When a company hits rough financial waters and teeters on the brink of insolvency, the concept of company administration emerges as a lifeline. It’s like a chance to turn things around or face the end. This insolvency proceeding in the UK could be a game-changer for struggling businesses, providing a way to sort things out when money matters become an uphill battle.
Today, in this blog post, we will show how companies can use this process to get back on track when things get tough financially. So, let’s dive into this world of dealing with financial problems and how UK company administration fits into the picture.
Insolvency Proceedings
As you have started reading, you may wonder: What is an insolvency proceeding, and how does it relate to company administration in the UK?
Insolvency proceedings are a way to help businesses or individuals deal with financial struggles when they can’t pay what they owe. It’s like a formal process where a legal system helps figure out how to manage debts and assets reasonably. These proceedings include different options, like restructuring debt, selling assets, or making arrangements with creditors to settle debts. In a nutshell, insolvency proceedings are structured ways to handle financial difficulties when things become unmanageable.
There are different types of insolvency proceedings:
- Liquidation.
- Administration.
- Receivership.
- Voluntary Arrangements.
These proceedings help handle financial struggles, deciding if a business can continue or must stop operating.
Company Administration Meaning
Administration is a type of insolvency proceeding where a licensed insolvency practitioner becomes the administrator, taking over managing an insolvent company. This process gives the struggling company time and legal protection from creditors’ pressure or legal actions like winding up petitions.
During administration, the company gets a break from legal actions by creditors and can’t have its assets seized. The appointed administrators manage the company and plan its future. They might sell the company, restructure it, or let the current directors continue running it.
Moreover, when administration is initiated, it establishes a moratorium. This moratorium halts any existing legal actions and prohibits initiating new legal proceedings unless authorized by the administrator or the courts.
Administration is a potent option, but it’s chosen only when it’s the best choice for everyone involved, including creditors. Remember, this process doesn’t always mean the end of the business. Instead, it’s a chance for the company to carry on differently. When a company goes into administration but can be saved, it can help keep some existing jobs.
Using a pre-pack administration can be very helpful in protecting the business’s value.
Pre-Pack Administration or Administration Pre-Pack Sale
Now, it’s inevitable that a question has entered your mind: What is a pre-pack administration?
A pre-pack administration is when a company’s business and assets are sold before an insolvency practitioner takes over. Pre-pack administration has a history of bad publicity and is seen as unethical by some creditors because it may involve selling the company back to its original directors. This can leave creditors unpaid, making them suspicious of possible collaboration between the administrator and directors.
However, this view doesn’t fully understand the administration’s goal: to achieve a better outcome than liquidation and, ideally, save the company. Often, only someone familiar with the company, like a director, is interested in buying its assets. But this doesn’t mean the directors escape accountability. After the pre-pack sale, a liquidator, possibly different from the administrator, examines the directors’ actions. If they violate any rules, they can face investigation and prosecution.
Moreover, when a company is sold this way, some employees might keep their jobs without changing their rights. This is a benefit for the employees that wouldn’t happen if the company was immediately closed down.
Types of UK Company Administration
A company’s administration can happen in more than one way. There are two primary types of company administration in the UK:
Voluntary Administration
Voluntary administration, also called out-of-court administration, involves appointing an administrator without a court order. It’s usually faster and can be an effective way to address financial distress.
Voluntary administration happens when the company appoints an administrator through the board or secured creditors. It’s called ‘voluntary’ because the company starts this process independently without any outside pressure. Companies might opt for administration to better understand their financial situation and act quickly if they find out they’re insolvent and want to rescue the business.
A brief outline of the steps of voluntary administration is as follows:
- Appointment of an administrator by the company
- Investigation of the company by the appointed administrator
- The administrator’s advice to the company’s authority
- The company’s board of authority votes on how to proceed.
Forced Administration
Involuntary or forced administration happens when creditors, not the company itself, initiate the administration process. This typically occurs when a company can’t pay its debts as scheduled. In this type of administration, the appointment of an administrator occurs through a court order.
A brief outline of the steps of involuntary administration is as follows:
- Applying of creditors for a winding-up order.
- The court’s appointment of an administrator.
- The sale of the company’s assets.
- Payment of the debts.
