Placing a company into administration is often a complex process and it is vital for every business owner to understand how it all works.
To begin with, a Licensed Insolvency Practitioner is appointed as Administrator to the company. This appointment may be by:
- Any creditor
- The holder of a Qualifying Floating Charge (or QFC), such as the Bank
- The company itself
If an administrator is appointed by a creditor via the courts or via a QFC, then the director(s) will have no say in which administrator is used. If the company or director(s) appoint an administrator themselves, they are free to choose whoever they wish to conduct the procedure.
Before being appointed as an administrator, an insolvency practitioner must ensure that they will be able to rescue the company as a going concern, or achieve a better result for the company’s creditors as a whole, than would be possible if the company were wound up without first being in administration.
If company survival is simply not possible, the administrator will look to sell the company’s assets in order to make a distribution to one or more secured or preferential creditors. The sale process can take many forms, for example, this could be achieved through a period of trading the company (i.e. closing down sale to realise the stock) or cease trading immediately and selling the assets on a break up basis (i.e. sale of assets through an auction).
Pre-pack administration
Pre-pack administration is when a buyer for the company is found prior to the business being placed in administration. The purpose of pre-pack administration is to guarantee that trade continues by moving contracts and employees to the purchasing company. In many cases, this is considered to be the best way to save the business as a going concern.
The media often refers to pre-pack administration as an “underhand sale”; a sale to a company run by the same directors. However, any sale during a pre-pack administration is subject to regulations, these outline pieces of information that company creditors are entitled to know.
Critics of pre-pack sales often dislike the concept of some or all of the existing management and/or the directors, buying back the assets of the insolvent business through a new “phoenix company”, effectively leaving all of the debts of the old company. The new regulations are designed to remove the veil, ensuring the creditors have a better understanding of the process.
A pre-pack of a business can be to anyone but it is often the existing management team and directors of the insolvent company. They are usually best placed to acquire the business through this process as they are able to move smoothly through the due diligence process. Any external interested party (new party), needs to get under the skin of the business, in order to understand the potential pitfalls (caveat emptor).
What happens after an administrator is appointed?
Once an administrator is appointed, they will have a number of duties to fulfil in order to successfully sell the company’s assets. First of all, the administrator must notify all of the company’s creditors that they have been appointed and make every effort to stay in touch with them, throughout the entire process. It is the duty of the administrator to ensure that every creditor is fully informed about the company’s sale strategy.
Administrators have a maximum of 8 weeks, from appointment, to send creditors proposals for achieving the purpose of the administration. The report to creditors includes an account of the circumstances that led to the appointment of the administrator, a statement of affairs, details of the disposal (sale) of assets already made, the basis of the administrators fees and the proposed exit route from administration. A creditors meeting may also be required and this must occur within 10 weeks of the administrator’s appointment. This allows the proposals to be discussed and is an opportunity for the creditors to ask the administrator any questions they may have. The administrator has one year to complete the entire administration process, however, if there are extenuating circumstances, the court can grant an extension.
Is administration right for my company?
Whilst administration is a powerful tool that can be utilised to save a company, whether it is the best option for your company will ultimately depend on your own circumstances. Understanding the key elements of your business and the pressures it is under, is essential in the decision making process.
Here at My Insolvency, we pride ourselves on giving you honest advice and will always provide you with the options that are best suited to your company’s individual circumstances. Need help? Why not contact our specialist team today on 0800 009 6106 or hello@myinsolvency.co.uk
