If your business goes into what’s known as company administration, this means you are seeking third-party help to make your business profitable again. This usually takes the form of hiring an insolvency practitioner.
It can also mean selling the business to preserve its value as well as protect jobs. The company administration process can take anywhere from a couple of hours to approximately two weeks.
Administration is the main form of insolvency. When other forms of administration are no longer viable to save the business, the next step is liquidation. In the eyes of a creditor, administration is preferable as they still have a chance to collect on the debt. Creditors lose any chance of collecting on debt when liquidation occurs.
Listed below are the primary forms of company administration you may come across, and how they differ.
Company Voluntary Agreement
If a business is viable as a long-term entity, insolvency practitioners may recommend a CVA. This is where the business owes creditors but can’t afford to pay the full amount at once.
A CVA is a legal document that provides insight into the struggles of the business. The CVA spells out a time period over which payments will be made to creditors and stipulates the amount of those payments. The maximum amount of time a CVA can be in effect is five years.
During the process of drafting up the plan for the CVA, the struggling business is protected by a “moratorium.” A moratorium prevents creditors from taking legal action against a business to collect on its debts.
Once the creditors agree to the CVA, the business has officially entered the administration process. From this point onward, they hand over all profits to the assigned insolvency practitioners who distribute this to creditors accordingly.
Business Sold as a ‘Going Concern’
There are two forms this process can take. Either it’s a “pre-packaged” sale, meaning that the business is marketed prior to administrators being appointed, or the business will be put up for sale on the open market.
During a pre-packaged administration, the sale takes place the instant an administrator is appointed. This helps minimize loss of profits and keeps goodwill with creditors. It also results in minimal disruption, meaning clients and customers stick around during the process. This form of administration protects the brand and company assets.
Moving from Company Administration Onto Liquidation
Perhaps there are still assets that need to be realized or a dividend that creditors are owed. In that case, liquidation is very often the next step. At this stage, creditors may be threatening enforcement action if they do not receive money owed soon. The administrator becomes the liquidator and begins the process, which can sometimes take over a year, much longer than administration.
Liquidation is a formal business closure. During this process, all employees are made redundant and the business no longer exists.
In some cases, administrators recommend the liquidation route as the best option from the start. This could be for a variety of reasons, the primary one being market decline. Think about the death of major video rental chains such as Blockbuster as audience preference turned toward streaming movie platforms. Or, if one of your major clients no longer uses your services or is going through the liquidation process themselves, this can have a knock-on effect on your business as a result.
The Benefits of Going Into Administration vs. Liquidation
No one likes it when their business experiences financial problems. However, company administration has a few benefits when compared to liquidation, such as:
- You spotted the issue early. Had you waited much longer, your business might have closed as part of a liquidation procedure.
- You can seek protection from creditors. Working with administrators gives you a level of protection that prevents further legal action from taking place.
- You will have access to more capital. The total funds left over at the end of the administration process are typically greater than that of liquidation.
- Disruption to your business is minimal. The process rids the business of historic debt and gets rid of contracts that no longer serve the business.
- Employees don’t lose their jobs. The administrator carries out the process with the best interest of the business in mind.
Company Administration Has Its Own Warning Signs
If you notice that your business is having cash flow problems, it’s better to seek advice as soon as possible. By waiting too long, you could be burning up much-needed working capital to assist with restructuring the business. This means you will have no cash to pay insolvency practitioners to help turn the business around.
In fact, if you know you have cash flow problems and still do not seek help, the insolvency practitioner can charge you with wrongful trading. This means you could be disqualified from being a director for up to 15 years and become personally liable for a percentage of the debts of the company, so avoid this by seeking help early.
The company administration process, and its various routes, can seem complicated to understand, but they don’t have to be. For more in-depth information on company administration, read the Simple Guide to Company Administration by the Insolvency Experts.