How Does a Company Enter Administration?
Administration is a formal insolvency process which places a company under the control of an Insolvency Practitioner, with the protection of the court, to enable him to achieve one of the three ‘statutory purposes’.
Those three ‘statutory purposes’, as set out at Paragraph 3 to schedule B1 of the Insolvency Act 1986, are:
- Rescuing the company as a going concern, or
- achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
- realising property in order to make a distribution to one or more secured or preferential creditors.
When is Going into Administration Appropriate?
To enter Administration, a company needs to be, or is likely to become, insolvent, where either the company’s liabilities exceed its assets, or it is unable to pay its debts as and when they fall due.
This procedure suits a business which is suffering from severe cash flow problems but where the underlying business is viable.
Who Can Appoint an Administrator
An Administrator, who must be a Licensed Insolvency Practitioner, can be appointed by:
- The company or its directors.
- The holder of a qualifying floating charge (often the company’s bank)
- One or more of the company’s creditors
Once an application has been filed in Court, all qualifying floating charge holders must be given 5 days’ written notice of the intention to appoint an administrator for the Order to be granted. During the 5 days’ notice, the charge holder has the opportunity to appoint their own Administrator if they so wish.
The application to Court triggers a moratorium, which prevents creditor action and gives the Insolvency Practitioner the opportunity to review the company’s position and consider all available options.
When to Seek Advice
A director has a responsibility to seek professional advice if he or she believes a company is insolvent, or may not be able to avoid insolvency. A Licensed Insolvency Practitioner will work with the company to assess all of the options available and advise the best route to take.
Although this may seem daunting, a pro-active approach ensures directors are meeting their obligations to the company and its creditors. This minimises the risk of being held personally liable for company debts and being exposed to wrongful trading and misfeasance actions. Early advice gives the company the best chance of survival.
If Administration is not a viable outcome and the company needs to be wound up, then this is something the Insolvency Practitioner will advise on. Our article The Difference between Liquidation and Administration provides a helpful overview of the differences between the two insolvency procedures.