If your company is in severe financial distress and insolvent, an administration order could provide legal protection from your creditors and give you breathing space, whilst the financial position is assessed and a restructuring plan is put together. The administration procedure is an alternative to receivership, or liquidation with its primary purpose being the survival of the whole company, or of part of its operation as a going concern. If you believe that there is a future for your business, either through a sale, or a restructuring exercise, administration gives it protection and a time period, to allow this option to be explored.
An Administrator can be appointed out of court by the holder of a qualifying floating charge (for example a bank or finance company) or by the company, or its directors and also by the court, on the application of one or more creditors.
Once in administration, the company's affairs are managed by a Licensed Insolvency Practitioner and it may continue to trade whilst a rescue plan is put together. An administration must achieve one of these 3 purposes:
- Rescuing the company as a going concern,
- Achieving a better result for the company's creditors as a whole than would be likely if the company were wound up, or
- Realising the assets of the company in order to make a distribution to one or more secured or preferential creditors.
The administration period automatically ends after 12 months unless the Administrator applies to extend it, or follows one of the various exit routes available to it.
This is where a sale of the company's business and/or its assets, is arranged just prior to the company formally entering into administration. The sale can be to a totally unrelated party or to a new company, set up by the same management as the insolvent company.
Once the company enters into administration, the sale takes place quickly, to allow business continuity as much as possible. The funds realised from the sale of the business ad/or assets, are then used to pay the costs and expenses of the administration and potentially pay a dividend to the different classes of creditors.
Pre-pack administration is generally appropriate where a significant value in the company may be lost, for example key staff leaving, or assets losing considerable value, once the administration process is announced.