Is it the end when your Business goes into Administration?

A business being placed into administration is always a difficult time for anyone connected with the company as many of them will now find their job at risk. For recent examples of this we only have to look at the news to see high profile brands such as Austin Reed and BHS hit the headlines with their difficulties. Naturally it is the information that 1,200 and 11,000 jobs are at risk respectively which causes the most concern.

However, administration is not the final step and many businesses who have reached this stage have ultimately flourished.  For example, it seemed at first to be the demise of Game Digital who entered administration in 2012; however, OpCapita stepped in, brought the business out of administration and ultimately floated the company on the Stock Exchange at a valuation of £340 million.

 How then do companies come back from administration and what does it mean for you if you are involved in the process?

What Does a Business Being Placed In Administration Mean?

A business will only be placed in administration if the directors of the company believe there is no other option. The enterprise by this point has accrued considerable amounts of debt and can no longer meet its payroll responsibilities, tax demands, or calls for payment from creditors. The difficulties are usually so severe that the directors of the company make this gruelling decision when they are faced with the imminent demise of the business.

Administration can only be carried out by licensed insolvency practitioners and the process is a legal one, driven by the courts. Administration is usually sought to protect the company from winding up petitions and to give it time to consider all possible solutions.

The administrators who are placed in the company take on immediate responsibility for running it while they examine three possible courses of action:

1) They consider negotiating a Company Voluntary Arrangement (CVA) so that creditors can be paid over a fixed period and the business is able to continue trading.

2) They consider liquidation whereby the assets are sold, creditors are paid and the company is closed. A high profile example of this would be the demise of the high street brand Woolworths who entered administration and were dissolved in 2008.

3) They look for the best buyer for the company. Sometimes this turns out to be the existing directors and shareholders and then the company is run under a new arrangement. Alternatively it can be a third-party.

If a buyer is found this is often the best outcome as it can lead to a better future for the business. There have been many high profile examples of this. The high street photography brand Jessops entered administration in 2013 with the loss of all its stores. It was only revitalised by a multi-million pound investment by entrepreneur Peter Jones. The store now has 51 new branches and is also available in increasing numbers of Sainsbury’s stores.

No-one can argue that a business placed into administration is not at high risk as there are many possible outcomes, not all of them positive. However, it shouldn’t be assumed that a business in this position cannot be turned around. There are clear examples of those who have experienced a reversal in fortune and many who went on to be much stronger than before.

As people connected with Austin Reed and BHS wait to hear about the outcome for their businesses, it can only be hoped that a solution can also be found by the administrators now placed at their helms.