Administration: A Definition

Discover everything you need to know about what happens when a company goes into administration, what the insolvency process is and how it impacts a business.

What does administration mean?

The definition of administration varies depending on what you read but in essence a company goes into administration when it no longer has enough money to meet its debt obligations, expenses and other liabilities - the company has become insolvent.

Insolvency can prove a death knell for companies, and may result in their going out of business. However, under the Insolvency Act 1986, a struggling yet ultimately viable business may be rescued by the process of administration.

When this happens the company is put under the control of a licensed insolvency practitioner, also called an administrator. It is their job to examine the company assets, look at how the company’s finances can be restructured, and work with creditors to secure the best outcome for them while still trying to salvage as much of the business as possible. An administrator may be appointed by the board of directors, a creditor, or the court.

What does going into administration mean?

While administration does represent a serious blow to any business it doesn’t always mean the end for it. The administration process is designed to protect the company and directors from legal action and provide the administrator with the opportunity to assess the future viability of a business, whether it can ultimately be saved or whether it is better to liquidate.

The law states that companies can still continue to trade while in administration. However, the administrator takes over the management and control of the business from the directors. The administrator will seek potential outcomes:

1. Save the business either by selling to another party or restructuring the business operations to make them more financially viable.

2. Liquidation in which case the business will be “wound up” and its assets sold off to satisfy the company’s creditors.

The government keeps track of all the businesses that go into administration, and there is a legal hierarchy of creditors that must be satisfied when a company undergoes liquidation:

• Secured creditors (banks and other asset-based lenders)
• Preferential creditors (employees and in some cases HMRC)
• Unsecured creditors (vendors, customers and trade creditors)
• Shareholders

The administration process

1. An administrator (licensed insolvency practitioner) is appointed either by the directors, a creditor or the courts. Once this happens a statutory moratorium is initiated which means the business is protected from enforcement action by creditors while administration takes place.

2. The administrator will write to the company creditors and Companies House to inform them they have been appointed as well as publish a notice of appointment in The Gazette.

3. The administrator will try to stop the company being wound up. If this is not possible they will try and use the company assets to pay off as much of the debts as possible.

4. They have eight weeks to write a statement explaining what they intend to do and this must be sent to creditors, employees and Companies House inviting them to approve or amend the plan at a subsequent meeting.

5. There are four things they can decide to do:
   • Negotiate a Company Voluntary Arrangement (CVA) which allows your company to keep trading. This allows you to pay your creditors, provided they agree, over a fixed period. Provided this is adhered to and completed successfully, the company can be returned to the directors eventually and can continue to trade.
   • Sell your business as a going concern to another company which means it can keep on trading with staff, equipment, orders etc.
   • Sell your assets to pay creditors as part of a creditors’ voluntary liquidation. Creditors can be paid from any money raised and the company will be closed down once this is done
   • Close the company if there are no assets to sell.
6. The administrator will retain control of the company for 12 months during which time one of the options listed above will take place.

Key aspects of administration

The primary goal of administration is to rescue a struggling company and get its cash flow back on track, either by restructuring its financial affairs or selling it as a going concern. If this isn’t possible then selling off assets to pay back the company creditors as far as possible is the second objective.

How long does administration last?

Administration lasts 12 months. It doesn’t typically take longer than this unless the insolvency practitioner asks for extra time and can show it is necessary to obtain the best result for the company and its creditors.

What is a pre-pack administration or a pre-pack administration sale?

This is an arrangement where the sale of a business or part of it is negotiated before the administrator is appointed. The sale is then executed on appointment of the administrator or very shortly afterwards.

Understanding pre-pack administration and its mechanics

A pre-pack administration is a powerful way of selling a struggling company legally to a third party. It can also be sold to the existing directors operating through a new company but they have to be able to show they have the funding in place to buy the assets of the old company at fair market value.

If a company is threatened with a winding up petition from a creditor such as HMRC,a bank or another trading business it owes money to it can provide a solution. However, if the winding up petition is issued it can no longer be used.

It’s quite an expensive procedure and usually used for larger businesses with more complex activities. It is suitable where there is a severe threat to the ability of a company to trade, for example a key supplier withdrawing support but there is still a good business to work with despite that threat.

Administration with CVA

As previously mentioned a CVA is one possible outcome. Directors, through the administrator, can negotiate with their unsecured creditors such as landlords, HMRC or suppliers to come to an arrangement where they pay their outstanding debts whilst still being able to trade.

For a CVA to progress all unsecured creditors are allowed to vote on the proposal and two requirements must be met:

• 75% of creditors who vote must approve the CVA
• No more than 50% of unconnected creditors may vote against a CVA
  CVAs can be a useful way of ensuring a company regains control of its cash flow while also meeting its debt obligations.

Examples of administration

Now that we know the definition of company administration, we can look at some examples to see how it works in practice.

Note that administration is not necessarily the end for businesses. Indeed, in some cases it may lead to more streamlined or cost-effective operational practices. For instance, a retailer may close all of their brick and mortar stores and liquidate the assets from those stores to satisfy their creditors and trade exclusively online.
The now-defunct UK retailer Woolworths is a notable example of this.

Debenhams is another example. The company went into administration twice in 2020. Under the first process it closed 22 stores and announced plans to shut a further 28. It also used a CVA to obtain rent cuts. It subsequently went into administration again in the same year and all its stores finally closed in 2021 with its ecommerce arm being bought by Boohoo Group in a £55 million deal.

Frequently asked questions about administration

Exploring common queries about administration

Administration occurs when a business can no longer meet its debt obligations. A licensed insolvency practitioner is appointed to either restructure the business and come to an arrangement with creditors or to sell off assets, pay off creditors and liquidate the business.
Voluntary liquidation occurs when a company’s shareholders and directors decide to wind up the business. The business is still solvent and they use the assets to pay off any remaining debts.

Compulsory liquidation occurs with a winding up order through the courts. Directors have no control over this procedure and it is rare for a company to be rescued if it undergoes compulsory liquidation.

How long does administration last?

The administration process takes 12 months. During this time an administrator will take control of the company, put together a proposal to satisfy its creditors, and either restructure and rescue the business or liquidate its assets.