Administration: A Definition

What does administration mean?

When a company is no longer earning enough capital to meet its debt obligations, expenses, and other liabilities, it becomes insolvent. Insolvency can prove a death knell for companies, and they may cease trading as a result. Under the Insolvency Act 1986, a struggling yet ultimately viable business may be rescued by the process of administration.

A licensed insolvency practitioner called an administrator thoroughly examines the company’s assets, looks at how the company’s finances can be restructured, and works with creditors to secure the best outcome while trying to salvage as much of the business as possible. An administrator may be appointed by the board of directors, creditors, or the court.

The law states that companies can continue to trade while in administration. However, the administrator takes over the directors’ management and control of the business. The administrator will seek potential outcomes that may save the company, such as a sale to another party or restructuring its business operations to make them more financially viable. Where the business cannot be saved, it will be “wound up”, and its assets liquidated to satisfy the company’s creditors. The government keeps track of all the businesses that go into administration. There is a legal hierarchy of creditors that must be satisfied when a company undergoes liquidation:

• Secured creditors (banks and other asset-based lenders)

• Preferential creditors (employees and in some cases HMRC)

• Unsecured creditors (vendors), customers and trade creditors

• Shareholders

Examples of administration

Now that we know the definition of company administration in this context, we can look at some examples to see how it works in practice.

Note that administration is not necessarily the end for businesses. Indeed, it may lead to more streamlined or cost-effective operational procedures. For instance, a retailer may close all of their brick and mortar stores and liquidate the assets from those stores to satisfy their creditors and trade exclusively online.

That being said, administration is never a great place to be, and whether a business hasn’t caught up with a changing market, suffers from internal mismanagement or is left exposed because of overzealous expansion, administration is typically the last step before liquidation.

Large companies that have failed to navigate the changes to the marketplace and have gone into administration are particularly prevalent in the retail sector, examples being Woolworths, British Home Stores and Arcadia (owner of Topshop, Dorothy Perkins and Burton).

The administration process

Once the administrator takes over, a statutory moratorium is put in place, meaning that the business is protected from enforcement action by creditors. The administrator has 8 weeks to get the company’s finances in order, restructure where possible, and determine whether the business can be rescued as a going concern or whether it should be liquidated.

The administrator puts together a proposal for all of the company’s creditors, and they vote on whether or not to approve the administrator’s proposals. The proposal contains terms of repayment for creditors and projected timeframes for dividends.

The administrator retains control of the business for 12 months. During this time, one of the following outcomes will have come to pass:

• The company has successfully been rescued and control of the company is returned to the directors

• The company has gone into liquidation and the value of its assets has been divided among its creditors

• The company has been dissolved but the administrator was only able to distribute funds to secured and preferential creditors

Frequently asked questions about administration

What is pre-packaged administration?

Pre-packaged administration may be suitable where the insolvency process has caused a business to lose much of its brand value and goodwill, which may, in turn, reduce its chances of being rescued.

Pre-packaged administration means that potential buyers are lined up for the business before it officially goes into administration. The business may be sold in part or in whole quickly after the administration process begins, reducing damage to the brand’s goodwill.

How long does administration last?

The administration process takes 12 months. During this time, an administrator will take control of the company, put together a proposal to satisfy its creditors, and either restructure and rescue the business or liquidate its assets.