Criteria for a Company Going into Administration in the UK
For a business to go into administration, there are a few specific conditions it needs to meet:
- The company has to be insolvent yet capable of achieving a particular legal goal outlined in current insolvency laws.
- The company is officially insolvent, so a sale must be made soon.
- There must be noticeable pressure from creditors, making administration a way to avoid forced closure and liquidation.
- Creditors will not agree to a company voluntary arrangement (CVA), or it will be impossible to complete in the short term.
3 Objectives or Statutory Purposes of UK Company Administration
Administration is a potent strategy used when it’s the best choice for everyone, especially creditors. It’s only applied if it aligns with one of three primary purposes:
- Saving the company as a functioning business.
- Providing a better outcome for the company’s creditors than if it were immediately closed.
- If none of the above work, then selling off valuable assets to pay secured and preferred creditors.
The administrator, an insolvency practitioner, must specify which purpose guides the decision for administration. Administration won’t be advised if none of these purposes fit, and the practitioner will discuss alternatives.
Who Can Put a UK Company into Administration?
A company can enter administration led by the company itself in two ways:
- With enough voting power, shareholders can agree to put the company into administration outside the court if specific requirements are met or through a court application. Directors can also decide to place the company into administration through a board meeting, following similar procedures without needing approval from shareholders.
- Creditors with a qualifying floating charge can appoint an administrator if the company breaches its funding agreement. This can happen outside the court, following specific criteria, or through a court application.
Creditors also have the option to ask the court to put the company into administration. This would lead to a court hearing to determine if appointing an administrator is right.
How Is a Company’s Administrator Appointed?
A company’s administrator may be designated per its particular circumstances. And it can happen in more than one way:
Out-of-court or Voluntary Appointment
If the company meets specific requirements, such as not being under a winding-up petition, the directors or the company can choose an administrator without going to court.
If the company owes money to a Qualifying Floating Charge Holder (QFCH), the directors or the company may declare an intention to appoint an administrator. If the QFCH doesn’t appoint an administrator within five days, the directors or company can file a Notice of Appointment of an Administrator at Court to make the appointment.
Alternatively, a QFCH can select an administrator before the company enters administration, but certain conditions need to occur, like a breach of the QFCH’s terms. Multiple QFCHs can appoint different administrators, with priority given to the first charge holder.
Sometimes, a QFCH might appoint an administrator if it helps speed up the company’s entry into administration to protect assets for the QFCH and other creditors.
Forced or Involuntary Appointment
An administrator might only be appointed through a court order in specific situations, such as a winding-up petition against the company. Also, creditors might need court approval for this appointment.
In these cases, the company’s directors, the company itself, creditors, and QFCH have the right to request the Court to choose an administrator. A hearing will be arranged soonest to discuss this application for the administration order and address any objections.
If the Court agrees that there are valid reasons for the company to enter administration, it will issue an order for administration and appoint the administrator.
Appointment of an Administrator
Like other insolvency processes, there’s a formal way to choose Insolvency Practitioners (IPs) as administrators for the company.
There are two paths for appointing administrators. In both cases, the court is involved. One often called the out-of-court route, involves the directors, IPs, and solicitors handling the paperwork. They file this paperwork in court to confirm the IPs’ appointment as administrators. To choose the Out of Court method, certain conditions must not exist:
- The company can’t have a pending winding-up petition.
- The company can’t have a pending administration application.
- An administrative receiver can’t have been appointed.
If any of these conditions apply, the appointment must go to court. The court then decides if the company should enter administration.
In both scenarios, the appointment waits until a Qualifying Floating Charge Holder gets five business days’ notice or approves the appointment. Once the court seals the order, the IPs are appointed administrators.
How Does an Administrator Work
The administrator will notify the company’s creditors and Companies House about their appointment and announce it in The Gazette.
Their main goal is to prevent the company from shutting down permanently (‘liquidating’). If that’s not possible, they’ll use its assets to pay off as much debt as possible.
Within 8 weeks, the administrator will prepare a statement outlining their plans. They’ll share this with creditors, employees, and Companies House and invite them to review and modify the plans at a meeting.
The administrator might choose to:
- Negotiate a Company Voluntary Arrangement (CVA) to let the company keep operating.
- Transfer the business to another company as a ‘going concern,’ allowing it to continue with its clients, staff, or orders.
