What Happens When a Company Goes into Administration

Navigating the complex world of company administration can be a daunting task for business owners and employees alike.

This blog post aims to provide clarity on the process, key players, and potential outcomes involved in company administration, specifically addressing the question of “what happens when a company goes into administration?”

By understanding the intricacies of this legal process, you can be better prepared to face the challenges and opportunities that may arise during this critical period in a company’s life.

Short Summary

Company Administration is a legal process managed by an insolvency practitioner to restore a business.
Key players in the administration of a company are the administrator, directors and creditors, with regular progress updates essential for successful resolution.
Options & outcomes include CVA, pre-pack admin., liquidation & dissolution. Asset realisation plays a key role in paying off debts & generating revenue.

Understanding Company Administration

Company administration is a legal process managed by an insolvency practitioner to save a business through restructuring or liquidation.

The company brand primary goal is to restore the business to profitability and, ultimately, avert insolvency.

This process involves various key players and certain criteria that must be met before a company can enter administration.

Criteria for Entering Administration

Typically, it is the directors who initiate the administration proceedings, although company shareholders may also do so in some cases.

In more extreme circumstances, banks may initiate administrative proceedings through the courts, with an appointed insolvency practitioner overseeing the court process itself.

It must be clear that using the company administration process will benefit the company by preventing it from going to liquidation.

Additionally, the process should provide a better return to creditors than other alternatives. The secured creditors also play a crucial role in the process, as their permission is required before the administration procedure is agreed upon.

Key Players in Administration

The individuals typically involved in the administration of a company include the administrator, the company directors, and the creditors, with the administrator being an appointed insolvency practitioner.

The appointed insolvency practitioner appointed administrator is obligated to act in the best interest of the insolvency practice or business prior the insolvent company’s creditors as a whole during administration.

When a company goes into administration, the company directors must work in conjunction with the administrator and supply them with all the necessary information to administer the insolvent company’s affairs.

On the other hand, creditors are responsible for casting their votes on the administrator’s proposals and determining whether to accept or reject them.

The Administration Process: Step-by-Step

The administration process follows a step-by-step procedure that includes the appointment of an insolvency practitioner, communication with creditors taking legal action, proposal submission, and decision procedure.

This process may take up to one year to complete, but it is crucial for the successful restructuring or liquidation of a company in distress.

Appointment of Insolvency Practitioner

An insolvency practitioner can be appointed by creditors, directors of a company in financial distress, or by the courts.

The role of the insolvency practitioner is to oversee the company’s operations, assess whether the company has the potential to operate profitably in the future, and determine whether the company needs to be liquidated.

By working closely with the company’s stakeholders, the insolvency practitioner plays a critical role in guiding the company through the administration process.

Communication with Creditors

During what happens when a company in administration, it is essential to maintain open communication with creditors. This includes notifying creditors of the appointment and advertising the administration in the London Gazette.

By keeping creditors informed and involved in the process, the company can work towards a mutually beneficial and positive outcome that addresses the concerns of all parties involved.

Proposal Submission and Decision Procedure

When a company goes into administration, the administrator has eight weeks to submit proposals to the company’s creditors.

These proposals outline the administrator’s plans for the company’s future, including potential restructuring or liquidation efforts.

After submission, an initial decision procedure must be held within ten weeks of the date the company entered into administration.

This decision procedure allows creditors to review and vote on the administrator’s proposals, ultimately determining the future course of action for the company.

Legal Protection and Moratorium

During the administration process, a company gains legal protection from creditors and is protected from ongoing legal action.

This protection includes a moratorium period that prevents assets from being recovered by execution creditors or any legal process without permission.

The moratorium period and creditor actions during administration are critical components of the process, allowing the company to reorganise without the threat of immediate legal consequences.

Moratorium Period

The moratorium period serves as a temporary delay or suspension of legal and insolvency proceedings against a company in administration.

This period allows the company to have a payment holiday from most of its non-finance pre-moratorium debts, providing the company enters much-needed breathing space to reorganise its finances and potentially avoid insolvency.

The moratorium period can be requested by the company itself, or by a creditor, and is usually granted for a period of up to 28 days. During this period, the company is protected from legal action.

Creditor Actions During Administration

The role of creditors during administration is crucial in determining the future of the company.

They are responsible for casting their votes on the administrator’s proposals and deciding whether to accept or reject them. The potential outcomes of creditor actions during administration could include the rescue of the company, liquidation, or dissolution.

By working together with the administrator and considering the best interests of all parties involved, creditors can play a vital role in achieving a successful outcome from the administration process.

Impact on Employees

The impact of company administration on employees can be significant, affecting their employment rights, redundancy, and the potential transfer of employment through TUPE transfers.

By understanding the implications of administration on their own employment contracts, employees can navigate this challenging period with greater confidence and clarity.

Employment Rights and Redundancy

Employees are entitled to claim their outstanding salary, commission, accrued holiday pay up to six weeks and occupational pension payments owed from four months prior to the company entering administration during its administration period.

