Administration can be used if a company is insolvent and unable to pay its debts. There must be a belief that the business can be rescued with appropriate restructuring. The solution provides a breathing space from creditor.
- Is Administration suitable for your company?
- Can Administration stop a Winding Up Petition?
- Implications for Directors must be understood
- How are suppliers likely to react?
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Use Administration if the company can be rescued
Once an Administrator is appointed they 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.
An Administrator should only be appointed if there is a belief that better return can be achieved for creditors than if the company was liquidated. If this is unlikely even after operational changes Administration should not be used.
A rescue solution proposed by the Administrator could take a number of forms. They will normally introduce significant operational and managerial changes. In addition they may suggest the company starts a Company Voluntary Arrangement (CVA). This would reduce the burden of its debt repayments.
It is possible that after their review the Administrator will discover that closing the company will produce the best return for creditors. At this point their objective will be to organise the company’s assets to achieve a better price for them before the liquidation.
Use Administration to protect against legal action
Once an Administrator is appointed legal protection is granted to the company against its creditors. Any creditors currently taking individual action must stop and no further actions can be brought. Even a Winding Up Petition will be overturned.
This gives respite to embattled directors who are otherwise too preoccupied with fire fighting to be able to run the company. The Administration allows the welfare of all the company’s creditors can be considered. The goal is to save all or part of the company rather than force everything to close.
Directors understand that they will lose control of the company
The directors must understand that Administration means they have to hand over control of the company to the Administrator. They will then largely lose their influence as to the decision about how to rescue the company.
The Administrator will ultimately make their recommendations based on a thorough independent investigation. It is then the Creditors of the company who have the power to agree these. If the creditors agree then the Directors must accept the decision.
Ultimately the Administrator may decide that the company should be liquidated. The directors are then unlikely to be able to prevent this. However the Administrator may be willing to consider an offer from the directors for the assets of the company. This could then result in a Pre Pack solution being implemented.
Will suppliers co-operate if Administration is used?
The fact that a company is in Administration must be advertised. This can make ongoing trading conditions more difficult for the business.
Current and potential new suppliers must be informed of the situation. Some of the current suppliers are likely also to be creditors. They may then decide to stop supplying the company altogether.
Administration is therefore only likely to be suitable if key suppliers are prepared to maintain a trading relationship or where new suppliers can be found. However special trading relations such as cash on delivery may be required. As such the cash flow position of the company will also have to be taken into account.