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As a company director or shareholder, you could face insolvency if your business is not running smoothly and is in trouble. This is a worst-case scenario and one you, as a business owner or shareholder, no doubt hope will not occur. However, if it does, you will receive a notice that a court has ordered your company into administration. Understanding the practical effects of administration is in your best interest as a company director or shareholder. To help, this article will explain what administration means for you if your business faces insolvency.
Why Administration?
Administration is a form of formal insolvency proceeding that a court can order against a company or business like yours. When the court makes the order, it appoints an administrator who oversees the process. The administrator is a licensed insolvency practitioner, meaning they are court officers. Licensed practitioners are typically accountants by trade.
The purpose of administration and the role of the administrator is to:
- If possible, rescue your business, allowing it to continue trading.
- If the administrator does not think they can rescue the business, they can wind the company’s business up. Winding up a business involves selling its assets and using the proceeds to pay back the company’s creditors.
- Alternatively, the administrator may conclude that although they can rescue the business, your company’s creditors are better served in a windup. Practically, it almost certainly means that you will not receive anything.
There are several ways an administrator can rescue your company. Most rescues end with the administrator selling the company to a buyer at a discount. The terms of the sale usually require the buyer to inject cash into your business, which the business then must use to pay off the creditors. As a shareholder, there is no guarantee that you will receive a return on your investment during such a sale.
The Moratorium
If your business faces insolvency, the court places your company in administration, the law automatically imposes a moratorium. This means that your company’s creditors cannot start any legal action against your company while the administration process is ongoing. Therefore, the administrator can handle your company’s affairs without simultaneously responding to several lawsuits against your company.
Who Might Apply For an Administration Order?
If your business looks likely to face insolvency, different people can apply to the court to issue an administrative order. These are:
- your company’s shareholders on behalf of your company, provided the shareholders pass a resolution;
- your company’s directors through a board resolution;
- any creditor; and
- other insolvency officials, such as a liquidator.
The court then approves the application if it has merit.
In addition, if you have granted one more of your company’s creditors floating charges over all of your company’s assets, these creditors can automatically appoint an administrator.
You may wonder why you might want to put your own company into administration. A full account is beyond this article’s scope, but as a director, you can effectively transfer your powers over to the administrator. This means you will no longer be liable for any decisions made after the administration begins.
Likewise, as a shareholder, you may want to appoint an administrator to execute a pre-packaged administration sale. This may ensure that you receive some value back in your investment rather than nothing.
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The Outcome of Administration
The rights and interests in your company differ depending on whether you are a shareholder or a company director. For small and medium-sized businesses, company directors are frequently shareholders and vice versa. Nonetheless, you should ensure you understand the distinction between the two.
Effect for Shareholders
As mentioned, an administrator might rescue a company and allow it to continue trading. Most rescues end with the administrator selling the company to a buyer at a discount. The terms of the sale usually require the buyer to inject cash into the business, which the business must use to pay off the creditors. As a shareholder, there is no guarantee that you will receive a return on your investment during such a sale.
Notably, the administrator does not act in your interests as a shareholder. An administrator must always act in the interests of your creditors.
Likewise, if the administrator decides to wind up your company’s business, they will sell all of the company’s assets to pay back the creditors. Rarely is there anything left for the shareholders.
Effect on Company Directors
If you are a company director, you will lose all powers over your company once the court appoints an administrator for the administration process. The administrator can order you to help them with various tasks.
Significantly, the administrator will review your conduct as a company director, particularly in the last twelve months before the administration process began. Specifically, the administrator will look to see if:
- you sold any property for less than what it was worth; and
- if your conduct breached any of your duties as a director.
If the administrator finds evidence of your wrongdoing, such as any misconduct, or an undervalued transaction made by you, they can refer the matter to court for further investigation. As a director, if you are found to have breached your duties, the court can order you to pay money to the company, which will then be used to repay the creditors.
Key Takeaways
If your business faces insolvency, it will go into administration. An administrator will be appointed and act on behalf of all of your company’s creditors. Their legal priority is ensuring that the company’s creditors are repaid. The process begins by trying to rescue your business, such as by selling it to a buyer. Alternatively, the administrator may conclude that they cannot rescue your company or that the interests of your company’s creditors are better served by selling off your company’s assets and winding the company up. Following a windup, there is rarely anything left over for the shareholders.
If you need help understanding your rights as a shareholder upon administration, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Administration is an insolvency process, and a court appoints or approves an administrator who handles the process. The administrator’s overriding goal is to ensure creditors get as much money back as possible, whether this is through a rescue or wind-up.
The administrator acts in the interests of all the creditors according to their legal rights against the company and should try and rescue the company’s business.
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