Administration is one of the options available to limited companies when they’re struggling financially. It’s important to understand that administration might not be the right process for you and your business. You should seek advice from a professional who can advise you on this. In this blog, we’re letting you know the pros and cons of administration.
Whether administration will work for you depends on a range of factors, including the following:
- Your financial situation
- What you need to protect
What is an administration?
When a company enters administration, the control of the company is passed over to an appointed administrator. The goal of an administration is to leverage the company’s assets to get some money back to the creditors. This should be completed promptly while giving the creditors as much money as possible. However, it’s worth noting that some creditors will likely still receive less money than they are owed.
What are the advantages of an administration?
It provides some breathing space
An administration provides a moratorium which prevents creditors from taking any further action immediately. This gives the business in question some breathing space to deal with the company’s affairs and to get the best outcome for everyone involved.
Company placed into the hands of the insolvency practitioner
The administration puts the company into the hands of a licensed insolvency practitioner who acts as the administrator. The insolvency practitioner’s role involves ensuring that all actions taken during the administration are carried out with the interest of the company and its creditors in mind.
What to consider when entering administration
When deciding whether to liquidate a company or put it into administration, the key consideration must be – will the total funds realised in an administration be greater than in a liquidation? If you can get an evaluator to agree that you’ll gain more, then administration is a viable route for your business.
This figure is based on either the continuity of the trade (business keeps going) or the pre-packaging of the sale. This means you’ll preserve the value of the assets and sell them to a third party. Generally, this third party will have the same company directors.
When using administration, the continuity of the business can be protected. This process can be used to discard historic legacy debts, HMRC arrears, CBILs, bounce-back loans and supplier debts. All of these debts are currently holding the insolvent company back from succeeding.
Another advantage of the pre-pack route is that it allows a seamless transition without any interruptions. Usually, in this scenario, a new-co is formed to buy the assets from the insolvent business. In most cases, the new co can still be run by the same directors as the insolvent company.
Disadvantages of using an administration
There are some disadvantages to using administration that you must be aware of.
Risk of sale to another party
During administration, it’s possible that a competitor will come in and make an offer to buy the business’s assets during the marketing period. When you first enter administration, there’s a marketing period (5 days minimum) where your business is basically for sale, and people can make offers.
It is quite unlikely that someone will swoop in and try to buy your business because they only have around 5 days to carry out a lot of due diligence and part with a lot of money.
The administration is public knowledge
The administration of a company becomes public knowledge. This is because correspondence between all parties must include a note to say the company is in administration. This can often cause confusion with customers, and directors then have to spend time rebuilding relationships with clients and suppliers. Their role is then to show clients and suppliers that they can still provide the same service.
Director’s investigation will be completed
Similarly to a liquidation, the insolvency practitioner must file a director’s conduct report into how well the director followed their duties. If wrongdoing is uncovered in the lead-up to the liquidation, it may result in personal liability or even director disqualification. This, and the cost of the administration, need to be considered.
Many directors find that administration is much more expensive than liquidation and therefore decide against the idea. If you have a decent cash flow, then you may benefit from administration.
In conclusion, it’s very important to research all potential outcomes and find the most suitable option for you and your business. You must also consider the potential advantages and disadvantages before you make any decisions. Reach out to us if you need any more information on the pros and cons of administration or other company advice.