What is Administration and How Does it Work?

What is Administration and How Does it Work?

‘Gone into Administration’ is a familiar phrase we often see in business news headlines when a company has hit hard times. From football clubs to high-street retail brands, many a household name organisation has ‘gone into administration’, some emerging out the other side to trade another day, others disappearing into the annals of corporate history.

But what exactly is Administration, and how does it work?

Administration is a formal insolvency process. Once a company is officially insolvent - i.e. it has insufficient assets to service its debts and other financial liabilities - one of the options available is to have a licensed Insolvency Practitioner (IP) temporarily take over the administration of the business (hence the name). The IP appointed to this role is known as the Administrator.

Administration has two main goals: either restructure a struggling company so it can continue as a going concern, or manage the winding down of the company in a way that maximises the returns creditors get. Either (or both) of these goals can be achieved through the sale of a company, which is often achieved via a special process known as a pre-pack Administration. 

Once appointed, the Administrator is responsible for managing all aspects of the company. The Administrator in effect replaces the directors, who no longer have legal control over the business and can act only in an advisory capacity to the Administrator.

How Administration Works

The Administration process can be initiated either by the insolvent company or by its creditors. The party initiating Administration must file a notice of intention to appoint an Administrator at court. This notice gives the company protection from further creditor action on unpaid debts for a period of ten business days, during which time the nominated IP will assess the company's financial position and decide whether Administration is the best course of action.

If Administration is deemed appropriate, the IP will apply to the courts again for an Administration Order. This Order appoints the IP as Administrator and automatically freezes any outstanding legal action against the company. Once appointed, as well as taking control of the day-to-day running of the business, the Administrator will begin the process of assessing its financial position (including its viability as a going concern), identifying assets, and preparing a strategy to achieve the goals of the Administration. The Administrator must also determine the order of priority in which creditors will be paid, should a rescue not be deemed possible.

The first priority for an Administrator is to try to restructure a company so it can continue trading and satisfy the demands of its creditors. A big advantage of Administration is that it provides breathing space for restructuring options to be explored. The Administrator has the power to negotiate with creditors, terminate contracts, and dispose of assets to raise funds to pay creditors. They may also seek new investment or funding to enable the business to continue operating. If that is the case, companies will often enter a Company Voluntary Agreement (CVA) with creditors upon leaving Administration, which sets out legally binding debt repayment schedules lasting up to five years. 

If the Administrator decides the company cannot be rescued as a going concern, they will then move on to liquidating the business and selling its assets (if there are any) to raise funds to pay creditors. 

Just as it is started with a court order, the Administration process can only be ended by the courts. The Administrator is required to prepare a report for the courts outlining their findings and conclusions, including details of the company's financial position, the actions taken by the Administrator, and the outcome achieved for creditors. It is up to the court to decide if they agree with the Administrator’s conclusions and end the process. 

Occasionally, the court may disagree with the assessment of a company’s viability and refuse a restructuring or resale plan, especially if creditors object. The court will then issue a winding-up order instead.

Where can I find support with Administration?

If you're worried that your company is insolvent and needs to go into Administration, don't panic. It's important that you seek advice early because the sooner we speak, the more options you will have. Get in touch with our team today.