When a company is facing severe financial difficulties and unable to pay its debts, it may enter administration as a last-ditch effort to salvage the business or its assets.
In the UK, administration is a legal process overseen by an insolvency practitioner whose primary goal is to rescue the company or at least manage its assets for the best possible outcome for creditors.
While administration can be a stressful and uncertain time, it offers companies a chance to reorganize, avoid liquidation, or achieve a better return for creditors than would otherwise be possible.
In this blog post, we’ll explore every aspect of what happens when a company goes into administration, from the initial appointment of an administrator to the possible outcomes and alternatives to administration.
What Does It Mean When a Company Goes Into Administration?
When a company goes into administration, it means that control of the business is handed over to an independent insolvency practitioner (administrator).
The purpose of this is to protect the company from immediate creditor action, while giving the administrator time to assess the situation and develop a strategy.
Typically, a business enters administration when it is insolvent, meaning it cannot pay its debts as they fall due.
There are several reasons a company might enter administration:
- Severe cash flow problems
- Inability to meet payroll or supplier obligations
- Ongoing legal actions from creditors
The administrator takes over the company with one of three primary objectives:
- Rescue the company as a going concern.
- Achieve a better result for the creditors than if the company were liquidated.
- Realize company property and distribute it to one or more secured creditors.
During this period, the company benefits from a moratorium, which prevents creditors from taking legal action against it without the court’s permission. This allows the administrator time to evaluate the business and explore the best course of action for stakeholders.
How Does the Company Administration Process Start?
The process of entering administration can begin in one of two ways—through a court order or an out-of-court appointment. In either case, the company must meet specific criteria, primarily that it is insolvent or close to insolvency.
- Court Appointed: Creditors, directors, or other interested parties can apply to the court to have an administrator appointed. This typically happens when the company is in severe distress and there’s a need for swift intervention.
- Out-of-Court Appointment: More commonly, a company’s directors or a secured creditor holding a floating charge over company assets (like a bank) can appoint an administrator without the need for a court order. This route is quicker and less costly but must still follow legal procedures.
The insolvency practitioner appointed as administrator assumes complete control of the business and begins working on an action plan within 8 weeks of their appointment. The administrator is legally obligated to act in the best interest of creditors, not shareholders or company directors.
Who Can Appoint an Administrator for a Company?
An administrator can be appointed by various parties, depending on the circumstances:
- Directors: If the company’s directors foresee that they will not be able to meet their financial obligations, they can voluntarily place the company into administration to protect it from creditor action.
- Creditors: Secured creditors, particularly those with a floating charge over the company’s assets, can appoint an administrator. This often happens when creditors are concerned that their debts may not be repaid if the company continues its operations unchecked.
- The Court: In some instances, the court itself can appoint an administrator if a company’s situation meets legal insolvency criteria, typically following a creditor’s application.
Once the administrator is appointed, they work independently from the directors and have full authority to make decisions on behalf of the company. They will also notify creditors and employees of their appointment, often placing a public notice in The Gazette, an official public record.
What Happens When a Company Goes Into Administration?
Once a company enters administration, several immediate actions are taken:
- Administrator Assumes Control: The appointed administrator takes complete control of the company’s operations, effectively removing decision-making power from the directors. The administrator’s primary goal is to act in the best interests of creditors.
- Moratorium on Legal Action: One of the key benefits of administration is that it provides the company with a breathing space, during which creditors cannot take legal action to recover debts without court approval.
- Business Review: The administrator will conduct a thorough review of the company’s financial situation. They will consider options for business rescue, sale of assets, or, in some cases, liquidation.
In the first eight weeks, the administrator must prepare and submit proposals to creditors. This report details the state of the business and suggests whether it can be rescued or whether assets should be sold off. Creditors then vote on whether to accept these proposals.
How Long Can a Company Stay in Administration?
By default, a company can remain in administration for up to 12 months. However, this period can be extended if more time is needed to resolve the company’s affairs. Extensions must be approved either by creditors or by the court.
The 12-month period begins when the administrator is appointed and includes a moratorium, during which the company is protected from creditor actions. In complex cases where asset realisation or business rescue takes longer than expected, the administrator may seek extensions, often in increments of six months.
Throughout the administration, the administrator is required to file progress reports with Companies House and keep creditors informed of the ongoing status.
Can a Business in Administration Continue Trading?
Yes, under certain circumstances, a business can continue trading while in administration. The decision to keep trading is made by the administrator, who will evaluate whether doing so is in the best interest of the creditors. Continuing to trade may be beneficial for several reasons:
- Preserving the value of the business as a going concern.
- Retaining employees and maintaining relationships with key customers and suppliers.
- Generating cash flow to help pay down debts.
If the company is fundamentally viable, the administrator may choose to keep it operating while seeking a buyer. This strategy can lead to a pre-pack sale, where the business is sold as a going concern, often with its employees and assets intact.
