What Is Company Administration?
A common term that appears in the mainstream pretty frequently, but what is a ‘company administration’ and what does it actually do?
If a company is being threatened by its creditors (i.e. – a landlord, HMRC, lender, suppliers, credit card providers, etc.) and there is a risk that the company could be taken to Court and potentially put out of business, then an administration order could protect that business from liquidation.
When a company enters administration all control of the business is passed to an appointed administrator. Their primary goal is to leverage the company assets to repay creditors as quickly and fully as possible and without preference.
The administrator has 8 weeks to send out formal proposals to all of the insolvent company’s creditors.
These will typically contain a basic plan detailing how the administrator will repay debts. It will also provide detail of the current status of the company, and what the anticipated outcome is likely to be.
Because it is about assets and there must be some benefit to entering administration then the company will need to have assets and/or a cash income.
Why use administration?
There are a key few benefits for a company to enter administration. In summary, these are;
- Any legal action being taken by creditors is stayed
- An administrator takes charge with their sole aim being to act in the interest of the company and its creditors
- It protects the creditors’ position from worsening
- It allows time for a clear picture of the business to be established
Sometimes following an administration the company can continue to trade, this is often with the support of creditors who have agreed to the plans put in place. Usually, an arrangement exists with creditors, landlords, HMRC etc who will have agreed to a plan of repayment.
During administration, the directors of the company are no longer in charge. During this time it can be proposed that parts of the company are sold off to a newco and continue to trade, this is known as a ‘pre-pack’.
Lenders will often have the right to appoint their own administrators under a floating charge provided by the business This ‘floating charge’ can be contained within a ‘Debenture’ which is taken by most lenders when lending to a limited company. This ability can be one of the most important reasons why lenders are so keen to take a Debenture.
Post Administration Trading
Many businesses will go through administration and continue the other side. Sometimes different parts of the business continue and the structure can be different.
Where a lender is pushing for administration it can be worthwhile looking at options to finance that lender out of the equation and retain control. The ability to negotiate with a lender can be driven by the exposure you have with them, the higher the exposure the more negotiation power you may have.
It is worth noting that the administration is made public. Trading post administration can lead to a loss of brand value or doubts between consumer and business as to the terms they are happy to trade under.
There is a clear difference between administration and insolvency. One can lead to the other or one can happen in isolation to the other.
For details on administration and how it could affect your business (or that of a supplier if you have concerns) then speak to a licenced practitioner and take their guidance. It may be more likely that a company entering administration impacts you because they are a supplier or customer, in this event, it is worth considering the certainty of payment or supply of goods. It also proves that credit checking both supplier and buyer does benefit your business.
For more details speak with a licensed practitioner.
By Dave Farmer