What is Company Administration (ADM)?
Posted on 18th October 2021 at 12:34
It's commonly assumed that a company entering into administration signals the end of the company. Administration is thought of as a punishment handed down by the courts as a result of mismanaging the company and its assets. However, administration can be a chance for the company to recover otherwise resolve.
Of course, some administrators are appointed by the courts in this way, but many aren't. Often administrators are appointed by the company directors themselves and are seen as the best way to transform the fortunes of the company. When administrators are appointed by company directors they are usually independent administrators that have the company's best interests at heart.
In the article below we look at the administration process and the ways in which administrators seek to resolve financial hardship and save the company. The options are narrow, a company voluntary agreement (CVA) or a pre-pack sale. Still these options do present companies with an opportunity to save a viable business model and move forward.
Companies in Administration
After an administrator is appointed by the courts or independently by the company directors, the control of the company is passed over to the administrator. The Administrator must be a licensed insolvency practitioner, and it is their job to use the company assets to repay creditors as quickly as possible and in full.
When a company enters administration and administrators are appointed they are given 8 weeks to contact creditors with administrative proposals to dissolve the company's assets. These proposals will outline the administrators plan of action to leverage the company's assets and repay its debts. This doesn't always mean the company will go out of business.
Contrary to popular belief the administration process doesn't always spell the end of a company, in fact, the administrators primary concern is to save the company by paying off the debts to creditors. The administration process is more of a holding phase for a company to reestablish its footing, create temporary relief from creditors (moratorium) and devise a concrete plan.
Once the moratorium is in place and the company has some breathing room from creditors, administrators can then look at the company assets and their viability going forward. The administrators will give priority to creditors following a balance sheet test where the value of the assets is set against the value of the debts.
The company's recovery
Many companies that experience financial distress and rack up debts that put the future of the business in serious jeopardy, also have an excellent core business strategy that is viable under different circumstances. It may be that poor decisions were made at the start of trading or high-interest loans were needed to build it up.
The administrators will determine whether the business is viable once the debts are taken care of and decide if a pared-back version of the business is sustainable going forward. If it is there are several suitable options including a company voluntary arrangement (CVA) or Pre-pack administration sale.
If the business is viable, that is, it has a steady cash flow, a healthy level of assets and a good volume of sales transactions, the administrators might be able to save it by raising enough money to pay off a significant percentage of the debt and coming to an agreement with creditors for the rest.
If administrators decide the company has a future it will enter into a CVA or Company Voluntary Arrangement. This takes the company out of the firing line and gives it the time and space needed to restructure internally, deal with unprofitable aspects of the business and renegotiate lease agreements. Some debts might also be written off.
If administrators see that the business has potential but that it is limited by the debts it holds to creditors, it can recommend a pre-pack sale. In this arrangement, the assets of the old business are sold to a new company that can be owned by existing company owners. All debts will remain with the old company.
This effectively means that the business model can continue with a clean slate unburdened by the debts and creditors of the previous company. To implement a pre-pack sale the administrators first have to determine if this option is the most viable option for creditors and better than alternative procedures.
If it is determined by administrators that the company can no longer continue trading and must deliver due to financial concerns it will be entered into Voluntary Liquidation. In this outcome the company's assets will be sold off, the creditors will be paid partially or in full and the company will be dissolved.
Under these circumstances, the company's director will be protected from accusations around irresponsible trading in the final transaction of the company. However, post liquidation there may still be investigations into the director's conduct and trading strategies in the lead up to the insolvency event.
While it is commonly assumed that company administration means the insolvency and dissolution of a company and its assets, in reality, administrators are sent into a struggling business to find ways of saving it and improving its financial health. Administrators might look for ways to raise funds to pay back creditors or switch assets over to a new company.
There are various ways administrators can help a company to get back on track. One way is a CVA or Company Voluntary agreement in which all debts to creditors are suspended while the company undergoes some restructuring to save it form liquidation. Another option is a pre-pack sale in which the company is sold to the same directors as a new-co without the old debts.
Of course, a company may not be eligible for either of these options and might have to dissolve. In this case, the company assets are sold and the creditors are repaid partially or in full. Company directors will be protected by administrators for the period leading up to the dissolution but investigations can be made into their financial conduct in previous years.
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