A company that is insolvent can apply to go into administration in the UK. This is a process whereby a person (called the administrator) takes over the running of the company and manages its affairs, including collecting any outstanding debts incurred.
The aim is to sell off the assets and pay creditors. The administrators will normally be appointed by a court, but they can also be appointed by the directors of the company or by the shareholders.
As stated by Elliot of Oliverelliot.co.uk:
“Unlike liquidation, an administration is first and foremost looking to save the company as a going concern whereas liquidation is the death of the company as a trading entity”
The administration puts in place a moratorium on the enforcement of all of the company’s debts, which means that any creditor that has sued the company for payment of a debt or the return of debt is prohibited from proceeding with the action. The moratorium period lasts for a fixed period and does not apply to secured creditors and those who have obtained a charging order on the company’s assets.
If in case it is not saved, the company’s assets can be liquidated and distributed in full to its creditors.
Once in administration, the company will trade but is no longer legally responsible for any debts or liabilities. The administrator can deal with any of the company’s assets as it sees fit, including selling the assets and paying the proceeds to the company’s creditors.
It is the administrators’ responsibility to create administration proposals within 8 weeks. Creditors are then requested to endorse the administrators’ plans via a decision procedure.
If in case administration sold the company’s business then the revenue or profits will be distributed to creditors in a statutory order of priority.
Rules of distribution:
The rules of distribution are set out in the Insolvency Act 1986. But, the general order is as follow:
- Secure Creditors.
- Customers, suppliers, and other unsecured creditors.
- Members or shareholders.
After 1 year, the administration will end automatically. But, it can be extended by a court if the administrator asks for an extension. The corporation may have the following options, depending on the administration proposals:
- The company was saved and transferred back to the directors, but it has since gone into liquidation.
- If the administrator could only distribute funds to secured and/or favoured creditors, the company would be dissolved.
What is a Pre-Pack Administration?
When a business becomes insolvent, it attempts to sell off its assets before selling the business. This is known as a pre-pack administration. This occurs prior to the appointment of an insolvency practitioner. The sale is finalized either at the start of the appointment or immediately afterwards.
Benefits of Pre-pack:
- Worth Preservation: The company’s value may be reduced due to the news of insolvency appointments or financial difficulties as well as customers and employees looking to work for other companies. In this case, pre-pack sale hits the marketplace and the danger of value degradation can be avoided.
- Employment Preservation: During insolvency, cost-cutting and curtailed trading operations might result in job losses. Pre-pack sale is the best way to prevent layoffs of employees.
- Decreased Costs: The costs of running a firm when it is insolvent might be significant. The administrators can avoid incurring trading fees because control of the business, as well as the risks and costs associated with it, is transferred to the purchaser immediately or shortly after the appointment. As a result, the costs of a pre-pack administration should be reduced, and creditors should receive a higher return.
- Preservation of the Business: If a business is placed into administration, the business will cease trading and all assets will be sold. A pre-pack sale, however, preserves the business and allows the business to continue operating.
Cons of Pre-Pack:
- Significant financial outlay: The board of directors will need to raise the required monies to purchase the company’s assets. One of the Administrator’s responsibilities is to sell them at fair market value so that the creditors can get the most money feasible. They are in charge of ensuring that assets are not undervalued. As a result, obtaining the cash required can be a considerable financial task for directors, and it may take some time to assemble the necessary funds.
- Loss of Director’s Control: Once a business is placed into administration, the board of directors loses control over the business and is unable to make decisions that might have an impact on the company. This could result in a lack of liquidity.
- View as Unethical: Pre-pack sale is considered unethical in the eyes of the law because it does not follow the usual procedures and processes. For example, it is not a part of the process to offer directors a sum of money that is less than what the business is worth.
When To Consider the Company Administration?
The company administration will be required if your company is facing one of the following circumstances:
- An immediate CVA is either not possible or creditors will not agree to it.
- As the business is technically insolvent, it needs to be sold quickly.
- Your company has a director and a secretary, but they are not able to act due to death, bankruptcy, mental incapacity, or any other reason.
Summing up, the process of administration is a complex one and will need to be undertaken by a company with extensive experience in the area.
We hope this article was helpful to you. If you have any further questions, please do not hesitate to ask us. We will be happy to help you out with your confusion.