Administration is a legal umbrella which gives a company a breathing space from its creditors. It provides a moratorium on insolvency and other legal proceedings. It is used to buy time so that a suitable recovery or restructuring package can be formulated and implemented.
- Find out if Administration is right for your company
- How to implement Administration
- How Administration will affect Directors and Employees
- What does company Administration cost?
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When to use Administration
Administration can be used when a company is unable to pay its debts. However it must be expected that with operational changes turn around can be achieved. The expected outcome of Administration must be that it will generate a better return for creditors than if the company was Liquidated.
Once an Administrator is appointed they will review the status of the business. Their primary objective is to decide on the solution that will give the best opportunity for the company’s creditors to be repaid. Significant operational changes may be made to allow the business to continue trading. Alternatively all or part of the company may be closed.
Due to its relatively high cost Administration is normally only used with larger companies. For small or medium sized organisations a Company Voluntary Arrangement or Pre Pack might be more appropriate.
How to start Administration
The directors or shareholders of a struggling company first appoint an Insolvency Practitioner (IP). The IP must be in agreement that Administration is the best course of action. If so they will inform the Court that they are to be appointed as the Administrator. There is no need to get a Court Order unless the company is already in Liquidation or a CVA.
The company is then known as being in Administration. Within 8 weeks the Administrator must make a statement setting out proposals for the company. The Administrator’s proposals must be agreed by the company’s creditors.
Once agreement is reached the Administrator is then responsible for implementing the plan. The original directors retain little or no control of the company. They may only act under the instruction of the Administrator.
Administration and Directors
Once a company is in Administration the power of the directors is vastly reduced. The Administrator assumes control. They have the authority to run the company in the way which is most appropriate to protect the position of the creditors.
Ultimately the fate of the Directors will depend on the recommendations of the Administrator. If it is decided that all or part of the company should continue to trade the directors may remain in their positions. Alternatively they may be replaced
If it is decided that the business should be closed a Liquidator will be appointed. The Directors will then be dismissed. The Liquidator will then submit a report on the conduct of the Directors to the Insolvency Service.
Administration and Employees
The effect of Administration on employees will depend on the restructuring decisions that are implemented. If all or part of the company continues to run then there may be minimal redundancies. However new employment contracts will often need to be introduced.
If the whole or part of the company is sold to a third party and affected employees will be transferred to the new company.
If all or part of the company is closed any affected employees will be made redundant. These employees will receive redundancy pay as per the terms of their employment contracts. However these will only be honoured if the company can afford to do so.
Cost of Administration
The Insolvency Practitioner appointed as Administrator will charge fees and expenses. The amount charged depends on the size and nature of the company and the expected work involved.
The Administrator must make their cost and fee charging methodology clear in their initial proposals for the company. These must be agreed by the creditors. A creditor committee may be set up to oversee the creditor’s interests in this area.
The basis on which the Administrator’s fees can be fixed may be as a percentage of the property they have to deal with. Alternatively on a time basis or as a set amount. A combination of these three can also be used.