Table of Contents
In Short
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Administration aims to rescue insolvent companies or achieve a better result for creditors than immediate liquidation.
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Directors lose management powers but retain their duties; an administrator takes control.
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Possible outcomes include business rescue, sale, or liquidation if recovery isn’t feasible.
Tips for Businesses
If your company faces insolvency, consider administration as a potential solution. It offers a statutory moratorium, protecting against creditor actions, and allows time for restructuring or sale. However, directors must act promptly to avoid personal liability. Engage with an insolvency practitioner early to explore options and ensure compliance.
During the lifecycle of your business, it is essential to consider the various options available if your business encounters financial difficulties. Some routes are used to ensure the business can continue as a ‘going concern’, and others focus on returning value to creditors of the company. Administration is one option you can use to rescue an insolvent business as a ‘going concern.’ This article explains how administration works and the legal implications for your company.
Insolvency
Generally, a company is at risk of or has become insolvent, where it is unable to pay its debts as they fall due. This includes situations where a company is unable to meet financial obligations. For example, an insolvent company is in a state where it:
- cannot pay its bills when they are due; or
- has more liabilities than assets on its balance sheet.
How Does a Company Enter Administration?
A company can enter administration in two main ways:
- through a court order; or
- via an out-of-court appointment.
The court route involves applying to the court for an administration order. At the same time, the out-of-court method allows directors, the company or a qualifying floating charge holder to appoint an administrator without court involvement, provided certain conditions are met.
This template helps you document important and major decisions or actions reached in board meetings.
How Does Administration Work?
The main aim of administration is to support the company as a going concern and to rescue it during financial distress. The key way that administration facilitates this is by allowing a company respite from creditor action.
The process involves handing over your company to an insolvency practitioner, also known as an administrator. During this period, your company benefits from the ‘statutory moratorium period’. This means that creditors are unable to take action against your company to recover debts without first obtaining permission from the court. Upon appointment, directors must provide the administrator with a Statement of the Company’s Affairs within 11 days. This will contain details of all the company’s assets and liabilities, and must specify any assets which are subject to fixed or floating charges.
What Role Does the Administrator Have?
The administrator manages the company and oversees the administration process. Within eight weeks, they must formulate proposals for administration that creditors then vote on to approve. Generally, administrators have wide powers in relation to the management of the company. They can:
- sell any assets of the business;
- carry on business; or
- enter into contracts or other arrangements on the company’s behalf.
The administrator, once approval has been obtained by creditors, will implement their proposals, which may include:
- restructuring the business;
- selling parts of the business;
- selling assets to raise funds; and
- negotiating with creditors.
Importantly, if you find yourself in administration as a director of your company, you lose your management powers. This does not mean that you will be automatically removed from the board of directors. You are still required to comply with director duties throughout the process.
What is the Outcome of Administration?
The administration can end in several ways:
- the company is rescued and returns to normal trading;
- a Company Voluntary Arrangement is agreed;
- the company is sold as a going concern; or
- the company enters liquidation if rescue is not possible.
Key Takeaways
Administration is designed to rescue insolvent companies or achieve a better result for creditors than immediate liquidation. Directors must act promptly when facing insolvency to avoid personal liability. During administration, the administrator takes control of the company, while directors retain their duties but lose management powers. A moratorium prevents most creditor actions during administration. The process typically lasts up to a year but can be extended for an additional period. Possible outcomes include rescue, sale of the business, or liquidation if rescue is not achievable.
If your business is struggling to meet its liabilities, 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 on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Yes, the administrator can make redundancies if necessary to rescue the company or achieve the best outcome for creditors.
Existing contracts generally remain in force, but the administrator may choose to continue or terminate them based on the company’s best interests.
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