- Sell the company’s assets in a creditors’ voluntary liquidation, pay the creditors with the money earned, and close the company.
- Close the company if there’s nothing valuable to sell.
While the company is under administration, the administrator will oversee its operations.
UK Administration Process of a Limited Company
The administration process of a limited company might seem challenging for directors, but it can be a helpful path toward recovery if handled correctly.
Professional guidance from a qualified insolvency practitioner helps directors comprehend their duties during this challenging period, benefiting not just the business but also employees, suppliers, clients, and creditors.
Here are the brief steps for a UK company’s administration process:
Appointment
Firstly, an administrator must be appointed, which directors can do without a court order. Forms are submitted to the Court, and a notice is given to secured creditors holding floating charges at least five days in advance.
A detailed proposal is prepared and shared with all creditors, outlining future strategies and the work done so far. The main aim of the administrator is to act in the best interests of the company’s creditors by assessing and realizing company assets to repay debts.
Communication
The administrator collects information about the company’s creditors and notifies them of their appointment. Additionally, the appointment is announced in the London Gazette. Directors must provide the administrator with a Statement of the Company’s Affairs (SOA) within 11 days, detailing the company’s assets, liabilities, and assets under fixed or floating charges.
Proposals
Within 8 weeks, the administrator submits proposed strategies to the company’s creditors, explaining their appointment details, providing the SOA, and outlining the administration’s expected conclusion.
An initial decision process to approve the proposals must be held within 10 weeks of the company entering administration. Creditors are given at least 14 days’ notice, extendable by the court or the creditors themselves.
Progress Report
If the administration exceeds 6 months, the administrator must report progress to the creditors and file reports with Companies House.
UK Company Administration Process Cost
The administrator’s fees have two parts. The first part covers costs before administration, which might be higher for pre-pack administration due to more work involved. The pre-fee typically ranges between £5,000 and £10,000 for small administrations, but it can be much more for more prominent companies.
Once the administrator starts the process, they have statutory duties, like closing or selling the business. We can estimate these fees for you. Creditors must approve all fees after administration, and sometimes they need to agree on the pre-administration fee if it was not decided with the directors earlier.
Payment Procedure or Order in an Administration
After a company enters administration, it can keep doing business. But the daily running shifts from the directors to the appointed administrator.
In about 8 weeks, the administrator needs to create administration plans. Then, creditors get to vote on these plans through a decision process.
If the administration includes selling the company’s business, the money gained (after covering the procedure’s costs) gets shared among creditors following a set order:
- Secured creditors.
- Preferential creditors (employees).
- Unsecured creditors (like suppliers, customers, and HMRC).
- Shareholders or members.
The administration plans will detail the chances of getting paid and when it happens.
Role of an Insolvency Practitioner in the UK Company Administration Process
The role of administrator is exclusively reserved for licensed insolvency practitioners. Before becoming an administrator, they must counsel the board of directors about the company’s financial situation and the available choices.
If it’s agreed that administration is the right path, the company hires an insolvency practitioner to place it in administration. In this role, the professional, like a director, takes charge of the company’s affairs, with powers granted by the Insolvency Act 1986 (as amended).
Since the company is dealing with insolvency, the insolvency practitioner must always consider the impact of their actions on the company’s creditors. They should focus on the overall benefits for all creditors and make decisions that reduce costs and increase returns for everyone involved.
How Long Does a UK Company Administration Last?
A company can’t stay in administration forever; it must eventually exit this state. This can happen in various ways, like selling to a related or unrelated party, entering another insolvency process like a CVA, or continuing normal operations.
Within 8 weeks of starting administration, the administrator must share their plans with creditors. Once these plans are approved, the administrator can take several months to finish the administration as outlined.
Generally, an administration isn’t supposed to last more than 12 months, but this period can be prolonged by the court or with the agreement of the company’s creditors. To extend administration, the court’s approval is needed first.
How long the administration lasts mostly depends on how complex the situation is and what way out is being looked for. The length of the administration process is primarily determined by the complexity of the case and the exit route sought.
What Are the Options for a UK Company During and After Administration?
Different things could happen to a limited company during and after administration, but some common ones are:
Selling the Business as a ‘Going Concern’
When a UK company goes into administration, an excellent way to help creditors and save jobs is by selling the business as a ‘going concern.’ But what does this mean, and how does it work during administration?
