Directors of insolvent companies have a few options at their disposal for dealing with debt. One method is voluntary liquidation, which allows directors an efficient method of winding up their company and paying back outstanding creditors. However, liquidation marks an end for the company in question, resulting in it being removed from the Companies House register. Administration may be the better option for directors who would prefer a procedure that can breathe new life into their company. But what does it mean when a company goes into administration?
In this article, Clarke Bell will answer this question, discuss the wider procedure, and cover what happens to a company going into administration.
What is company administration?
Company administration is a type of insolvency procedure used by an insolvent company. It is a voluntary arrangement, allowing directors to appoint an insolvency practitioner of their choosing to the role of administrator. This allows companies facing financial difficulties to use the procedure to deal with company debts, ensuring a favourable outcome for both the company and its creditors.
Once a company has been entered into administration, the administrator will attempt to get the company back on track. This will be done by drafting and implementing a business recovery plan, which aims to restore the company to a stable level of profitability. This is a win-win, as both directors and creditors benefit from this approach. However, not every company can be restored to profitability. For such companies, one of two strategies will be employed; the company will be prepared for sale, or it will be liquidated. The administrator will make a choice on behalf of the company, depending on which is most profitable. This is typically only reserved for a terminally insolvent company.
What happens to a company going into administration?
As mentioned previously, company administration has three objectives that an administrator will pursue based on the scenario in question. In the overwhelming majority of cases, the primary objective will be to rescue the company as a going concern. In other words, the administrator will attempt to lessen the financial pressure faced by a company and bring it back to profitability, to the benefit of both directors and creditors. This can be achieved through implementing a business rescue plan, or through a Company Voluntary Arrangement (CVA).
If the company cannot be returned to profitability, the administrator will pursue another objective instead. This next objective is usually arranging the sale of part or all of the company, or its assets. If a buyer or buyers are found, the administrator will act to sell the company as a going concern, with the intention of raising enough money to repay outstanding creditors. In some cases, directors may be able to place their company into pre-pack administration. In essence, this offshoot of company administration involves the pre-arrangement of the sale of a company before the administration process begins. While the buyers of the company are often not affiliated with the company, it is possible for individuals linked to the company, even its own directors, to make a purchase in some cases. However, there are guidelines for doing so, and it is vital to follow them to avoid facing legal action.
If the prior two objectives cannot reach a good result, the administrator will lastly pursue liquidation. Regardless of the liquidation procedure used, the company’s assets will be sold and its accounts emptied to raise the funds required to repay creditors. Once these distributions have been made, the company will be wound up and removed from the Companies House register.
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Alternatives to company administration
While company administration is a viable method to handle a company’s debt, it isn’t always the best method. Depending on their specific circumstance, some companies may benefit more from an alternative procedure.
Company Voluntary Arrangement
A Company Voluntary Arrangement is a procedure that is sometimes carried out as part of company administration. It is a voluntary procedure, one where the insolvency practitioner appointed by company directors will negotiate with creditors. This negotiation aims to reach a new loan agreement suitable for both directors and creditors, by lessening the financial pressure on the company, but still ensuring creditors receive their payment. For example, a new loan agreement could include repayments spread out over a longer period of time, deferred interest payments, and so on. If creditors approve of the proposal, the new terms can be implemented.
Creditors’ Voluntary Liquidation
Although there are advantages for a company going into administration, terminally insolvent companies are more likely to benefit from other procedures. One such example is Creditors’ Voluntary Liquidation (CVL). This procedure offers terminally insolvent companies a series of significant benefits, starting with the ability to appoint a liquidator of the directors’ choosing. The liquidator will then take the helm of the company, identify assets and accounts, realise them efficiently, and distribute the proceeds to outstanding creditors. Once all distributions have been made, the company will be wound up and struck off from the Companies House register.
In addition to an efficient method of closing a company, the CVL process offers several legal benefits to directors. Once entered into a CVL, the company in question will be shielded from legal action. This essentially prevents creditors from filing a winding-up petition and starting a compulsory liquidation, protecting directors from the consequences that follow this procedure. Moreover, as the procedure is voluntary, it demonstrates a willingness of directors to act in the best interests of their company’s creditors. This provides a strong defence against accusations of misconduct, and greatly decreases the likelihood that such allegations are made in the first place. Lastly, any debts that remain outstanding once the company is closed will be written off, provided a personal guarantee did not secure them. Any debts that are guaranteed must be repaid from the signatory’s personal finances.
Clarke Bell can help
If your company is facing financial problems, don’t struggle alone; let Clarke Bell help. We have more than 28 years of experience in helping companies handle their debts in the best ways possible, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.
