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What is Administration and how does it work?

When a company is struggling financially, there are several routes you can take. One option if the business is still viable despite its current troubles is to place it into Administration.

An Insolvency Practitioner must agree that there’s a realistic chance of rescuing the business through the Administration process. If they do, the Insolvency Practitioner who acts as the administrator will assume control of the company and implement financial and operational restructuring measures to get the business back on track.

Although Administration is not suitable for every failing business, it can be a powerful and effective way to protect the company, save jobs and reduce creditor losses. Here we explore what the Company Administration process involves, how long it lasts and when it might be the right approach for you.

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What is Administration?

Company Administration is a formal insolvency procedure in Scotland, England and Wales that helps limited companies deal with serious debts. If a company is insolvent (cannot pay its debts when they’re due), a company director, shareholder or one or more of its creditors can place the company into Administration with or without a court order.

When the Administration begins, a legal ringfence, known as a moratorium, is placed around the company. The moratorium prevents creditors (parties it owes money to) from commencing or continuing legal action against it. That creates some breathing space so the administrator can assess the company’s position and devise a plan that meets one of the three statutory aims of the process.

The aims of Administration are to:

  1. Rescue the company as a company concern; or
  2. Achieve a better return for the company’s creditors as a whole than if the company were wound up without going through Administration; or
  3. Sell company assets for the benefit of one or more of the company’s secured or preferential creditors.

How does the Administration process work?

An initial eight-week moratorium begins when the company enters Administration. That pauses any creditor legal action and allows the administrator to assess the company’s position and make a plan to achieve one of the statutory aims.

Rescuing the company is always the administrator’s primary objective. However, if that’s not possible and they think winding up or selling the company would deliver a better result for the creditors, they can plan to achieve one of the other two objectives.

The administrator will submit a proposal to the creditors outlining their aims, detailed costs, how the company will exit the procedure and forecasted returns for the creditors. The creditors then have 14 days to decide whether to accept the proposal.

If the creditors approve the proposal, the initial period of Administration ends and the next stage will begin. The administrator will work towards achieving their aims and send a progress report to the creditors every six months. The Administration then ends when its purpose has been achieved.

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How does a company exit Administration?

Eventually, the business will exit the process and leave behind the legal protection it provides. A company can exit Administration in several ways:

  • Continue trading – As part of the restructuring process, the administrator can renegotiate lease agreements, refinance existing debts and move away from unprofitable areas to put the business in a more stable financial position so it can recommence trading. 
  • Enter into a Company Voluntary Arrangement (CVA) – The company may exit Administration and immediately enter another formal insolvency process such as a CVA. A CVA is a formal debt repayment plan that allows the company to repay its creditors over time while it continues to trade. 
  • Sell the business as a going concern – The administrator may decide that selling the company is in the best interests of its creditors. The whole business could be sold to a connected or unconnected third party via a pre-pack sale. Alternatively, parts of the business could be sold or moved to a new company and the old company will be liquidated.
  • Liquidation – If the administrator cannot save or sell the company, they have no option but to liquidate. That could be the case if the company is no longer financially viable or if liquidation is the best way to maximise creditor returns.

Is my company eligible for Administration?

Your business must be insolvent and facing significant creditor pressure to enter Company Administration. Despite being in debt, there must be some underlying value, for example, it could have a valuable brand or strong order book. It should also have a realistic prospect of either being revived and becoming profitable once again or being sold and generating a greater return for the company’s creditors than if you put it into liquidation.

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While all three closure options have their advantages and disadvantages, the right one for you will depend on a number of factors including the current financial position of the company and your plans for the future.

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Who oversees the Administration process?

Company directors can apply to put their company into Administration, but a licensed Insolvency Practitioner must oversee the process itself. The company directors or shareholders can choose the Insolvency Practitioner they want to act as the administrator. The administrator will then take over the running of the insolvent company. Although the administrator works for the company, they must prioritise the interests of the creditors and seek to achieve the best possible outcome for them.

How long does Company Administration last?

Administration is only a temporary measure. The process has a statutory length of 12 months, but it can be extended with the court’s permission or the agreement of the company’s creditors if the administrator has not completed all their tasks. The administrator can also end the process before 12 months if they have achieved their aims, but only if the creditors agree.

How can we help?

Scotland Liquidators has extensive experience advising on and overseeing Company Administration. We can help you explore whether it could be an appropriate option for your company and the potential implications for you as a director. Get in touch for a free same-day consultation or arrange an in-person meeting at one of our offices in Scotland.

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There are several options when it comes to closing a limited company and it is vitally important you choose the one which is right for you, your company, and your creditors. Whether you are struggling with rising costs, falling trade, or impatient creditors, we are here to help.

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