Company administration

What is company administration?

Company administration is a formal insolvency procedure under the Insolvency Act 1986 in which an insolvency practitioner is appointed as administrator to take control of an insolvent company, protect it from creditor action and try to rescue the business, or achieve a better result for creditors than an immediate liquidation would.

Administration exists to buy an insolvent but potentially viable company time and protection. From the moment an administrator is appointed a legal moratorium stops most creditor action, so the business can be stabilised, sold or restructured. It is one of the two main company rescue procedures, alongside a Company Voluntary Arrangement, and it is used where a company needs breathing space that a CVA alone cannot give.

How do you know your company needs administration?

A company is a candidate for administration when it is insolvent, meaning it fails the cash-flow test or the balance-sheet test, and it is under active creditor pressure that a rescue procedure could hold off while the business, or part of it, is saved. Administration suits companies with something worth protecting, not empty shells.

The situations where directors most often reach for administration are these.

• A creditor has issued, or is threatening, a winding-up petition and you need the moratorium to stop it.
• HMRC arrears for VAT, PAYE or corporation tax have reached the point of enforcement action such as a bailiff visit.
• The business is fundamentally viable but cannot survive the immediate pressure of its historic debts.
• There is a buyer, or a realistic prospect of one, for the business or its assets as a going concern.
• The company holds valuable contracts, a workforce or goodwill that would be lost in an immediate liquidation.

How does company administration work?

Company administration follows a defined statutory path in which the administrator takes over from the directors, imposes a moratorium, sets out proposals to creditors and then works to achieve one of the three statutory purposes in Schedule B1 of the Insolvency Act 1986. The directors nominate the practitioner, but the administrator acts for the creditors as a whole.

The main stages are as follows.

• Appointment. The company, its directors or a qualifying floating charge holder appoint the administrator, often without a court hearing by filing the paperwork at court.
• The moratorium. A legal moratorium takes effect immediately, halting winding-up petitions, bailiff action and most other enforcement against the company.
• The administrator takes control. The directors' powers cease and the administrator runs the company, deciding whether to keep trading while the position is assessed.
• Statement of proposals. Within eight weeks the administrator sends creditors a statement of proposals explaining how the purpose of the administration will be achieved.
• Creditors consider the proposals. Creditors approve, modify or reject the proposals through a decision procedure such as deemed consent or a virtual meeting.
• Exit. The administration ends by a route that fits the outcome, such as a rescue, a sale, a Company Voluntary Arrangement, a creditors' voluntary liquidation or dissolution.

What are the statutory purposes of an administration?

The administrator must work towards a hierarchy of three statutory purposes set out in Schedule B1 of the Insolvency Act 1986, taking each in order: rescuing the company as a going concern first, then achieving a better result for creditors than a liquidation, and finally realising property to pay secured or preferential creditors. This hierarchy governs every decision the administrator makes.

In practice the three purposes shape the outcome as follows.

• Rescue the company as a going concern. The first aim is to keep the same company trading, restructured and free of the pressure that caused the insolvency.
• A better result for creditors than liquidation. Where the company itself cannot be saved, the administrator seeks a higher return for creditors than an immediate winding up, often by selling the business as a going concern.
• Realise property for secured or preferential creditors. As a last resort the administrator sells assets to pay a secured creditor, such as a bank with a floating charge, or preferential creditors such as employees and HMRC.

What is a pre-pack administration?

A pre-pack administration is a sale of the company's business and assets that is negotiated before the administrator is appointed and completed immediately afterwards, allowing the business to continue trading under new ownership with minimal disruption to customers, staff and suppliers. It is a recognised tool under the Insolvency Act 1986, not a loophole.

A pre-pack sale often preserves jobs and value that a slow, publicised administration would destroy, but it carries safeguards you should understand. Where the buyer is connected to the company, for example the existing directors, the sale must be reviewed by an independent evaluator through the pre-pack pool, and the administrator must justify the deal to creditors. We explain how these rules apply before any sale is contemplated.

How much does company administration cost?

Company administration typically costs from around £5,000 to £20,000 plus VAT and often considerably more, because it is a hands-on procedure in which the administrator runs the company, and the exact figure depends on the size of the business, whether it keeps trading and the complexity of any sale. These are indicative ranges to confirm at a free consultation, not fixed prices, because every company is different.

The administrator's fees are normally paid from the assets and trading of the company rather than from the directors personally, and they must be approved by creditors or the court. Administration costs more than a straightforward liquidation because there is a business to run and protect, so it is worth using only where there is something real to rescue.

Figures are indicative and confirmed in writing before you commit. Ask us for a clear estimate for your company.

What happens to directors in an administration?

In an administration the directors' powers cease and the administrator takes over the running of the company, though the directors remain in office and must cooperate, hand over the company's records and help the administrator understand the business. For directors who have acted properly this is a handover, not a punishment.

Three points matter most to directors personally.

• Loss of day-to-day control. The administrator makes the decisions, but this also lifts the personal pressure of dealing with creditors from the directors.
• Conduct report. The administrator must report on the directors' conduct to the Insolvency Service, which can lead to disqualification proceedings where there has been misconduct, so taking advice early matters.
• Overdrawn director's loan account. If you owe the company money through an overdrawn loan account, it is an asset the administrator must consider recovering. We explain how this is handled before you start.
• Personal guarantees. Any company debt you personally guaranteed, such as bank lending or a lease, remains your responsibility regardless of the administration.

What happens to employees during administration?

When a company enters administration the administrator decides whether to keep employees on to continue trading, transfer them with the business under the TUPE rules on a sale, or make them redundant, and employees who lose their jobs can claim redundancy pay, unpaid wages, holiday pay and notice pay from the Redundancy Payments Service. Employees rank as preferential creditors for certain sums.

Where the business is sold as a going concern, whether by a pre-pack or a later sale, employees often transfer to the buyer and keep their jobs, which is one of the reasons administration can produce a better outcome than an immediate liquidation.

How long does an administration take?

An administration is designed to last no more than one year from the date of appointment, although it can be extended with the consent of creditors or the court where the work is not finished, and the initial protection of the moratorium and the change of control take effect immediately on appointment. The eight-week timetable for sending creditors the statement of proposals sets the early pace.

A pre-pack sale can complete within days of appointment, while a trading administration that works towards a going-concern sale or a restructuring commonly runs for several months. Directors feel the relief of the moratorium from day one, well before the administration formally concludes.

How does administration compare with the other options?

Administration is the right procedure when an insolvent company has a business worth protecting and needs a moratorium to hold creditors off while a rescue or sale is arranged, but it is one of five main options and the best choice depends on whether the business is viable and whether it is solvent. The table below sets out where each one fits.

Not sure whether your company can be rescued or should be closed? Call us and we will tell you honestly.

Why choose NTF for company administration?

NTF Corporate Solutions is a boutique insolvency practice whose administrations are carried out by named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales. You deal with an experienced, named practitioner from the first call through to the exit from administration.

As part of the NTF group, we have helped company directors since 2009, we explain the moratorium, the proposals and any sale in plain English, and the first conversation is free, confidential and without obligation. If administration is the right step for your company, we will act quickly to secure the protection you need.