What happens when a company goes into administration?
The basic concept of Company Administration is to allow a company with financial difficulties sufficient time to try and trade out of those current difficulties. It is a formal court approved process and can only be carried out by a licenced insolvency practitioner.
If you run a London based business and would like more information or advice, contact our team of London Insolvency Practitioners, who will be happy to meet with you for a no obligation chat.
The main reason a company goes into Administration is to seek formal protection from its creditors whilst the Administrator, usually with the assistance of the directors looks for a solution to those financial problems. This usually will focus on finding a buyer for the business, which can include the previous directors. In such cases, the Administration is likely to be deemed a prepack Administration – there are additional rules involved in such cases, details of which are given below.
Most Administrations are instigated by a secured lender, whose lending is secured against the company by a qualifying floating charge., allowing the lender to appoint Administrators, usually someone from their panel of licenced insolvency practitioners.
The directors can also consider appointing Administrators of their choosing, although if a secured lender holds a qualifying floating charge, the company will need to give 5 days’ notice of that appointment to the lender. The lender can either agree to that appointment or chose to appoint their own Administrator. Our team of Insolvency Practitioners in London can act as Administrators.
Once an Administrator has been appointed, they assume full control for all aspects of the business. The directors’ legal powers of control at that point cease. It is the Administrators legal duty to maximise realisations. This is usually through a sale of the business or part sale of the business. A growing number of Administration sales are now processed through the prepack route. Effectively this is where the directors have been discussing the prospect of buying the business back from an Administrator, where those discussions have taken place prior to the formal appointment of the Administrators – usually anything from 1 – 4 weeks prior. By completing a prepack purchase, the purchaser will only be acquiring the assets of the business. The liabilities will remain in the old company in Administration for the Administrator to deal with. The proceeds of sale, will firstly be used to discharge to costs of Administration and any remaining funds will then be used for distributions to the different classes of creditors.
Where a prepacked sale takes place, new rules have recently been brought in to try and ensure total transparency. Any such potential sale must now be approved by the prepack panel. This involves the Administrator advising the panel of the likely sale and the reasons for it and why it is in the interest of the creditors to do so. The panel have the option of approving the sale, seeking further clarification, or objecting to the sale. Key information required in the Administrators report will include:
- Details of marketing activity of the business
- Details of looking for alternate buyers for the business
- Details of discussions with major creditors
- Details of any other offers for the business
- A detailed explanation as to why the Administrator believes this to be in the best interests of the creditors.
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