What is an Administration?
Administration is a formal insolvency process designed to help companies facing financial difficulties gain valuable time and legal protection to try and steady the business.
It safeguards the business from creditor pressure and threats of winding-up action.
How does the Administration process work?
Once a company is placed into administration it enters a moratorium period whereby it receives protection from creditors and landlords.
Legal action against the company cannot be started and any ongoing litigation is ceased. All assets of the business are also protected from bailiffs, hire purchase companies and asset-based lenders who cannot take possession of their property without administrator approval.
Appointed Insolvency Practitioners, who act as the company’s administrator have to assess the company’s financial position, operations, and overall viability.
Following their review they have to put a plan in place to move the company forward which may include selling the company out of administration or continuing to trade whilst implementing a restructuring plan.
Administration can only be entered into if it is deemed to be the best solution for all stakeholders.
The Insolvency Practitioners are required to state which one of the three statutory purposes of administration is behind their decision to place the company into administration.
If none are able to be met, administration cannot be recommended.
What are the advantages and disadvantages of Administration?
Advantages
- Legal action stops
- Keeps the company’s financial situation from worsening
- Continuity of the business can be protected
- Insolvency Practitioners take over to protect creditors interests
Disadvantages
- Directors lose control of the company
- The process can be very costly due to the intense and active role of administrators
- Negative publicity, administration is a very public procedure
- The directors conduct will be heavily scrutinised
- There are some limitations, such as not being able to shed excess staff costs due to TUPE laws
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