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When a company is insolvent and facing serious threats from creditors it may enter into administration. Licensed insolvency practitioners such as ourselves are appointed by either the company, the directors, or a third party, or by a direct application to the court (see below for more detail). During this process, the company is protected from creditor action.
What is administration
Administration is a process available to insolvent companies to provide protection from its creditors. It involves a licensed insolvency practitioner (IP) being appointed to take control of the company and look into its financial situation. Administration provides the IP with breathing space to formulate a plan outlining how to restructure or sell the company and its assets. Protection from creditors is particularly useful and necessary in a situation where a company is being proactively or aggressively pursued for debt repayment. A common reason for a company to enter administration is if creditors are threatening, or have issued a winding-up petition. Otherwise, creditors may be pursuing the company through the courts.
Once placed into Administration, then under paragraph 3 (1) of Schedule B1 of the Insolvency Act 1986, the Administrator of a company must carry out their duties.
Purpose of an administration
A company administration can only go ahead if one of three statutory purposes exist. The three statutory purposes (required outcomes) are set out in Paragraph 3 to schedule B1 of The Insolvency Act 1986.
The three statutory purposes are:
- Rescuing the company as a going concern
- Achieving better results for the company’s creditors as a whole, than would be possible if the company were wound up without first being in administration
- Realising property and assets to make a distribution to one or more secured or preferential creditors
How does a company enter into administration?
A limited company is only able to enter into administration in one of two ways. If a licensed insolvency practitioner such as ourselves is appointed by the company directors or through a direct application to the court. A holder of a floating charge over assets of a limited company can also force the appointment of an administrator over a company, if it fails to uphold the conditions of a debenture agreement.
Before an administration can go ahead, it needs to be established if the company is solvent or insolvent. Administration is not a procedure available to every insolvent company, the process would only be able to go ahead if one of the above three purposes could be achieved. Administration can either be quick and simple or a more protracted and complicated process. It depends on the circumstances surrounding the company. It is, however, a transitionary process for the company and not a long-term solution.
Our company administration process.
- Appoint an administrator
- Company directors will choose to an appoint an administrator on behalf of the company, or the holder of a floating charge can force through the appointment of an administrator over a company, if it has failed to uphold the conditions of a debenture agreement.
- Assess the company
- After the appointment of administrators, they have an eight-week period to send out formal administrative proposals to all creditors.
- Statement of affairs
- The newly appointed administrator must request that one or more of the company’s current or former directors, must provide a detailed statement of company affairs. This document needs to detail all assets and liabilities of the company, including any contingent liabilities and assets which are subject to a fixed or floating charge.
- Send out the proposal
- The administrator must attach the statement of affairs to their proposal within the eight-week time period, which the administrator will send out to creditors. When the proposals have been sent out, a copy will be stored with the registrar of company’s house on the company’s public file.
- Creditors’ decision
- In the past a physical meeting of creditors would have been held to consider the proposals but since The Insolvency (England and Wales) Rules 2016, new decision making procedures such as deemed consent or an alternative decision making procedure will be used.
- Administrative progress report
- The administrator is required to send an administrative progress report at least once every six months to all creditors involved, until the company administration procedure ceases.
Advantages and disadvantages of administration
For insolvent companies, there are many advantages to entering administration. It gives the company breathing space to plan for survival. It can also prevent one creditor taking action which could be to the detriment to other creditors or indeed threaten the very future existence of the company.
An administration will protect the company from creditors whilst the process is ongoing, giving the company respite from creditor pressure. Administration is also an opportunity for the company to potentially be restructured, at the same time removing inefficient or non-profitable parts of the business.
Whilst the positives are there to be seen, advertising that a company has entered into administration can be damaging to a business, it shows that the company is insolvent. Directors also lose control of the day to day workings of the business, with the administrators taking temporary charge.
Company administration is a formal procedure which must be carried out by a licensed insolvency practitioner. It enables an IP to have control of the company and giving it protection against creditors, and plan the best way forward for the business. This could be through saving the company completely perhaps by entering a CVA, selling parts of the business or liquidating the company and realising assets.
How we can help
If you’re worried about your company being insolvent, or have creditors constantly breathing down your neck, it’s crucial to act as quickly as possible. Administration is only suitable for certain companies, depending on their situation. If you think it might be right for you, we can help guide you through the process and if it would suit your company. We offer free face-to-face consultations nationwide.