Is Company Administration the right option for your business?
If your company is insolvent and cannot pay its debts when required, it could be at risk of liquidation. Company administration provides an avenue for your company to restructure its operations and achieve a better result for its creditors.
Administration is a powerful legal procedure that lets you refocus and recover your company while avoiding the threat of liquidation. Company administration involves your business working with an insolvency practitioner to restructure and recover.
Entering into company administration has many benefits, especially for a company that is commercially viable but is struggling with excessive debts and threats from creditors or potential lawsuits.
However, it’s not the only solution for your business, nor is it the ideal one for many companies. Not all struggling businesses will benefit from entering administration; some may be better suited to other arrangements with their creditors.
What is company administration?
Company administration is a legal procedure that allows your company to protect itself from legal action and restructure to continue trading. Administration allows insolvent companies to work out whether continued business is possible.
Administration can have several objectives. Many companies enter administration in order to restructure their operations and recover their business. Others go into administration to sell a property in order to raise funds to repay creditors.
Finally, some companies enter into administration to maximise the return to its creditors. Administration often allows companies to generate more cash and pay more to creditors than in liquidation.
Administration offers a number of benefits for your company, as well as numerous downsides. Although it isn’t suitable for all companies, it could be your best option for restructuring and recovering your business.
What are the benefits of company administration?
Not every company benefits from entering into administration. Companies that are insolvent, with a reasonable amount of assets (such as property, equipment or bank account funds) and stable cash flow are most suitable for company administration.
Generally, company administration is a response to pressure from creditors to pay back debts. If you are concerned that your company could be taken to court by its creditors, administration can provide you with the legal protection you require.
One of the biggest advantages of company administration is that it places on hold all legal actions placed against your company. Entering administration protects your company from the threat of liquidation via a winding up order.
Administration also gives your company time to review its financial position and put together a plan for repaying creditors. Your administrator will work in the interests of your company’s creditors to prevent their position from becoming weaker.
If your business is burdened with debt but is still commercially viable, entering into administration can allow you to protect continuity through a pre-pack or propose a Company Voluntary Arrangement (CVA) to repay creditors over a certain period.
What are the downsides of company administration?
There are several downsides to company administration. There are also situations in which administration may not be the best solution for your insolvent company to repay its creditors and recover.
Administration is best suited to businesses with significant assets and predictable, steady cash flow. If your company has limited assets and weak cash flow, it may be more beneficial to propose a Company Voluntary Arrangement instead.
One of the biggest downsides of company administration is that it requires you and other directors to give up control of your company. The administrator will manage your company’s affairs throughout the course of the administration itself.
Another downside of administration is that it’s public. Companies in administration are legally required to inform their clients, creditors and employees that they are in administration via a note specifying so in invoices and other correspondence.
Administration is an expensive process and is only suitable for companies with sufficient cash flow and assets. Small companies with limited assets and cash flow are often better suited to a Creditors’ Voluntary Liquidation (CVL) or CVA in the event of insolvency.
If your company is insolvent and faces the threat of legal action from its creditors, it may be in yours, the company’s and its creditors best interests to consider appointing an Administrator. However, administration is not for all companies and may not be your best step forward.