Company administration tends to attract negative headlines. We saw as much with the recent case of convenience store chain McColl’s. On entering administration, the press focus was largely on the threat to the livelihoods of its 16,000 employees and the risk of hundreds of local stores closing.
But as it turns out, McColl’s was a perfect case study of the positive side of administration – indeed, the very reason there is such a thing as administration in the first place. Within days of entering administration, the chain was bought by supermarket giant Morrisons, which not only took on all 16,000 staff, but also committed to keeping all 1,160 stores open and took on the company’s pension fund.
In this case, the decision to put McColl’s into administration achieved exactly what it was supposed to do – it facilitated the sale of a business that had been struggling financially, and it kept the business running as a going concern.
However, achieving those aims more often than not comes at a price. The McColl’s case stands out from the norm because so many stakeholders – employees, creditors, pension scheme members – seem to have gotten a positive outcome. But that isn’t always the case.
How does company administration work?
Administration is a formal process businesses can enter when they are insolvent (i.e. they can no longer pay their bills and debts). It has some immediate benefits, namely halting all action by creditors to recover money they are owed.
But the trade off is that company owners and directors lose control of the business. It passes into the hands of an Administrator, who must be a registered Insolvency Practitioner. Their main responsibility is to find a way to recover money owed to creditors.
But at the same time, the priority is to also find a way to keep the business running, whether that’s by coming to an arrangement on debt repayments with creditors (such as a Company Voluntary Arrangement or CVA) or selling the business as a going concern.
Otherwise, there would be no point in administration. You might as well proceed straight to selling off the company assets following liquidation to pay back creditors.
Who benefits from administration?
In a perfect world, administration would benefit all stakeholders when a company becomes insolvent, as in the McColl’s case. That was an example of what we call a pre-pack administration. The buyer, Morrisons, was already lined up to buy out the struggling business. Entering administration allowed the sale to go through in a matter of days.
As a result, all McColl’s stores were kept open and all staff kept their jobs. In addition, Morrisons agreed to take on the company’s £170m debts and keep running the pension scheme. Creditors will get paid, pension scheme members can rest assured their retirement funds are safe.
But administration doesn’t always turn out so well for everyone. In the event of a sale, it depends on what the new buyer values the company at. The fee they agree to pay may cover some but not all the outstanding debts. In that case, proceeds from the sale will be distributed to creditors from the largest down. So while the likes of banks and landlords tend to get their money back, smaller creditors like unpaid suppliers can often miss out.
The new buyer may decide that they don’t want to run the business in its current form. They may decide to close branches and make redundancies. Similarly, if a CVA is agreed with creditors or the company is restructured, the new arrangements may include cost cutting measures to protect the firm’s ability to service its debts. That can also see staff laid off, branches shut etc.
Ultimately, as an insolvency procedure, the overarching aim of administration is to benefit creditors. But depending on the financial circumstances, that doesn’t always mean all creditors, especially smaller ones, will always get their money back. At the same time, administration tries to keep insolvent businesses trading to protect jobs and protect value. But again, it isn’t always possible to do either.