What is company administration and could it save your business?

When a business finds itself with unmanageable debt and facing the threat of insolvency, the prospect of shutting down operations can seem like the only way out.

However, there’s an alternative solution that could potentially save your company from closing completely: entering into administration.

Company administration is a formal insolvency process that offers a lifeline to struggling businesses by providing temporary protection from creditors while a restructuring plan is implemented.

In this article, we’ll look into the details of what company administration entails and if it could be a viable option for rescuing your business.

What is company administration?

Company administration can often be used when a company’s insolvent but has a viable business model or valuable assets, which could be saved to keep the business open or realised for its creditors’ benefit.

The process of entering into company administration begins with the appointment of a licensed insolvency practitioner as the administrator.

A company could use an administration when:

  • It’s insolvent, which means it cannot pay its debts as they come due, or when its liabilities exceed its assets.
  • The company has a potential for recovery, reorganisation or the sale of parts of the business as a going concern.
  • As an alternative to liquidation, where the company administration is the best way of maximising the asset value for creditors’ benefit

Advantages of going into company administration

It gives protection from creditors: Entering administration triggers a moratorium on legal action by creditors. This prevents creditors from taking legal action against the company, granting much-needed breathing space. It allows the company to focus on implementing a recovery plan without the threat of lawsuits or asset seizures.

There’s potential for business rescue: A licensed insolvency practitioner takes control of the company’s affairs, acting as the administrator, and works closely with the directors to devise a
recovery plan. This plan outlines strategies for repaying debts, cutting costs and restructuring operations to make the business viable again.

Creditors tend to be supportive: Creditors are more likely to recover more of the money they’re owed from a company in administration than a liquidated one. If creditors are happy with the administrator’s recovery plan, they’ll work productively with them to settle the outstanding debt.

Jobs could be saved too: The period of company administration can be a time of uncertainty and stress. However, if the business is successfully rescued or sold as a going concern, some jobs may be preserved. The administrator plays a crucial role in keeping employees informed about the plans, potential timescales and their rights and entitlements during this process.

What happens in a company administration?

Company administration is a complex legal process that requires the appointment of a licensed insolvency practitioner to manage the company’s affairs, business and property. There are many steps to undertake throughout the process. We’ve outlined the main stages below.

Appoint an administrator

Engaging the services of a licensed insolvency practitioner is the first step – and the most important one. As well as official insolvency qualifications and licensing, reputable insolvency
practitioners have years of experience working with companies of varying sizes in a wide range of sectors.

Work on a recovery plan

The recovery plan is created by the administrator. It will take into account the desired outcomes of the company directors. But they’re also legally obliged to find a solution that gets best results
for the company’s creditors. The recovery plan will explain how debts are to be repaid, as well as the changes which can be made to make the business viable going forward.

Get the creditors’ agreement

By law, a creditors’ meeting must be called within 10 weeks of a company going into administration. At the meeting (which will probably take place remotely) the recovery plan will be explained to creditors. If the majority of them vote in favour of it then the administrator will proceed. In this event, the administrator may encourage creditors to set up a creditors’ committee to help expedite the recovery plan.

Acting together, the company directors, the administrator and the creditors’ committee will be able to discharge the 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.

Could going into company administration save your business?

Company administration can be a powerful tool that provides a lifeline to businesses facing financial difficulties. By offering temporary protection from creditors, facilitating debt restructuring and enabling operational reorganisation, company administration presents a viable path to business rescue.

While the process can be daunting, seeking the guidance of a licensed insolvency practitioner can significantly increase the chances of a successful outcome. If your company is struggling with mounting debts and the threat of insolvency, exploring the option of administration could be the first step towards a brighter future.

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