What Does Administration Mean?

In Short

• Administration helps struggling companies avoid liquidation by transferring control to an external administrator.
• The administrator assesses the company’s finances and suggests solutions like a CVA, business sale, or liquidation.
• Key benefits include breathing room from creditor actions, professional guidance, and the potential for operational continuity.

Tips for Businesses

Entering administration provides time to pause creditor actions and explore solutions such as a CVA or business sale. This process allows the company to reorganise, negotiate favourable terms with creditors, and possibly continue trading. Consider administration as a way to recover without the finality of liquidation.

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Table of Contents

• The Administration Process
• Potential Resolutions
• Key Benefits of Administration
• Timelines and Trading During Administration
• Key Takeaways
• Frequently Asked Questions

When a company faces financial difficulties and cannot meet its debts, administration can help avoid liquidation. In this process, directors transfer control to an independent party, known as an insolvency practitioner or administrator. The administration then assesses the company’s financial situation and suggests a way forward.

This article explains the administration process for companies facing financial difficulties, including potential resolutions like CVA, business sale, or liquidation, and the benefits of entering administration.

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The Administration Process

The process begins when the company’s leadership team appoints an administrator of their choice. Once appointed, the administrator takes complete control of the company’s operations and assets. They file the required legal notices, informing creditors of the administration order and requesting a moratorium. This moratorium stops creditors from pursuing the company for money owed during the administration.

For up to eight weeks, the administrator thoroughly reviews the company’s finances, operations, and future prospects. They produce a detailed report on the company’s financial position and suggest possible ways to resolve outstanding debts. These options may include a Company Voluntary Arrangement (CVA), a sale of the business, or liquidation.

Potential Resolutions

Company Voluntary Arrangement (CVA)

If the administrator determines that the company can recover, they may propose a CVA, which outlines a repayment plan while the company continues operations.

Selling the Company as a ‘Going Concern’ to Another Company

A sale of the company offers a more immediate solution. This involves the company’s assets being sold to another entity, and the business can continue to be carried on, and existing creditors can be repaid from the sale proceeds (if any). 

Liquidation

If the administrator deems the company’s financial position unsustainable and its long-term operations unrealistic, they may recommend liquidation. This involves selling the company’s assets, repaying creditors as much as possible, and dissolving the company, removing it from the Companies House register. Liquidation can be either voluntary (initiated by directors/shareholders) or compulsory (initiated by creditors and court-ordered).

Key Benefits of Administration

If a business is struggling, choosing to place the company into administration can provide several advantages:

1. Breathing Room: The moratorium briefly stops any legal actions by creditors, allowing the company to have extra time to thoroughly assess its situation and formulate a recovery strategy.
2. Professional Guidance: The appointed administrator brings specialised expertise in financial restructuring and insolvency matters. They can offer potential solutions that the company’s leadership may have overlooked.
3. Creditor Negotiations: As an impartial third party, the administrator can better negotiate favourable debt repayment terms with creditors.
4. Operational Continuity: Depending on the chosen resolution (CVA or sale), the company may continue trading, maintaining operations, safeguarding jobs, and preserving enterprise value.

Timelines and Trading During Administration

The duration of a voluntary administration can vary, with a CVA potentially being achieved within weeks. At the same time, more complex cases may extend up to a year or longer under certain circumstances. During the initial assessment phase, the company can generally continue business operations as usual, unless specifically directed otherwise by the administrator.

Once the administrator’s report is presented and a resolution is agreed upon, the company’s future depends on the chosen outcome. If a CVA or sale is approved, the company can likely continue trading to generate revenue for debt repayment. However, if liquidation is the prescribed path, the company must stop all of its operations and sell off its assets.

For companies facing insolvency, entering administration provides a valuable opportunity to explore restructuring options, negotiate with creditors, and potentially continue operations under a court-approved repayment plan. While handing control to an external administrator is a tough decision, this process can offer struggling businesses a lifeline, helping them recover financially and avoid liquidation.

Key Takeaways

If your company is in financial distress, entering administration can give you time to pause creditor action and consider your options. An external administrator will take control, assess the business, and recommend a way forward. This could include a repayment plan (CVA), a business sale, or liquidation. Administration allows you to regroup, access expert advice, and potentially keep the business running.

If you need help in navigating administration, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions