Administration is a formal insolvency procedure.

A licensed insolvency practitioner is appointed as administrator and takes control of the company’s affairs, business and property.

The administrator then decides how best to achieve the statutory purpose of the administration.

In practical terms, that might mean:

• Keeping the company trading while it is restructured
• Trying to rescue the company itself
• Negotiating a CVA
• Selling all or part of the business as a going concern
• Selling assets in an orderly way
• Ultimately moving the company into liquidation or dissolution

Administration therefore does not necessarily mean that the business closes.

The legislation gives administration three possible objectives, in a particular order.

• Rescue the company as a going concern
  This is the first objective where it is reasonably practicable and produces the appropriate outcome.
• Achieve a better result for creditors than an immediate winding up
  This is frequently what administration achieves in practice — for example, by trading the business for a short period and selling it as a going concern rather than simply closing the doors.
• Realise property for secured or preferential creditors
  This objective is used where the first two cannot reasonably be achieved and the statutory conditions are met.

This is why “going into administration” does not necessarily mean that the company will survive. Sometimes the business survives through a sale even though the original company does not.

One of administration’s biggest advantages is the statutory moratorium.

Once the company is in administration, creditors are generally prevented from starting or continuing many forms of legal and enforcement action without the administrator’s consent or permission of the court.

That can provide valuable breathing space where the company is facing:

• A winding-up petition
• Court enforcement
• Sheriff officer action
• Other creditor pressure threatening the business

But timing matters.

Do not wait until the last possible moment and assume administration can automatically undo enforcement that has already taken effect.

No — not in the ordinary sense. This is a major difference between administration and a CVA.

In a CVA, the directors normally continue running the company. In administration, the administrator takes control of the company’s affairs, business and property.

The administrator can decide, for example, whether to:

• Continue trading
• Stop part of the business
• Sell assets
• Sell the business
• Make employees redundant
• Renegotiate or terminate contracts where legally possible

The directors remain directors, but they cannot simply continue making decisions as though the administration had not happened.

Administration tends to make most sense where there is something substantial to protect.

For example:

• A viable business that could be sold as a going concern
• Significant employees and customer contracts
• Valuable intellectual property or goodwill
• A profitable part of the business that can be preserved
• Assets that will produce a better return through an orderly sale
• Serious creditor action that threatens an otherwise viable rescue
• A restructuring that requires temporary protection from creditors

Administration is particularly useful where simply stopping trading immediately would destroy value.

Administration is a relatively substantial formal insolvency procedure.

It may not make commercial sense where:

• The company has already stopped trading
• There is little or no business value to preserve
• There are few assets
• The business has no realistic purchaser
• There is no funding to trade during the administration
• A straightforward CVL would achieve essentially the same result

For many smaller owner-managed companies that simply need to close, a Creditors’ Voluntary Liquidation may be more proportionate.

We would not recommend administration merely because it sounds like a more sophisticated insolvency procedure.

Yes, if the administrator believes that doing so helps achieve the purpose of the administration.

Trading might continue for days, weeks or longer while the administrator:

• Looks for a buyer
• Completes profitable contracts
• Preserves customer relationships
• Protects the value of the business
• Develops a restructuring proposal

But continuing to trade requires funding.

If there is no cash, available finance or trading income to support the administration, a prolonged trading period may not be realistic.

Fraudulent trading is more serious and involves dishonesty.

The Insolvency Act allows the court to order a contribution where the company’s business has been carried on with intent to defraud creditors or for another fraudulent purpose and the relevant person knowingly participated in that conduct.

Ordinary commercial failure, poor forecasting or a business decision that turned out badly is not the same thing as fraudulent trading.

If there are concerns about deliberate deception, false representations or misuse of company funds, specialist legal advice may be appropriate.

A pre-pack administration usually describes a situation where a sale of the company’s business or assets is negotiated before the administrator is formally appointed and completed shortly after the administration begins.

That can sometimes preserve more value because the business spends less time trading in an uncertain insolvency process.

It can also help preserve:

• Jobs
• Customer contracts
• Goodwill
• Supplier relationships
• The value of the trading business

A pre-pack is not a separate type of insolvency. It is a way in which a business sale can take place within an administration.

Potentially, but there are important safeguards.

A company controlled by the existing directors may sometimes offer to buy all or part of the business from the administrator.

The administrator’s job is not to favour the directors. Any sale has to be considered by reference to the interests of the administration and creditors.

There are also specific rules where a substantial disposal is proposed to a connected person during the first eight weeks of administration.

Unless creditors approve the transaction, the connected purchaser generally needs to obtain an independent evaluator’s report for the administrator to consider before completing the disposal.

So a director cannot simply put the company into administration and move the business into a new company on whatever terms they choose.

It depends on what the administrator intends to do with the business.

Some employees may continue working if trading continues or the business is being sold.

Others may need to be made redundant quickly if there is no work or insufficient funding.

Where a business transfers to a purchaser, employment-transfer rules may also need to be considered.

If your company has a significant workforce, employee issues should therefore form part of the administration planning from the beginning.