Of all the formal insolvency procedures, administration is by far the best known. Ask anyone on the street what it means when a company goes into administration, and they’re likely to give you an answer that is somewhere close to the mark.
It means the company can’t pay its bills. It’s insolvent. Bankrupt. They might even know that administration means a company is taken out of control of its owners or directors and run by a representative of the Insolvency Service.
Where most people start to drift away from fact, however, is they often assume that administration means a business is done for. In the public imagination, administration is widely confused with liquidation, or the formal closure of a business as a result of insolvency.
It is certainly true that, once a business enters administration, liquidation is one possible end game. But the whole purpose of administration is actually to try to avoid a company being wound up.
When it comes down to it, insolvency procedures are there to try to get the best outcome possible for creditors who are owed money by a struggling business. If a company is liquidated, the only route for creditors to recover any of their debts is from the business’s assets being sold off. More often than not, liquidation doesn’t lead to a good outcome for creditors.
Administration is intended to find a better option, which usually also means finding a way to keep a business running as a going concern. Here are three ways that can happen.
Company Voluntary Arrangement (CVA)
Arguably the most straightforward route out of administration for any business is to come to an agreement with creditors on restructuring their debts. You don’t have to go into administration to agree a CVA with creditors. Any company facing insolvency can seek one. But it is certainly a major tool available to administrators once they take over the running of a business.
The purpose of a CVA is to make debt repayments manageable to help a business return to the black. The debts will be stretched out over a longer period (typically 36 to 60 months), and often include creditors agreeing to write off a portion of the debt. They do this on the understanding that they would get lower returns if the debtor wasn’t able to recover.
Another option for an administrator is to sell off all or part of an insolvent business to a new owner. This is often lined up prior to the formal process of administration starting, with the sale executed by the administrator once they take control. This is known as a pre-pack administration, as in a ‘pre-packaged’ sale.
The new buyer doesn’t have to be an external third party – it’s common for existing directors to take over a company as part of a pre-pack deal, if they can raise the necessary finance. This leads to such entities being referred to as ‘phoenix companies’, or new legal entities that rise from the ashes of previous businesses. Creditors are paid from the money raised to complete the buyout, but after that the new entity is freed from its previous obligations while being able to trade as normal.
Return to the Black and Continue Trading
Finally, sometimes it simply takes the intervention of a professional insolvency practitioner acting as administrator to make internal changes to a business that help restore it to financial health. If there are glaring inefficiencies or structural issues in a business, an administrator can make a positive difference without needing to seek a CVA or a sale. After a period of being run by an administrator, if the company returns to the black again, it will come out of administration and be returned to the control of its directors.