A ‘going concern’ is a business that can operate without facing liquidation soon, generally within the following year. Selling a business as a going concern involves selling everything about it—assets, operations, etc.—so it can carry on under new ownership.
Pre-Pack Administration
Before an administrator is officially appointed, the company might prepare for a sale. This helps keep the company’s name, business, and assets safe until formally dissolved.
Company Voluntary Arrangement (CVA)
An administrator might suggest a Company Voluntary Arrangement or CVA if they believe the company can survive. This plan involves making monthly payments to creditors based on agreed terms, allowing the company to continue its operations.
Liquidation
If there are still things to sell or money to pay creditors after administration, the company might go through liquidation. This process can take more time, sometimes over a year.
Dissolution
Sometimes, dissolution becomes the only option for an insolvent company. If no money or assets are left to pay creditors, the company might be dissolved without going through liquidation. This erases the company’s details from public records.
What If a Company in Administration Owes Me Money?
If a UK company that owes you money goes into administration, they’re trying to fix their financial problems. An administrator runs the company, taking charge of the entire management.
The administrator will look at all the company’s debts and try to pay them off fairly. You should contact the administrator and tell them about the money the company owes you. They will add your claim to a list of debts. However, you might have to wait, and there’s a chance you won’t get all the money back, depending on the company’s financial situation.
Advantages and Disadvantages of UK Company Administration
A company’s administration has both benefits and drawbacks of its own. Take a look below to learn those:
Advantages
- Creditor Protection: When a company enters administration, it gets protection against legal actions by creditors, giving it a break from potential lawsuits or winding-up petitions.
- Chance for Reorganization: The administration sets up a structured way for the company to reorganize, which could help it become more workable and profitable.
- Possibility of Business Continuation: Successful administration might mean the business keeps operating, saving jobs and keeping the worth for everyone involved.
- Management Support: Experienced administrators can provide expertise in steering the company toward recovery.
- Increased Returns: If the company can’t be saved, administration might bring in better returns for creditors than immediate liquidation.
- Preserved Brand Image: The administration can safeguard the brand’s reputation for famous companies, making it more appealing to potential buyers.
Disadvantages
- Losing Control: Company directors give up control to the administrator during the process.
- Publicly Known: When a company enters administration, it becomes public, which might affect its reputation and how stakeholders see it.
- Expensive: Administration can cost a lot, reducing the money that goes to creditors.
- Unsure Results: There’s no promise the company will survive. Sometimes, it might still have to close down.
- Job Risks: Employees might lose their jobs if the business is sold or parts shut down.
What Happens to Directors When a Company Goes into Administration?
When a company enters administration, the directors lose control but usually remain directors unless the administrator decides otherwise. Their responsibilities as directors continue. The administrator takes charge of the company’s affairs, and the directors are usually uninvolved unless the administrator allows it. Company documents and websites must show that the administrator runs things during this period.
The directors regain their authority if the company gets back on track after administration. Once appointed, the administrator will ask the directors for a detailed report of the company’s assets and debts. This helps the administrator understand the company’s financial status and decide what to do. Directors must provide this report if asked; otherwise, it’s a criminal offense.
Directors must also be cautious, as they could face personal liability or be disqualified as directors if they’ve taken specific actions while the company was insolvent, like engaging in wrongful or fraudulent practices.
What Happens to Staff When a Company Goes into Administration?
During the administration phase, the initial 14 days are significant for employees. If you’re laid off during this period, you’ll rank as a regular creditor to get the money owed. Despite this, you’ll still receive redundancy payments and pending wages.
When your company goes into administration, it’s crucial to be realistic about its future. Administrators could rescue it if it had been profitable before and now face financial issues.
If you’ve stayed on, you’re in good shape if the company survives and remains financially stable. This is the ideal scenario for everyone involved. However, if the company’s performance has declined steadily, it might signal the end. It might face liquidation if administrators can’t revive the business in time.
For employees, liquidation means job termination. It’s a harsh reality, especially in tough economic times. If this occurs, employees will be made redundant but retain their rights if they’ve worked during the administration phase.
Exiting UK Company Administration
A company can exit administration in different ways, depending on what they plan for the future.
- Selling the Business: The company might be sold as an ongoing concern, either openly or to another party, connected or not, through a pre-pack sale. This pre-pack sale happens before administrators are officially appointed to avoid disturbing ongoing business.
