Is your company insolvent? Entering into administration is one of the most effective ways to protect your company from being wound up by its creditors and, if possible, create the right conditions for a financial recovery.
While many companies can benefit from entering into administration, the process has both advantages and disadvantages. In many cases, administration may not be your company’s best solution for ending creditor pressure and exiting insolvency.
Pre-pack administration also has both advantages and disadvantages. Read on to learn more about the benefits and drawbacks of entering into administration or selling your company’s assets through a pre-pack administration sale.
Advantages of entering into administration
Your company is protected against legal action from its creditors
One of the biggest advantages of administration is that it protects your company from being liquidated by its creditors. Entering into administration shields your company against legal action from its creditors, such as a winding up petition.
In many cases, creditor pressure can prevent your company from implementing a good long-term solution to its financial issues. Entering into administration gives your company time to turn around without the threat of creditor pressure.
Control of your company is given to a professional administrator
Although this can also be viewed as a disadvantage, handing over control of your company to an administrator is often a benefit. This is because the administrator will have extensive experience turnaround around struggling companies.
It’s often difficult to make the best decisions for your business, particularly if you have a long trading history. An administrator can take an objective, unbiased look and efficiently implement solutions that benefit the company and its creditors.
If your company is viable, it can usually avoid being liquidated
Although there is no guarantee that entering into administration will protect your company from voluntary liquidation, if your company is viable there is a significant possibility that it can exit administration and continue trading.
Administrators typically aim to help a company recover as a first priority, as this is usually the best outcome for creditors. Only if a company isn’t viable will voluntary liquidation be used to create liquidity for creditors.
Your company can still propose a CVA while it’s in administration
If your company is viable and simply needs help or additional time to pay its debts, it can propose a Company Voluntary Arrangement to its creditors while it’s already in administration.
If the CVA is accepted, the company will exit administration and begin the process of repaying its creditors. Entering into a CVA is one of the most common and effective ways for viable but distressed companies to successfully exit administration.
To preserve the business, you can use pre-pack administration
Even if a business is insolvent, it may have the potential to continue trading once its debts are removed. Through pre-pack administration, you can preserve some parts of your business through a pre-packaged sale to the company’s directors.
Although your company’s directors will need to pay the market price for company assets, entering into a pre-pack administration sale is often the best outcome for a company’s creditors and its directors, as it generates cash and creates continuity.
Disadvantages of entering into administration
Entering into administration means giving up control of your company
Unlike proposing a CVA to creditors, entering into administration means you will need to give up control of your company. An insolvency practitioner is appointed and will act as administrator while the company is in administration.
For many directors, giving up control of a company is extremely difficult. If your company is insolvent, understand that the administrator will work effectively to facilitate a recovery and create the best outcome for the company’s creditors.
The administration process can cost your company a significant amount
Since administration can take several months – in some cases, longer than one year – to complete, it can be quite expensive. Your company will need to pay all fees for the administrator, which can quickly add up in a complex case.
These fees are typically deducted from payments to creditors. Although this doesn’t result in any direct costs for your company’s directors, it can significantly reduce the total amount your creditors receive through liquidation or a pre-pack asset sale.
Administration is public, so your customers and creditors will know
Companies that enter into administration are required to alert their customers and creditors. Your company will need to note that it’s in administration on its invoices, letters and other communications with customers and creditors.
Your company is also required to notify its employees of its administration. In some cases, entering into administration can result in difficulties retaining staff, as many staff members may question the ability of the company to recover financially.
Advantages of using pre-pack administration
You can preserve certain parts of the business and create continuity
Typically, liquidation results in a company losing all of its assets, including contracts with existing customers. Selling assets through a pre-pack administration sale gives you the ability to preserve certain parts of your business, creating continuity.
Instead of watching as the company you’ve built is dismantled and sold to generate cash for creditors, entering into pre-pack administration makes it possible to keep the business and continue trading as a new company.
In pre-pack administration, you can remove debts and some contracts
One of the biggest advantages of pre-pack administration is that your company can continue trading without onerous debts. You may also be able to remove contracts that affect your company’s solvency or ability to grow.
This makes pre-pack administration a great option for companies that have a large amount of potential but are held back by significant debts that prevent them from being able to grow or continue operating.
Pre-pack administration is more affordable than company administration
Administration is often a long and involved process that involves an administrator working with your company over several months. In some cases, the administration period can last for longer than one year.
This makes administration an expensive endeavour for many companies. A pre-pack administration sale, in contrast, is arranged very quickly and usually takes very little time to implement, resulting in lower costs for your company.
Since assets are sold immediately, company operations are usually not affected
Due to the limited amount of time required for a pre-pack administration sale, the process can often result in your business trading without any serious interruptions or issues.
In many cases, businesses can be transferred from one company to a new company within a day. This allows your business to continue trading without ever having to close its doors or delay its delivery of products and/or services to its customers.
Disadvantages of using pre-pack administration
Pre-pack administration can result in negative attention for your company
Although pre-pack administration is a highly effective insolvency procedure that’s often the best option for creditors and directors alike, many people have a negative view of pre-pack asset sales.
This view can often affect customer perception of your company. A pre-pack asset sale can often result in some level of dissatisfaction from staff, particularly people whose jobs are not transferred to the new company.
There are limitations on what you can change in pre-pack administration
Although pre-pack administration allows you to make some large-scale changes to your business, there are significant restrictions on your ability to remove staff in a pre-pack administration sale.
The Transfer of Undertakings (Protection of Employment) regulations, which are better known simply as “TUPE”, are designed to protect the jobs of employees in a pre-pack sale.
When your business is sold through a pre-pack administration sale, you’ll need to ensure any changes made to the business fully comply with the TUPE regulations.
The purchaser will need to pay the full market price for company assets
Pre-pack administration is not an opportunity for your company’s directors to buy its assets at a reduced rate. In a pre-pack sale, your company’s assets are valued by an independent appraiser to determine their fair market value.
In order to purchase the business and continue trading, you’ll need to pay the full market price for the company’s assets. In some cases, the directors may be able to pay for assets over an extended period using a payment plan.
Does your company need expert help?
If your company is insolvent, you need to take immediate action to prevent creditors from winding it up. Entering into administration protects your company from being subject to a winding up petition, making it a powerful and effective solution.
In administration, your company may be able to negotiate a CVA with its creditors, sell specific assets to create liquidity and become financially solvent, or enter into liquidation voluntarily to raise cash and pay its creditors.
You may also be able to sell the business via a pre-pack administration sale, giving your company’s directors the opportunity to continue running the business while ensuring creditors are paid a fair price for the company’s assets.
Contact us to speak to an insolvency expert and learn more about the administration and pre-pack administration processes. We can examine your company and provide detailed advice to ensure both your company and its creditors are treated fairly.