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 an insolvency procedure in which a licensed insolvency practitioner, the administrator, takes control of a company to rescue it as a going concern or, if that isn’t possible, to get creditors a better result than liquidation would. Most administrators are appointed out of court by the directors, the company or a lender holding a qualifying floating charge.
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. It is different from receivership, where a secured lender appoints a receiver to sell the assets its charge covers and repay that lender, with no duty to try to rescue the company.
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. When they are let go affects how some of what they are owed is paid.
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.
Wage arrears for the four months before the administration, up to £800 per employee, and accrued holiday pay are preferential claims whenever an employee is dismissed. The 14-day point matters for a different reason. If the administrator keeps staff on for more than 14 days after appointment, their contracts are treated as adopted, and wages and holiday pay earned after that are paid ahead of the administrator’s own fees (paragraph 99 of Schedule B1 to the Insolvency Act 1986).
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: fixed charge holders (from the assets their charge covers); administration costs; preferential creditors (employees, then HMRC for VAT and PAYE); the prescribed part for unsecured creditors; floating charge holders; unsecured creditors; shareholders
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 arrangement (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. Directors can also propose a CVA without going into administration first, and the two differ mainly in who controls the company while it happens.
- 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 will carry out 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.
For more information about how Inquesta can help you, book a free consultation or contact our team today.