need to be stamped and accepted by a Court Clerk.
When it comes to the priority of creditors and deciding who gets money first there is a hierarchy:
- Secured Creditors – First to be paid money owed
- Preferential Creditors – After secured creditors are paid, preferential creditors are repaid next using any remaining assets
- Unsecured Creditors – unsecured creditors are the lowest priority creditor, and are paid back from the assets that still remain
- Shareholders – Once all creditors are paid
After the administration process comes to an end, if the company is deemed to have been rescued it will be handed back to the directors. However, if it was not successful then the business may be forced to go into liquidation.
How Long Can a Company be in Administration?
There is no finite length of time that a company can be in administration for, although administrators are expected to undertake their duties as promptly as possible. Typically, the administration process will take up to one year, but can last longer if agreed upon by the court and creditors.
Each individual case is different and should be treated as such. Every company facing insolvency will have different peculiarities to deal with.
Can a Company Come Out of Administration?
The purpose of administration is to attempt to pay as much of a company’s outstanding debt as possible, while coming up with a way to prevent liquidation. Since businesses who enter administration are ones in significant financial holes, this is not always possible.
The most common ways for an administration to end are:
- A company voluntary agreement (CVA) – this is designed to allow a business to continue trading throughout the process, and is often the most effective method for sustainable long term viability for a business.
- Sold as a ‘going concern’ to another company – If a sale out of administration is the course of action, the administrator will make moves to streamline and cut costs to make the business more attractive to a buyer. This method can be excellent for preserving jobs, and improving public sentiment that may have declined during administration.
- Creditors Voluntary Liquidation – If the only viable option to repay creditors is to liquidate the company and sell off assets, then the liquidator will be forced to, even if it will cost jobs.
- If it is deemed that there are no viable assets to sell, the company will be shuttered immediately and all employees will be made redundant.
It may have an intimidating reputation, but the core of administration is to try to save a business, and preserve its history, reputation, and employees.
If you are concerned about your firm’s finances, or are unsure about what happens when a company goes into administration, Inquesta are here to help.
Our dedicated team of advisors are experts in their field and guarantee to undergo a thorough, detailed analysis of your business to assist you throughout the administration process.
We know that no two situations are ever truly alike, this is why we promise to approach each client with a fresh, unique perspective designed to guarantee results.
For more information about how Inquesta can help you, book a free consultation or contact our team today.