Could going into administration save your business?
In the world of business, there are times when companies face financial distress and the threat of insolvency seems to loom large. But if your business has a viable future, despite its short-term outlook, one option you could consider is going into administration.
Administration is a legal process that provides temporary protection from creditors while your company restructures and works towards a solution to save the business, or works towards the sale of the business.
This article will explore how going into administration can help save your business, the process involved and the advantages and disadvantages of this approach. We’ll also look at what happens to staff when a company goes into administration.
What is administration?
Administration is a formal insolvency procedure governed by the Insolvency Act 1986 in the UK. It’s initiated when a company is unable to pay its debts and faces insolvency, and the directors decide administration is the best option.
In this process, a licensed insolvency practitioner will be appointed to take control of the company and manage its affairs, in the role of Administrator. The primary goal of administration is to rescue your company as a going concern. Or, if that’s not possible, to try to achieve a better result for the creditors than might be possible through liquidation.
Advantages of going into administration
Protection from creditors:
the moratorium provided during administration protects your company from legal action by creditors, allowing the business to focus on restructuring and recovery.
Potential for business rescue:
the primary goal of administration is to save the business as a going concern. This can be achieved through restructuring, attracting new investment or finding a buyer for the business.
Better outcome for creditors:
if the company cannot be saved, the administration process aims to achieve a better outcome for creditors than would be possible through liquidation.
Continuity of business:
administration allows the company to continue trading while the administrator works to implement the rescue plan, helping to preserve jobs and maintain relationships with suppliers and customers.
The process of going into administration
1. Appointing an administrator
Engaging the services of a licensed insolvency practitioner (IP) is the first step – and the most important one. Companies such as FA Simms employ IPs with years of experience, who’ve worked with companies of varying sizes in a wide range of sectors.
One of the crucial aspects of appointing an IP is that it buys your company time. Effectively, it keeps creditors at arm’s length, providing much-needed breathing space. Any legal action against your company will be frozen for the duration of the administration.
Working with the administrator you can use this time to create a recovery plan, which outlines the next steps to be taken.
2. The recovery plan
The recovery plan explains how debts are to be repaid, as well as how costs can be cut to make the business viable going forward. It’s important to remember that while the administrator is ‘on your side’, they have a legal duty to act in the best interests of your creditors.
3. The creditors’ meeting
By law, you must call a creditors’ meeting within 10 weeks of your company going into administration.
At the meeting (which will probably take place remotely) you’ll explain your recovery plan to creditors. If the majority of them vote in favour of it then the administrator will proceed with it. In this event, the administrator may encourage creditors to set up a creditors’ committee to help expedite the recovery plan.
Generally, creditors tend to be supportive: they are more likely to recover more of the money they are owed from a company in administration than a liquidated one.
Acting together, and with your input, the administrator and creditors’ committee will be able to discharge your company’s debts, streamline and restructure it, and then move it forward into profitability and a brighter future.
Do note, however, that if the recovery plan is rejected then a court will decide on what happens next.
What happens to staff when a company goes into administration?
The good news is that going into administration means there’s a good chance some jobs will be saved, either through business rescue or because the buyers choose to keep them employed after the sale has gone through. After all, they know the business best and could be an important asset.
However, when a company goes into administration, employees will most likely find it an uncertain and potentially stressful time. It’s important that they’re kept informed of the plans and potential timescales during the period of administration, as well as given advice on their rights and entitlements. This is something your administrator can help with.
How we can help your company with administration
Going into administration can be a lifeline for struggling businesses, offering protection from creditors and the opportunity to restructure and recover. It can be daunting, a tough step to take. But with the right help it need not be the end of the line for your business. You could emerge debt-free (or with much less debt) and leaner, with more insight and more positivity.
It enables you to take a step back, evaluate what you as a business could do better and translate these findings into positive action. With this insight you can re-engineer the company, streamline processes, chop out the dead wood and start afresh. Importantly, you‘ll need help with all of this – and that’s where a licensed insolvency practitioner comes in.
If your company is facing financial difficulties and you’re facing difficult choices, our business rescue and insolvency experts could help to find a solution to your challenges, including going into administration. We’ll always clearly explain all the options available to you and it’s always your choice as to the best way forward for your particular business.