What is Company Administration? What Happens When Company Goes into Administration
What is Company Administration?
As per the United Kingdom Law, company administration means a situation where a company is under debt and not able to repay it to its creditors and under such circumstance, the management of the company shifts from its board of directors and is replaced by a licensed insolvency practitioner whose job is to find the best possible solution of the problem and is appointed by the directors and secured lenders of the company. However the process of selecting or appointing the insolvency practitioner has to go through the court and in order to find the best possible solution, the licensed insolvency practitioner can opt any means, provided they are ethical in nature such as selling of the assets, increasing the firm’s efficiency by cutting down the employees, selling the business to other company or company voluntary arrangement (CVA) etc. Basically a company gets administration in order to get protection from its creditors and it can either be a compulsory or voluntary act and an administrator can be appointed by one of the following three ways, i.e.
- They are appointed voluntarily by the company directors; or
- They are appointed on the application of a qualifying floating charge holder; or
- By Court order.
Before you appoint the licensed practitioner, you need to ensure that he/she is eligible and meet the requirements of an administrator such as:
- Has cleared insolvency JIEB examinations.
- Gained experience in insolvency work.
- Is authorized or validated by an authentic organization to conduct or carry out the administrator role. Authorized organizations include names such as Association of Certified Chartered Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW) and the Insolvency Practitioners Association.
In normal man’s world, company administration is normally seen and understood as the end of a business or a company; however, as a matter of fact company administration gives its owners and directors’ time and space in order to take right decisions in order to pull out the company from debt and insolvency. The time period given during the company administration is known as moratorium in corporate language. Normally moratorium period is of eight weeks and during this period the creditors are bound to not to take any legal actions or insolvency proceedings against the firm. This process is best suited for the companies which are dealing with serious financial issues and have high probability to recover from the same. However, before calling for the administrators, the directors need to ensure that the restructuring does not result in additional pressure from the creditors.
A company getting into administration has its own share of advantages and disadvantages and it is up to your intellect to utilize its advantages to your utmost benefit. To look at the positive side, a company getting into administration is in safe hands of an experienced person i.e. the administrator and thus can come out of insolvency faster. Also the moratorium time gives adequate time and space to the directors to think straight and act in the right direction. However, the fall side of administration is that it might turn out to be a costly process because the administrators cost high and their fees is borne by the company. Also administration is a public process and can affect your business in longer run.
Main purpose of the company administration can be summed up in three main points, such as:
- To rescue the company; in case this is not possible then:
- Achieve and find a better solution for the company other than its liquidation; in case if this is not possible then:
- Realize firm’s or business property for the benefit of secured or preferential creditors.
Once a company or a business reaches its insolvency, the board of directors has following concerns or options available with them before succumbing to last resort i.e. liquidation:
- Sale as a going concern: No one wants to sell of the company and will only opt for the same when there is no other way out to take it out from the insolvency or creditor’s debt. However, with a little bit of smart planning and good foresight, you can sell the firm or the business without doing much damage to your employees. You can either sell the business or the company by either placing it in the open market or by using pre-pack sale i.e. you start marketing your business in the market before the company enters into administration officially. In this case, you can transfer your staff to new company under Transfer of Undertakings (Protection of Employment).
- Restructuring of the company/business: This option is best suited in case the company owns valuable tangible assets such as machinery or equipments and thus can sell them off in order to raise funds to pay off the debt.
- Company Voluntary Arrangement (CVA): This option is availed when the company is viable in the long-term. Company voluntary agreement involves single repayment which is made to the administrator or licensed insolvency practitioner who in turn distributes it amongst its creditors as per the terms and conditions mentioned in the company voluntary agreement.
- Creditors’ Voluntary Liquidation (CVL): Creditors’ Voluntary Liquidation is the last resort i.e. is opted only when there is no chance to rescue the business and it can be proved advantageous to its directors because if the creditor returns is maximized , chances of wrongful trading allegations is reduced.
How Does Administration Works?
Once the administrator is appointed, he will write to the creditors and the Companies House regarding their appointment. Also, he/she has to publish a notice regarding their appointment in The Gazette and once the administrator is appointed, his primary duty is to save the company or the business from being liquidated and in case he is unable to do so, he will try to pay off as much debt as possible by various way as listed above. As long as the company is in administration, the administrator will make all the important calls regarding the business, however he is not authorized to run the business or continue trading.
Why Should Company Administration Be Considered?
Company administration is basically to give shield to your company and protect it from threats or warnings from creditors or HMRC. Also, in a situation where you might feel that you are being forced into compulsory liquidation of your company, company administration gives you one of the best possible alternatives. Also, entering into company administration under the guidance of an authorized and experienced insolvency practitioner will give you required time and space to think and act in the right direction.
How Long Does Going Into Administration Last?
Once a company goes into administration, it is nearly impossible to reverse the process and thus the decision to do so should be taken after giving it a prudent thought. Having said so, one and only way to stop your company from entering into administration is by taking appropriate measures when you get to know about the insolvency of the company. Once a company gets into its administration phase, it can last anywhere between few weeks to a year or may be more depending on the circumstances or situation of your company.
As mentioned above, duration of administration phase depends on the circumstances, however the administrators or the insolvency practitioners take on the contract days of employment after 14 days and as per the law, the licensed insolvency practitioners cannot run the business which is under loss because doing so will only add on to the creditors woes. Also once the insolvency practitioners take over, they have to report to the creditors at regular intervals on the ongoing situation of the company and the probable time they are likely to get their money.
Once the company gets into administration, the insolvency practitioners or the administrators have a time duration of 8 weeks to submit their proposals to the creditors i.e. what they intend to do with the company.
Can You Stop Your Company From Getting Into Administration?
Yes, you can stop your company from getting into administration by being present in your company on all levels. So, the best way to stop or prevent going into administration is to avoid or prevent the insolvency of your company before it becomes official and it is possible only if you are watchful of the warning signs and taking appropriate measures once thee signs surface in real world. Because only the administrator is appointed officially, it becomes nearly impossible to make a u-turn.
When Does Administration End?
Officially the administration ends when its purpose has been achieved i.e. when either the company has regained its ground or its assets have been restructured or if the creditors have agreed the administrator’s proposal for company voluntary arrangement. Under normal circumstance, an administrator contract ends after an year, however it is subject to the prevailing circumstance and can be renewed if required. On the official termination of the administration, protection against legal actions of the creditors also end which means that the creditors can start the legal proceedings once the administration gets over.
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