What do I need to know about the process of administration?
Despite the fact that recent data from the government’s Insolvency Service has revealed that the number of businesses going into liquidation recently dropped by a figure of 17.9% year-on-year, the UK’s stagnant economy means that a number of firms have recently fallen into administration, while others are teetering on the brink of financial collapse.
Here is brief guide to a business administration and how it will affect your company:
How does a company enter administration?
A company enters the process of administration when it is about to become or is already insolvent, and control of the company’s operations are then transferred from the directors into the hands of the insolvency practitioner.
There are three main ways a company can enter company administration, by an order of the court; appointment by a qualifying floating charge holder; and appointment by the company or its directors.
An administration normally lasts for one year, but can last for longer depending on the individual circumstances of a company. During that time a moratorium is put in place preventing creditors taking legal action against the business to recover their debts.
What are the key objectives of administration?
One of the central objectives of administration is to attempt to rescue the company so that it can continue as an ongoing concern. However, if this is not possible then the administrator or an appointed liquidator - which may be the same person - may consider putting the company into liquidation, where the assets of the business are distributed to creditors.
Secured creditors will take the proceeds of the sale of secured assets, while the sale of any other assets that are realised by the administrator will go to the unsecured creditors. For unsecured creditors these proceeds will be shared according to the pari passu principle, which means that these assets are shared amongst unsecured creditors in the proportion of debt owed to each unsecured creditor.