Ever wondered what ‘administration’, in the company/business sense actually means? Partner and Insolvency specialist Chris McDuff explains here in the second of our blog series on options for an SME when it finds itself experiencing financial difficulties.

Administration

The Insolvency Act 1986 (the Act) and the Insolvency Rules 1986 (the Rules) govern the administration process for England and Wales.

What is Administration?

A procedure that allows an administrator (who most likely will be an Insolvency Practitioner to try to rescue a company or sell the company’s assets to repay all the creditors as much as possible of what they are owed.

Why consider placing a company into administration?

In order to assist the company to overcome its financial difficulties without having to enter into liquidation. All options should be considered from the start – there is no ‘one size fits all’ strategy, as every company’s situation is different.

The purpose of administration

Firstly, an administrator needs to be appointed.

The Administrator should seek to either:

  • rescue the company as a going concern, or failing that;
  • achieve a better result for creditors as a whole than would be likely if the company were liquidated without having been in administration first, or, where this is not possible;
  • realise property and assets so as to make a distribution to one or more secured or preferential creditors.

The potential consequences for your company can be severe as stated above. Advice should be sought at the earliest possible opportunity. It may be the case that your company can simply refinance its debts in order to avoid any administration process, but get advice.

How and by whom can a company enter into administration?

A company can be placed into administration by either filing an application for administration. Alternatively, by filing documents with the Court.

Who can put the company into administration?

  • directors of the company;
  • Shareholders of the Company;
  • Floating Charge holder; or
  • Creditors.

When considering an Administration, those who are putting the company into administration once advised, must always consider the creditors.

Effects of administration

A short moratorium is provided to prevent other creditors/litigants from commencing legal proceedings against the company.

On appointment, the Administrator has a duty to act for the benefits of all creditors. The Administrator shall oversee and delve into thoroughly the companies processes and procedures. The Administrator needs to ascertain how the company is working or is not working.

The Administrator takes control of the company’s assets and functions and he or she may carry on the business of the company.

The Administrator steps into the shoes of the directors and the now former directors cease to have power. Again it cannot be stressed enough on how important advice should be sought in order to make the ultimate decision as to a company.

Ending the administration

It is always hoped that in an administration the company’s objective has been met in dealing with its financial difficulties that were responsible for the company entering into administration in the first place.

If the financial difficulties have been overcome; then the company can exit administration.

If unfortunately it cannot, the administration can be converted into a creditors’ voluntary liquidation or the administrator can dissolve the company.