What Are the Legal Requirements During Administration?
Administration is a legally regulated process, primarily governed by the Insolvency Act 1986. The administrator must comply with strict legal obligations, including:
- Fiduciary Duty: Acting in the best interests of the creditors and distributing assets according to a statutory order of priority.
- Notification: The administrator must notify creditors and employees of their appointment. They must also advertise the appointment in The Gazette and report to Companies House.
- Reporting: The administrator has a duty to prepare and file a proposal for the company’s future within eight weeks of appointment. This proposal must be submitted to creditors, and progress reports are due every six months during the administration period.
Who Gets Paid First When a Company Is in Administration?
When a company enters administration, there is a strict order in which creditors are repaid. The distribution of assets is governed by the Insolvency Act 1986, and the hierarchy is as follows:
- Secured Creditors: These creditors have security over the company’s assets (e.g., banks with a floating charge). They are first in line to receive payments from asset sales.
- Preferential Creditors: Employees owed wages and other entitlements, as well as certain government debts (e.g., unpaid taxes), fall into this category.
- Unsecured Creditors: Trade creditors, suppliers, and customers who have paid for goods or services not yet delivered are next in line.
- Shareholders: If any funds remaining funds after all creditors have been paid, shareholders may receive a portion, though this is rare in insolvency cases.
The administrator is responsible for realising assets and distributing them according to this priority.
What Are the Possible Outcomes After Administration?
There are several possible outcomes once a company has been placed into administration:
- Rescue of the Company: The best-case scenario is for the company to be rescued as a going concern, allowing it to exit administration and return to trading under the control of its directors.
- Sale as a Going Concern: If rescuing the entire company is not possible, parts of the business may be sold to new owners in a pre-pack arrangement.
- Company Voluntary Arrangement (CVA): If creditors agree, the company can enter into a CVA, which restructures its debts and allows it to continue trading under a formal agreement.
- Liquidation: If the business cannot be saved, the administrator may recommend liquidation, where the company’s assets are sold off and the business is wound down.
- Dissolution: If all assets are realised and distributed, the company may be dissolved and struck off the Companies House register.
What Are the Alternatives to Company Administration?
While administration is one of the more structured approaches for handling insolvency, other alternatives exist that could be more suitable depending on the financial health of the company. These include:
- Company Voluntary Arrangement (CVA): This is a legally binding agreement between the company and its creditors to allow the business to repay its debts over time, often with reduced payments. Unlike administration, the directors remain in control, and the company continues to trade, making it less disruptive than other insolvency procedures.
- Receivership: In this process, a receiver is appointed by secured creditors to manage specific assets of the company to repay the debt. Unlike administration, receivership typically benefits the secured creditors only, leaving unsecured creditors at a disadvantage.
- Creditors’ Voluntary Liquidation (CVL): If the business is beyond saving, CVL allows the company’s directors to voluntarily liquidate the business, ensuring a more orderly winding-up of affairs. In this case, the company ceases trading and its assets are sold off to pay creditors.
Choosing between administration and these alternatives depends on factors such as the company’s long-term viability, the level of debt, and creditor relationships.
Conclusion
Entering administration is often seen as a company’s final option to avoid complete collapse, but it can also present opportunities for business rescue or securing better outcomes for creditors.
The process provides companies with breathing space from legal actions while an independent insolvency practitioner takes control to assess the best path forward. Whether the outcome is business rescue, pre-pack sale, or liquidation, administration offers a structured way to manage insolvency in the UK.
It’s essential for directors and creditors to understand their rights and obligations during administration. By acting early and seeking professional advice, companies may still have the chance to recover and thrive, even when faced with significant financial pressures.
Whether administration or an alternative option is chosen, the right strategy can help preserve value, jobs, and business goodwill.
FAQs About What Happens When a Company Goes Into Administration
How does administration differ from liquidation?
The administration aims to rescue the business or secure a better outcome for creditors, while liquidation involves winding up the company and selling off its assets to repay debts.
Can a company exit the administration and recover?
Yes, if the administrator believes the business can be saved, the company can be rescued as a going concern, allowing it to exit administration and resume normal operations.
What happens if the administration process fails?
If the business cannot be saved, the administrator may place the company into liquidation, where its assets are sold off to repay creditors.
Are directors still responsible during administration?
Directors lose control of day-to-day operations once an administrator is appointed, but they remain legally responsible for providing information and may be investigated if any misconduct is suspected.
What happens to shareholders during administration?
Shareholders are typically the last to receive any returns from the business, making it unlikely they will recover their investments in an insolvent company.
Can suppliers terminate contracts during administration?
Generally, suppliers cannot terminate contracts without the administrator’s consent, but this depends on the terms of the agreement.
What happens to employees in administration?
Employees may continue working if the business remains operational, but redundancies may occur if the company is sold, restructured, or liquidated.