This procedure is designed with the rescue of the company’s business as its principal focus. It is a formal insolvency process, recognising the company can no longer pay its debts in full and the statutory framework supports the administrator’s key objectives: if the company as an entity cannot be rescued, then the business of the insolvent company may be sold on a going concern basis. It is only if neither of these objectives are possible, that the administrator may realise the assets of the company on a break up basis.
Access to Administration
There are various access routes to administration: what is called the court-route and the out-of-court route. The court route is open to any creditor, the directors or the company to request the appointment of an administrator. The company could be forced into administration by a creditor.
There are two out-of-court routes. One is designed specifically for the holder of a floating charge to make an appointment of an administrator, and the other route is for the directors or company to do the same.
The money raised by the sale of the business and/or assets goes to pay back the creditors. Depending on the amount available, they may get none, some or all, of their money back. Creditors are bound by the legal process of administration and cannot take any further action against the company, nor can they demand more than is available by way of dividend.
The administrator is specifically protected by a statutory moratorium – a form of legal protection against creditor action – that allows the insolvency practitioner some time to formulate a rescue strategy. In practice the moratorium does not invalidate any creditors’ rights to recover goods or repossess items, but they must get the administrator’s consent before doing so. If that consent is not given, then the creditors may ask the court for permission to exercise their rights. Generally, so long as the creditors’ actions do not impede the administrator’s attempt to rescue the business, they will usually be given consent.
The directors or the company can choose to enter administration voluntarily, and pick their preferred administrator, or the company can be forced into administration by a creditor or the bank as floating charge holder, and they will choose their preferred administrator.
An insolvency practitioner must be appointed as administrator to deal with the company’s assets and liabilities. Dunedin Advisory’s insolvency practitioners are qualified to act as administrators. We can advise you, whether you are a creditor, director, floating charge holder or shareholder, on the right route to an administration appointment.
Business rescue from administration
Where possible in administration, and if there is value in doing so, the business undertaken by the company will be sold on a going concern basis. This allows a functioning business with underlying profitability to be sold free from its debt burden.
Administration is frequently used where a business is over-leveraged (is carrying too much debt for its current performance) and the operational business can be carved out of the insolvent shell. The business may be sold to a third party, or to a new company, specifically set up for that purpose.
Pre-pack sales out of administration
You might have heard the term “pre-pack” in relation to an administration. It is not a different form of administration, but stands for pre-packaged sale, and one that usually takes place immediately after the company has gone into administration.
Commonly once appointed, the administrator will assess the business, decide if it can be sold, and then market the business for sale through various channels. This presumes however that the company in administration has enough cash to allow it trade for the period of time needed to advertise and conclude a sale. There is also a risk that customers and employees walk away from a business while trading in administration and purchasers of the business discount the price they are prepared to pay, because of the insolvency.
A pre-packaged sale means that the marketing of the business and the negotiations for its sale all take place in the lead up to the formal insolvency, but the sale itself is concluded as quickly as possible by the administrators after appointment. Pre-packs can be most effectively used where there is a risk of business devaluation or loss of customer confidence in an insolvency situation.
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