The Different Forms of Company Administration, Explained

This is when your company goes into what's called company administration. You are looking for third-party assistance to make your business more profitable. This is usually done by hiring an insolvency practitioner.

To preserve the business' value and protect employees, it can also be necessary to sell it. Administration of a company can take from a few hours to two weeks.

Administration is the most common form of insolvency. Liquidation is the next stage of insolvency. Administration is preferred by creditors because they still have the chance to collect the debt. Liquidation is when creditors lose all chance of collecting debt.

Below are the main forms of company administration that you might come across and their differences.

Company Voluntary Agreement

Insolvency professionals may recommend a CVA if a business is financially viable. This is when the business owes creditors, but cannot afford to pay it all at once.

CVAs are legal documents that provide insight into the difficulties of a business. The CVA outlines the time frame for creditors to receive payments and the amount. A CVA cannot be in force for more than five years.

The CVA plan is drafted and the business is protected by a "moratorium." This prevents creditors or other creditors from taking legal action against the business to collect its debts.

The business is officially placed into administration when the creditors have agreed to the CVA. They then hand over all profits to the insolvency practitioners, who distribute it to creditors as appropriate.

Businesses Sold as a "Going Concern"

This process can take one of two forms. It can be either a pre-packaged sale where the business is sold before administrators are appointed or it can be offered for sale on an open market.

Pre-packaged administrations allow the sale to take place immediately after an administrator has been appointed. This minimizes loss of profit and maintains goodwill with creditors. This also ensures that clients and customers are not disrupted, which means that the process is less disruptive. This administration helps to protect the company's brand and assets.

Transferring from Company Administration to Liquidation

There may be assets left that must be realized, or a payment that creditors owe. Liquidation is often the next step in this situation. If the creditors do not receive the money owed, they may threaten enforcement action. The administrator is the liquidator. This process can take up to a year and may be more complicated than administration.

Liquidation refers to the formal closing of a business. This is when all employees are made redundant, and the business ceases to exist.

Administrators may recommend liquidation as the best option right from the beginning in some cases. There are many reasons for this, but the most common is market decline. Consider the decline of Blockbuster and other major video rental companies as an example of how viewers have shifted to streaming movies. This can also happen if a major client leaves your company or goes through liquidation.

Benefits of Going into Administration vs. Liquidation

It is not something that anyone likes to see when their company has financial difficulties. Administration can have a few advantages over liquidation.

The issue was discovered early. If you waited, your business could have been liquidated.

You have the option to seek protection from creditors. Working together with administrators will give you some level of protection, which can prevent any further legal action.

You have more capital. The funds remaining at the end are usually greater than the liquidation.

There is little disruption to your business. Contracts that are not in the best interest of the business can be canceled.

Employees are not fired. The administrator does this in the best interests of the company.

The Company Administration has its own warning signs

It's best to seek professional advice immediately if your company is experiencing cash flow problems. You could end up spending a lot of money on restructuring your business if you wait too long. This will mean that you won't have enough cash to pay an insolvency practitioner to turn your business around.

If you are aware of cash flow problems but don't seek help, an insolvency practitioner may charge you with wrongful trade. This could mean that you are disqualified as a director for up 15 years, and may be personally liable for a portion of the company's debts.

Although the company administration process and its many routes can seem complex, they are not. The Simple Guide To Company Administration is a comprehensive guide to company administration by the Insolvency Specialists.