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A Guide to Company Administration for small business owners

November 28, 2016

The purpose of putting a company into administration is one that’s widely misunderstood by business owners. So to help de-mystify what’s involved and what it entails; here’s a guide to the company administration process;

Company Administration: An introduction

Administration is an insolvency process where an administrator manages an insolvent company.

The administrator will seek to achieve one of three objectives:

1. The first is to restore the company to profitability.

2. If that is not possible, the administrator will seek to achieve a better return for the company’s creditors than they would otherwise have received on a liquidation of the company.

3. If neither of the first two objectives is possible, the administrator’s aim is to realise the company’s assets and distribute it to its creditors.

Administration is meant to provide a viable alternative to liquidation for companies of all sizes, and, when used in the right situation, can be a powerful tool for turning companies around.

During administration, the company benefits from a moratorium: its creditors are not able to take it to court for outstanding debts or force the company into liquidation for the period that the administration lasts.

RELATED: 8 Signs a Company is Approaching Insolvency

What happens during an administration?

An licensed insolvency practitioner will be appointed as an administrator of the company. The administrator takes control of the company from the directors and manages it accordingly. The administrator has a wide range of powers that allow him to do anything necessary for the business and management of the company.

After his appointment, the administrator will examine the affairs of the company then make a statement declaring which of the three objectives they deem to be suitable. They must make this statement within eight weeks of their appointment.

Once the administrator has declared their objective, they will take appropriate action to realise this objective. These actions range from continuing to run the company in order to make it profitable once again, selling it as a going concern or selling the company’s assets then commencing a liquidation process to distribute the proceeds to the company’s creditors.

Is administration suitable for your business?

Administration will only be suited to companies where there is scope for the company to be profitable in the future. It’s an insolvency process, so should only be used for companies that are insolvent.

It’s also expensive: the company will have to pay the administrator’s fees for the duration of the administrator, which can place an additional financial burden on an already struggling business. If your business is very small, you will need to consider whether administration is a viable option costs-wise.

You should note that the administrator acts on behalf of the company’s creditors, not the company’s directors, which may mean that they make decisions you do not agree with.

Administrators take over the majority of the duties of the directors, so you are essentially handing over control of the party to a third party. If there is a disagreement between the company’s directors and the administrator, the administrator’s will prevails. These are serious things that you should consider when thinking about whether administration is suitable for your business.

You should also consider whether other options, such as a Creditors’ Voluntary Arrangement might be a better choice for the company. If a Creditors’ Voluntary Arrangement (CVA) can be agreed with the company’s creditors, it might be a better choice as the directors retain control of the company.

There are, however, many advantages to the administration process: not least the moratorium placed around the company.

Additionally, the administrator is an independent third party and will have experience turning failing companies around, so they will bring a fresh perspective and new knowledge to the company during the administration.

RELATED: Bytestart’s Guide to Insolvency, Liquidation and Bankruptcy

Who can choose whether the company goes into administration?

Broadly, there are three sets of parties who are able to put a company into administration: the company’s directors, the company’s shareholders and the holders of a qualifying floating charge over the assets of the company (this will usually be a bank).

The process is different depending on which of the three categories is putting the company into administration, so it’s always advisable to seek professional advice tailored to your particular circumstances.

How long does a Company Administration Last?

Administrations automatically end after one year. They can be ended earlier if the administrator achieves one of the three objectives prior to end of that year long period.

Additionally, the administration can be extended beyond the year-long period, and often is where there are large and complex companies involved.

Conclusion

Administration is a viable option for many struggling companies and can help restore a struggling company to profitability. It can be difficult to justify the costs for small businesses, particularly if other courses of action, such as Creditors’ Voluntary Arrangements are a workable alternative.

About the Author

This article has been written exclusively for ByteStart by Company Debt, one of the largest insolvency hubs on the web and a leading company turnaround and rescue practice.

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