What Happens When a Company goes Into Administration?

by Nick Wood Digital Marketer

A licensed insolvency practitioner will be formally appointed and will assess the company's affairs to determine whether the company is viable. If it is, they will work out how to make this happen. Administration does not provide a long-term solution but only offer temporary relief.

Understanding the process when a limited company enters administration

If used correctly, the process of administration is daunting for many directors but offers the best chance of successfully turning a business around.

Although some people view administration as a court-ordered punishment for insolvent companies that can't pay, many directors choose to appoint their own administrators using an insolvency practitioner.

To get the best possible outcome, company directors must be honest with the qualified insolvency practitioner when a business goes into administration.

Exit out of company administration process

Company administration is an in-between stage that allows for the development of a solid plan, rather than being a final solution.

One primary benefit of an administration is the start of a hold administration period during which the company cannot be legally pursued by unsecured creditors—such as when they are owed money and thus issued with a winding-up petition.

When a business is indebted, this allows them time to plan for the future without stress or worry from creditors who might begin legal proceedings.

The administrator's key objective is to restore the company and get the best possible outcome for all creditors, including those who are owed preferential payment. To achieve this, they need to think about all potential routes and plan accordingly.

What happens if the company can recover?

A company might be in bad shape money-wise, but that doesn't mean there isn't a good business foundation. Debts can happen because of early poor choices, continuous struggles with financial owedness, or spending too much on leases and loans.

Perhaps when you get rid of all that debt, the essential business plan is sound and making enough cash to support a smaller version of the enterprise.

Company Voluntary Arrangement (CVA)

If the company has dependable and steady cash flow, enough assets, and good sales volume transactions, then there is a possibility that the administrator will be able to raise sufficient money to pay off most of their debt or come to another formal arrangement with creditors instead of having to close down the business.

This would usually happen through a formal insolvency process referred popularly as a CVA.

A CVA is an opportunity for a company to change how they're structured, quit unprofitable areas of their business and renegotiate lease agreements. Some debts will be entirely discharged while others will have monthly payments planed. After a CVA is put into place, it's legally binding on both parties.

Pre-pack Administration

The administrator also has the option to recommend a pre-pack administration sale, where the company's assets and business of the old company are sold to a new company. The latter might or might not be owned by the directors of the existing company. Since the debts stay with current company, then the new business can start afresh financially. This particular procedure is commonly called a “pre-pack” and is an insolvency procedure that is carried out often."

Before a pre-packaged sale can be finalised, the appointed administrator must demonstrate to a company's creditors that this is the best option for the company and would result in more money than any other potential outcome.

What happens if a company can’t recover?

If the company is unable to improve its financial situation, it will be placed into a creditors voluntary liquidation (CVL). This means that all of the company assets will be sold and the company itself will closed. The appointed insolvency practitioner will ensure that the company's directors are protected from any accusations of wrongful trading by handling the company’s final transactions and closing duties at this time.

A director conduct report will be compiled in the future to examine the transactions that took place during the years leading up to the company’s insolvency.

If you feel like company administration is a bit too confusing and daunting, don't worry--The team at Company Doctor are here to help. They offer free consultations so that way, you can receive all the information necessary to make the best decision for your insolvent company. You shouldn't have to go through this process alone!

Contact Company Doctor by leaving an enquiry on our website or by calling us on freephone 0800 189 1536