When your company goes into administration, it receives what’s known as a moratorium i.e. legal protection.
This means creditors can’t start any legal action against your company, which gives you time to restructure your business and plan an exit strategy.
Administration allows a company or business to survive as a going concern.
There are three ways a company can enter into Administration:
- By Court order, following the application of the company director or a creditor.
- Appointment by a qualifying floating charge holder.
- Appointment by the company or its directors.
Administration stops legal action being taken against a company, unless the Administrator or the Court give their permission, and must fulfil one of the following purposes:
a) The survival of the company (as opposed to the survival of the business the company carries on) as a going concern, or if it’s not reasonably practicable;
b) A more advantageous realisation of the company’s assets for creditors, than would be likely if the company was placed into liquidation: or if a) and b) are not reasonably practicable;
c) The realisation of the company’s property, to make a distribution to the company’s secured or preferential creditors.
The Administrator has far reaching powers, and can do whatever’s necessary to manage the affairs, business and property of the company. The Administrator is an agent of the company to which they’re appointed. This means he can contract without personal liability.
The Administrator is also an officer of the Court, and has a duty to act in good faith and in the interests of the company’s creditors. Administration often results in the sale of the company’s assets on a going concern basis.
This may be agreed before the company goes into Administration, and completed immediately after it begins (known as a “Pre-Pack” or “Pre-Packaged Administration”). A “Pre-Pack” can ensure a smooth transition, with minimal disruption to the business, preserving its goodwill and increasing outstanding debt repayments to creditors.
Employees in companies under Administration usually keep their employment, transferring to the purchaser of the assets under the TUPE regulations (Transfer of Undertakings (Protection of Employment) Regulations 2006).
If the Administrator decides to proceed with a pre pack sale, creditors receive a detailed report which outlines why action was considered appropriate. Administration ends automatically after one calendar year, unless the creditors agree to an extension.
There are four ways a company may exit from Administration:
- Liquidation – If there are funds to distribute to unsecured creditors.
- Company Voluntary Arrangement – If the business is able to generate a better return to creditors by continuing to trade, than if its assets were sold.
- Dissolution – if there are no funds to be distributed to unsecured creditors.
- The company may be returned to its directors if the company, and not just the business that it carries on, has survived as a going concern.