Why administration might be the right choice for you to bring your company to an end

What are the benefits of Administration?

• Automatic moratorium

  If you put your company into administration – then it will provide your company with an immediate statutory moratorium. The statutory moratorium prevents creditors from taking further enforcement action without consent from the administrator or the court. What this means, in practice, is that it will produce a helpful breathing space to help stabilise the company – to give it time for them to explore restructuring or sale options. In our experience, permission for Creditors’ enforcement is rarely granted if, in doing so, the court would undermine the administrator’s objectives.

   

• Company Voluntary Arrangements 

  The appointment of an administrator to carry out an administration can provide a route to allow for the proposal of a Company Voluntary Arrangement (“CVA”). While a CVA does not need to be proceeded by an administration, as it can be proposed independently, doing so outside administration does not automatically stop creditor action. For businesses that require genuine protection while negotiating with creditors, using administration as a platform for a CVA can be significantly more effective.

   

• Better returns for creditors

  It is the principal objective of an administration to arrive at a better outcome for creditors than if the company went into liquidation. This could and often results in higher overall realisations, whether through continued trading or a pre-packaged sale that protects asset value. This is probably because buyers will be of the view that an administration is a rescue process rather than a terminal one and, may therefore, be willing to pay more than they would if the company were in liquidation.

   

• No shareholder deadlock

  Placing a company into voluntary liquidation requires 75% shareholder approval. If that threshold cannot be met, the remaining options are compulsory liquidation or administration. In such circumstances, administration is often the more cost-effective route and generally delivers a better outcome for creditors than compulsory liquidation.

   

• Pre-packed sales (“Pre-Pack Admin”)

  It is often assumed that an administration appointment is commonly used to facilitate pre-pack sales, allowing a viable business to continue free from historic debt and burdensome contracts. This approach can preserve goodwill, protect jobs and enable a seamless transition with minimal disruption to operations. Involving the Pre-Pack Pool and providing viability statements can further strengthen the credibility of the process.

The Disadvantages of Administration

• Higher costs

  The process, appointment and work carried out within an administration is intensive and requires a lot of work and is therefore a time-consuming process. The administrator plays an active, integral and ongoing role – this can cause the costs of the administrators to rise quickly. It is also a factor that all pre-pack sales are heavily scrutinised and require the administrators to provide clear evidence that the transaction achieves best value for creditors.

   

• Loss of control for directors

  Once the decision has been made and the administrator’s appointment is filed, control of the company transfers immediately from the directors to them. Once it has been done then the directors no longer make operational decisions in relation to the company even if the intention is to pursue a CVA (details above). If rescue efforts fail, the administrator may proceed with a sale of the company and/or the assets of the same. Whilst the directors may bid, within the process, they will not control it.

   

• Public exposure

  The Administration process is a public procedure. This is due to the process itself as well as the fact that notices must be advertised and displayed at company premises and online, making it highly likely that customers and suppliers will become aware of the situation in real time. 

   

• Director investigations

  One thing that does not change, to the process that is carried out within liquidation, is that the administrator must investigate and report on the conduct of directors, once they have been appointed. This, as with liquidation appointees, can lead to disqualification proceedings or recovery actions where misconduct is identified. Directors who have fulfilled their duties properly, in the way in which they have run the company prior to the administration and the appointment of administrators, should not be adversely affected.

   

• Employment and TUPE considerations

  Although administration can release the company from certain onerous contracts, it doesn’t sanction an unobstructed restructuring of the company’s workforce — particularly in pre-pack scenarios. The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will often apply, safeguarding employees’ rights and potentially transferring liabilities to the purchasing company. 

  It is essential that independent legal advice should always be sought before proceeding with any business transfer.

Conclusion

It’s important, that you as a director, recognize that each insolvency option can play a role when you are assessing your company’s financial situation and how to address both the company’s debt issues and the interests of its creditors. The best course of action for you to choose will depend on factors like your company’s financial health, the profile of your creditors, the shareholder structure, and your long-term goals. 

However, as a director, seeking early professional advice is crucial to ensure you can make the most informed decision on the best way forward for your company.

How we can assist you

Our dedicated team of restructuring and insolvency lawyers, operate from our Kent and London offices, and are committed to working directly with you to overcome the challenges arising from your business's financial difficulties or potential decline.  If you need advice with regards to bringing your business to an end please contact Richard Ludlow on 01732 496493.