When a company is experiencing financial distress, one option is to place it into liquidation and bring the business to an orderly conclusion. However, in some instances the company may be viable in spite of its current financial difficulties. If there is a realistic chance of being able to rescue the business, the company can be placed into administration, a process which ultimately looks to save a company through a process of financial and operational restructuring.
As with all formal insolvency processes, a licensed insolvency practitioner will need to be appointed, and in the case of administration, they will assume control of the company while a way forward is plotted. Administration is not right for every company, however, when it is deemed to be appropriate, it can be a powerful process which can help save a company, protect employees, and mitigate creditor losses.
Not every company is able to be placed into administration; it must serve a point and be able to satisfy one of three statutory aims:
- To save the company as a going concern
- To realise a better result for outstanding creditors than would be possible if the company was liquidated without first being placed into administration
- To realise assets for the benefit of one or more secured or preferential creditors should rescuing the company not be deemed possible.
The company is granted a moratorium. This is a powerful legal ringfence which is placed around the company preventing creditors from commencing any litigation action. The moratorium provides the breathing space needed for the administrator to assess the position of the company and for a plan to be developed which will meet the aims of the administration.
Remaining in administration is not a long-term solution for a company; administrators are required to adopt the employment contracts of the company after 14 days, and they are also not able to run the company at a loss and worsen the position of creditors. Sooner or later therefore, the company will have to exit administration and the safety this provides.
A company can exit administration in a variety of way depending on the long-term objectives for the business.
- Sale of the business – The business may be sold as a going concern, either on the open market or alternatively to a connected or unconnected third party through a pre-packed – or pre-pack – sale. If the business is to be sold through a pre-pack sale, this will be arranged before administrators are formally appointed; this ensures minimal disruption to ongoing trade.
- Continuation of trade – Following a process of restructuring, which may involve refinancing existing debts, negotiating lease agreements, or divesting the company of unprofitable areas, the business will hopefully be in a more solid financial position from which it can recommence trading.
- Alternative rescue and recovery process – In some instances a company may exit administration and immediately enter another formal insolvency process in order to facilitate its recovery. This may typically involve a Company Voluntary Arrangement (CVA) which acts as a formal payment plan between a company and its creditors. Existing debt can be renegotiated, allowing for lower monthly payments to immediately boost cash flow.
Liquidation – Despite all efforts, sometimes liquidation is inevitable. This may be decided upon following an examination of the company’s financial position which suggests the business to be unviable, or alternatively, liquidation may have always been the preferred option, but the company was placed into administration prior to this in order to maximise creditor returns. If liquidation is the chosen route out of administration then this will be achieved through a Creditors’ Voluntary Liquidation (CVL).