What is the cost of an Administration?
Administration is a formal insolvency process which places a company under the control of an Insolvency Practitioner and the protection of the court. A ‘Notice of Intention to Appoint’ or ‘Notice of Appointment’ can be filed at court by the Director(s), qualifying floating charge holder, a company, or creditor to commence the process of Administration. You can read more about how a company enters administration here.
Administration costs are relatively high, when compared with other insolvency solutions. It is impossible to give an actual Administration cost figure, as each situation is different. For example, sometimes an Administrator will be able to sell the business almost immediately on their appointment, whereas on other occasions they might be required to run the company for a considerable period of time. In all cases the fees and expenses charged would be based on the number of hours spent working on the administration.
Determining the Administrator’s fee
When a company enters Administration, it’s often assumed that the owner of the insolvent company will pay the administrator’s costs/fees, but that isn’t the case. The costs of Administration, including the Administrator’s fees, are paid out of the company’s assets before anything is paid to creditors. This is why creditors have a valid interest in the Administrator’s remuneration.
An Administrator is obliged to put forward a proposal to creditors for achieving the purpose of the administration. The Administrator must outline why an administration, as a potential rescue and recovery option, would provide a better return for creditors, as opposed to other debt solutions. Creditors would be invited to a meeting to discuss the proposal and the Administrator must get approval for their fees and costs. The fees must be clear in the proposal and creditors could request modifications before they approve them.
Which companies should use the Administration process?
Administration is mainly used by companies where turnover is sufficient to support the ongoing fees and costs associated with restructuring a company. The Administration process has three potential ‘statutory purposes’. The first would be to rescue the business as a going concern; if that is not possible then the second would be to achieve a better outcome for creditors than in liquidation. If both of these cannot be achieved then it would be to realise property or assets in order to distribute funds to one or more secured or preferential creditors.