What is administration?
The process of administration is one of the possible outcomes for a company if it becomes insolvent.
An administrator will be appointed to effectively run the company, try to keep it functioning as a going concern and try to ensure the creditors get a return on the money owed to them.
The idea behind the process is, therefore, to rescue the company so that it continues to run as a business.
Several high-profile football clubs have been placed in administration in recent years along with large high-street retailers.
Administration may be seen as a preferred option to liquidation (when the company ceases to exist) if it is felt that if the business is allowed to continue it may be able to recover at some point.
Recent changes to administration process
There were changes to the system of administration which were implemented in 2003 which aimed to tackle the expensive nature of administration along with the fact it favoured certain creditors over others.
As a result of these changes it is now possible for the company or its directors to appoint an administrator without having to go through the courts. This not only saves on costs but also allows the process to take place a lot quicker, which is vital given the state a company facing administration is in.
The changes also allow more creditors to be able to petition to put the company into administration, give the administrator more powers to make payments to creditors, and remove provisions which favoured certain types of creditor.
Why favour administration?
Given that there are other systems of corporate insolvency, such as compulsory liquidation and a creditor’s voluntary liquidation, which are also open to the directors of the company, and in some cases the creditors, why then would the process of administration be favoured?
One significant advantage is the fact that as soon as the company is placed into administration there is a freeze on the creditor’s actions (commonly known as a moratorium).
This is a huge advantage as the creditors are prevented from trying to place the company into liquidation and cannot immediately try to claim back all monies owed.
The main advantage is the obvious fact that the company avoids being wound up and is able to continue running as a going concern.
However, administration should not be seen as a way of reducing the creditors’ powers to try to liquidate the company, or as a way of protecting the company’s assets from the creditors.
The administrator is appointed and has a duty to try to achieve a better result for the creditors of the company than would have been the case had the company been placed in liquidation.
Often, therefore, a creditor will prefer to place the company in administration rather than liquidation as it may well see a greater return on the money owed to it in the long term.
Administration is one of a number of processes that can occur when a company is facing insolvency; all of the options should be discussed with a lawyer before a decision is taken as to what is the appropriate method.
In these circumstances, getting legal advice from a solicitor is vital as often the creditors can take the issue out of the director’s hands by making a petition to the court themselves.
Anybody whose company is facing liquidation should, therefore, contact a solicitor as not all options may be appropriate to your specific circumstances and in all cases a strict procedure must be followed.