- Continuing Operations: After restructuring, which might involve redoing debts, sorting lease agreements, or selling parts of the company that aren’t profitable, the business might be in a better financial position to restart operations.
- Other Recovery Processes: Sometimes, a company exits administration and immediately goes into another insolvency process for its recovery. For instance, a Company Voluntary Arrangement (CVA) can help renegotiate debts and arrange lower payments to boost cash flow.
- Liquidation: Despite efforts, liquidation might become necessary. This decision might be made after examining the company’s finances, showing the business is not viable. Or, it might have been the preferred option, but the administration was chosen first to benefit creditors. Liquidation usually happens through a Creditors’ Voluntary Liquidation (CVL).
Alternatives to UK Company Administration
As the primary goal of administration is to save the company, there are two main alternatives:
Finding New Funding
The company’s owners might put more money into the business to avoid administration. But getting new loans or investments can be challenging, especially if the business can’t become profitable again without significant changes.
Company Voluntary Arrangement (CVA)
This is a legal deal with the company’s creditors. It lets the company pay back some of its debts over time. The CVA can last from 6 months to around 5-6 years. To get it approved, 75% of the important creditors must agree. It’s a robust tool for cutting costs, reducing staff, and improving cash flow. After it’s agreed, the company can keep running as usual, and the bosses stay in charge. Shareholders don’t lose control. This can be a good choice instead of administration, and the directors stay in charge of the company.
FAQs
Q1: What is the meaning of a company that has gone into administration?
Answer: When a company has gone into administration, it has severe financial troubles and can’t pay its debts. To help fix this, an insolvency practitioner, acting as an administrator, is brought in to manage the company. Their job is to try to save the company or find the best way to pay back as much money as possible to the people the company owes money to.
Q2: Who can be an administrator?
Answer: When a company goes into administration, it must appoint an administrator, who should be a licensed insolvency practitioner. To work as an insolvency practitioner, this person must have passed particular insolvency exams, possess insolvency work experience, and hold a governing body’s authorization.
It’s vital to pick a trustworthy professional for the best advice and outcomes. Insolvency practitioners often have accounting qualifications like ACA, ACCA, or CIMA, and they handle various roles, such as administrative receiver, liquidator, or supervisor for insolvent companies.
Q3: Can a company still trade when in administration?
Answer: If the administrator decides it’s not good for the creditors anymore, they stop the business, shut down the company, and sell its stuff to pay off its debts. The company can keep operating during administration only if it’s helpful for the creditors.
Q4: UK Company Administration: Can a Company Recover from It?
Answer: Yes, a company can recover from administration. This process is like a time-out, where experts, known as administrators, help solve the company’s financial problems. They can make changes to how the company works or arrange to pay off debts in a way that keeps the business running. If things go well, the company can get back on its feet and keep doing business.
Q5: What is a Qualifying Floating Charge Holder (QFCH)?
Answer: A Qualifying Charge Holder, or QFCH in England, as defined by the Insolvency Act 1986, holds charge over most or all of a company’s property or assets not subject to a fixed charge. In company administration, this matters as it influences how secured creditors are treated and their importance. According to the law, a qualifying charge holder gets specific rights and benefits when a company is in administration.
Q6: How long does the administration process take?
Answer: Going into administration can happen quickly or take some time, usually from a few hours to 2 weeks or longer. Before the company officially enters administration, an Insolvency Practitioner will work on a plan, which usually takes one to two weeks.
Q7: Does administration mean insolvency?
Answer: Yes, administration means a company is facing insolvency. It’s a process used in the UK when a company can’t pay its debts and needs help to manage its financial problems. This process aims to either save the company or make sure its assets are used in the best way to pay off debts.
Final Words
So, we are at the end of our long but necessary blog. We thoroughly provided all the information you need about UK company administration.
In a nutshell, company administration in the UK is a significant route, sometimes even a lifeline, for struggling companies facing financial challenges. While it could steer a company toward recovery, its effectiveness depends on how well it navigates during insolvency proceedings.
Whether seen as a savior or a pause in the face of inevitability, the process offers a structured approach that could lead to a fresh start for insolvent companies, enabling them to address financial difficulties and emerge stronger.
Very best of luck to you!
