Administration is a debt solution used to buy a company time. Once an Administrator has been appointed legal proceedings for the enforcement of debt payment or the closure of the company must be suspended. This gives an opportunity to implement a solution to resolve the company’s financial problems.
- Find out how Administration can help a struggling company
- What happens to the company Debts?
- How is the company Credit Rating affected?
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How does Administration work?
Administration gives a struggling company protection from its creditors. This could be for up to a year or even longer in certain cases. During this time any legal action currently being taken against the company must be suspended. In addition no new actions can start.
From the day an Administrator is appointed they have 8 weeks to review the company’s affairs and produce a report stating what is going to be done to rescue the business. Alternatively if they feel a rescue is not possible and the company should be liquidated they must give reasons for this.
The proposed changes and time required to implement them must then be agreed by the company’s creditors. The changes may be significant and radical. They could involve anything from changing the focus of the business to closing whole loss making departments.
What happens to Company Debt during Administration?
The affect of Administration on a company’s debt will depend on the solutions that the Administrator believes should be implemented. Generally speaking debt repayments will be suspended during the Administration period.
As part of the Administration proposals creditors will normally expect to agree the timescales for there debts to be repaid. The proposal may suggest that debts can be repaid in full. However more commonly a Company Voluntary Arrangement will be agreed where the overall debt burden is reduced.
The worst outcome for the creditors is where the Administrator recommends that the company should be closed. A creditors meeting will then be held and a liquidator appointed. They will then start the orderly closure of the company. In this situation any unsecured creditors are unlikely to be paid.
How does Administration affect a Company Credit Rating?
A significant implication of Administration is that it is a public event. The company must advertise the fact that an Administrator has been appointed on all of its correspondence. As a result its relationship with current suppliers will be made increasingly difficult.
The company’s bank may be reluctant to extend further credit facilities and may even wish to withdraw current facilities. The Administrator may be able to prevent this in discussions with the bank about the restructuring proposals. In addition other suppliers may no longer want to deal with the company other than on a cash basis.
Administration can also make it difficult for a company to win new business. The fact that it is in Administration must be made known to potential clients. As a result they may question the long term financial stability of the operation and choose to place their business elsewhere.