Such payments must be requested from the administrator in charge of the insolvency process. To make a claim, employees should contact the insolvency practitioner and the Redundancy Payments Service, then a claim can be made from the National Insurance Fund for redundancy pay of up to two months’ wages and six weeks’ holiday pay.

Employees who are dismissed from their positions within the initial 14 days of administration are categorised as “ordinary creditors,” while those who maintain their roles are labeled as “preferential creditors”.

If an employee is made redundant during the first 14 days of company administration, they would be classified as an ‘ordinary creditor’ and would be entitled to any outstanding wages and redundancy payments.

TUPE Transfers

The Transfer of Undertakings (Protection of Employment) regulations, or TUPE, protect employees’ terms and conditions and ensure a continuous term of employment.

In the event of a company entering administration, TUPE regulations are applicable to the transfer of employees and their associated terms and conditions to the the new company or employer.

This safeguards the employees’ rights and ensures they are not detrimentally impacted as a result of the transfer of ownership of limited’ company assets.

Options and Outcomes of Administration

There are several potential options and outcomes of administration, which include Company Voluntary Arrangement (CVA), pre-pack administration, liquidation, and dissolution.

Understanding these options can help stakeholders make informed decisions about the best course of action for a company in administration.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a formal insolvency process that enables a company to pay creditors over a fixed period.

It is a legally binding agreement between the business and its creditors, outlining the manner in which the company’s debts and debts will be repaid.

A CVA can assist a company in restructuring its debts and averting insolvency, while also protecting the company from legal action from its unsecured creditors and allowing for a more adjustable repayment plan.

To establish a CVA, the company must submit a proposal to its creditors that outlines the terms of the CVA, and the creditors then vote on the proposal.

Pre-Pack Administration

Pre-pack administration is a process that ensures the value of the business is maintained. It involves an arrangement that is established before administration is declared and implemented shortly after the appointment of the administrator.

The purpose of pre-pack administration is to expedite the sale upon appointment of the pre pack sale administrator to optimise the value of goodwill and reduce the loss of customers and trade.

Administrators must provide full disclosure of the pre-pack administration to creditors within a period of seven days following the transaction.

Liquidation and Dissolution

Liquidation and dissolution are two potential outcomes of administration. Liquidation involves the selling of a company’s assets to pay off its debts, while dissolution is the legal termination of the company’s existence.

If there are still assets to be realised and creditors to pay after administration, the company can be put into liquidation, with the administrator appointed as Liquidator.

Alternatively, company dissolution may be appropriate when there are no funds or other assets available to pay creditors, in which case the company will be closed and removed from the company record at Companies House.

The Role of Insolvency Practitioners

Insolvency practitioners play a vital role in the administration process, overseeing the company’s operations, assets, and liabilities.

Their responsibilities also include asset realisation, reporting, and providing progress updates.

The expertise of insolvency practitioners is crucial in guiding a company through the complex administration process and determining its future course.

Asset Realisation

Asset realisation is the process of converting assets into cash or other forms of value, typically through the sale of assets to pay off debts or generate revenue.

During the administration period, the company’s goodwill assets are evaluated and liquidated to generate funds that will be allocated to the creditors of the company.

The proceeds from the sale of assets are then utilised to settle the company’s creditors. The effect of asset realisation on creditors depends on the amount of assets that can be realised and the amount of debt that creditors owed money the company has.

Reporting and Progress Updates

Providing regular reports and progress updates to creditors during administration is critical for keeping stakeholders informed and involved in the process.

These reports offer an overview of the administration’s progress, financial performance, and any restructuring initiatives.

By maintaining open communication with creditors, insolvency practitioners can work towards a successful outcome that addresses the concerns of all parties involved.

Frequently Asked Questions

Do I get paid if my company goes into administration?

Unfortunately, if your company goes into administration, you may not receive all of owed money to repay creditors or the payments that you are due from old company.

However, you can apply for unpaid wages and other money you’re owed, such money owed as bonuses, overtime and commissions. You will also retain your entitlement to redundancy payments and outstanding wages.

Do you lose shares if a company goes into administration?

Yes, when a company enters administration, its shares are usually suspended and investors may lose their shareholdings. Depending on the outcome of the company enters administration the process, this could result in investors receiving no value for their holdings.

Who gets paid when a company goes into administration?

When a company goes into administration, it is expected to pay all creditors in full, with the exception of some creditors voting certain secured creditors who are paid a ‘prescribed part’. As payment demands such, creditors are given priority to repay other creditors when it comes to payment.

Summary

Understanding the ins and outs of company administration is crucial for business owners, employees, and creditors alike.

By understanding the process, key players, and potential outcomes, stakeholders can make informed decisions and navigate the challenges that arise during this critical period.

A solid grasp of company administration can provide a foundation for future success, even in the face of financial distress.

Information For Company Directors

Here are some other informative articles for company directors in the UK: