Building a company and turning it into a sustainable and successful operation is a daunting task. It requires significant business acumen and a healthy dose of luck. Establishing a company with a solid foundation and business plan while remaining agile enough to quickly accommodate sudden shifts in the local industry sector or the consequences of global events can be overwhelming.
Even profitable operations can find themselves under threat of insolvency due to poor cash flow management and other deficiencies. Fortunately, there are several mechanisms available that could help a business turn its fate around, stabilize, and emerge stronger.
One such option is company administration. The process consists of relinquishing control of the business to an Administrator who will try to chart the best course forward while balancing the company’s interests and those of its creditors. The chosen Administrator must be an insolvency practitioner.
For the best results, the expert should be well-versed in the local business environment and law, such as finding insolvency practitioners in London if the ailing company operates in that area. An insolvency practitioner is uniquely qualified to provide the necessary guidance and direction to the insolvent business in order to achieve the best possible outcome for all involved parties.
Initiating Administration And Its Requirements
Depending on the specific circumstances, several entities could initiate administration proceedings for the company. Typically, the directors start the process after determining that this is their best option. Sometimes, the shareholders can vote to start administration, effectively overruling the directors who may consider it too early for such a procedure.
In addition, in the most extreme cases, the business may be put under administration due to a court order after a bank has started the proceedings. The company directors will have no input on the matter and will need to accommodate an Insolvency Practitioner who will be appointed for them as an administrator.
In general, for a company to be eligible for administration, it must meet two requirements. First, the business must be insolvent, meaning it cannot cover its outstanding debt but is still able to achieve a certain statutory purpose determined by the current insolvency legislation.
Secondly, there should be sufficient pressure from the creditors that makes entering into administration a necessary step in order to prevent the business from falling into compulsory liquidation. During the administration, the company is under legal protection from its creditors, and any ongoing legal action will be stopped.
The Administrator is given a time limit of 8 weeks, during which they will need to set a strategy and reveal it to the involved creditors. This proposal must include full details of their appointment, a copy of the company’s SOA (Statement of the Company’s Affairs), and the necessary details about the expected outcome of the administration. A procedure to approve the proposals should be held within ten weeks, counting from when the entity entered into administration. Creditors should receive a notice at least 14 days before the chosen date.
There are several major outcomes of an administration process. The business could be placed on the open market with the intention of being sold to an interested party as a ‘going concern.’ The company could also be offered as a ‘pre-packaged’ sale.
In this case, the business is prepared to be soled even before the appointed Administrator has been confirmed. The goal is to finalize the sale as soon as possible in order to retain the maximum value of the existing goodwill and to minimize the potential loss of clients and trade opportunities. A pre-pack deal is intended to protect the company’s brand, business, and assets.
If the long-term viability of the business is not in question, the Administrator may opt to set a CVA (Company Voluntary Arrangement). If the CVA is passed, the company will leave the administration process, and the Administrator will now move to a supervisor role.
Typically, the CVA will involve a monthly repayment of an agreed-upon amount. Subsequently, this sum will be distributed among the creditors under the terms outlined in the CVA. If the company’s financial state fails to improve, it could be headed for liquidation or complete dissolution.
It should be noted that each administration case is unique, with a myriad of specific factors and circumstances. As such, the administration period would typically end when its purpose and set goals have been achieved. However, it can also be automatically discontinued after 12 months or further extended if more time is needed to reach the statutory purpose, finalize any potential asset realization, or complete other company administration actions.