What is Administration?August 28, 2019
For years now, customers have flocked online, leaving the high streets barren. In their masses, clothing retailers have dissolved or moved to the digital space in a bid to recoup their losses.
Pretty Green, the clothing store brainchild of former Oasis front man, Liam Gallagher, is one of many retailers that have felt the impact of the high street abandonment first hand.
Pretty Green had been operating at a loss throughout 2017 and 2018 and were hopeful of raising investment to lift them back onto their feet. Instead, relying heavily on their 33 concessions within House of Fraser, Pretty Green's prospects looked even poorer when the iconic department store went into administration. They were left stinging, a further £500,000 out of pocket.
With 12 stores across the UK and over 100 employees on the payroll, Pretty Green were forced to declare insolvency and enter into administration, leaving them and their appointed insolvency practitioner to review different strategies to settle debts and recover the remains.
When JD Sports put their offer on the table to absorb Pretty Green into its extensive portfolio of fashion brands, the company was saved. With their company restructure, every store but its Manchester flagship was closed, putting almost the Pretty Green entire workforce out of work. The brand had fallen but had narrowly swerved liquidation. Only time will tell how the brand will fare from now on.
But what is administration exactly? Why do companies enter into it and what is the end result? In this article, I'm going to talk to you about the administration process. I'll firstly explain what administration is, what happens during the process, what options a company in administration has, how long it can go on for, and I'll weigh up the pros and cons of the process.
What is administration?
When a company is no longer able to pay off its debts, they can enter into a state called "business administration". By requesting an administration order, a court-ordered moratorium is placed over the insolvent company. This essentially places a protective bubble over them that stops legal action being taken against them by their creditors, landlords, HMRC, or bailiffs until the period of administration ends. The company's assets are protected for the time being.
While they are in this protected state, the company is assigned an administrator who will assume control of the company in place of the company directors. This administrator must be a licensed insolvency practitioner and they will work with the directors to devise the best course of action for the business to take.
When the administrator is deciding on the best plan of action, they have three main concerns driving them:
- To save the company as a going concern.
- They want to achieve a better result for the creditors than liquidating the company.
- They want to pay off the secured and preferential creditors.
Aim 1 is rarely achieved, but Aim 2 (and Aim 3 thereafter) are more likely reached.
Entering into administration gives insolvent companies some welcome breathing space from their creditors, allowing them to pool their resources together and draw up a plan for going forward. It is not a permanent solution, however, but rather a temporary measure to give the insolvency practitioner and directing team time to come up with their strategy without the strain of debt repayment constantly looming over them.
What happens when a company goes into administration?
There is a deal of preparatory work to be done in the lead up to entering into administration but the process of obtaining the actual administration order can be done very quickly. What you might expect to be a long back and forth via snail mail, signing hundreds of forms and filing requests and transferring calls to multiple departments at multiple locations is actually a fairly straightforward process.
Prior to applying for the administration order, the company has to organise a deal of paperwork. They should include:
- How much debt they owe, to whom, the type of debt, and whether it is joint debt with another party.
- Information about any repayments they are making, including the type, to whom, and how much.
- A budget sheet outlining their income and spending per month.
Once this has been gathered, the company can proceed with their administration application.
Application and Appointment
To get an administration order, the insolvent limited company or limited liability partnership simply needs to fill out a few forms and have them sworn at a solicitor's office. These forms are then taken to court, stamped by the court clerk with the time, date, and case reference number. The company is then in administration without the need to see a judge. The out-of-court filing of the appointed documents is the most common route for obtaining the order.
After this, the first step in the administration procedure is for the insolvent company to appoint their administrator. It is not normally the court that appoints the administrators, but rather the company itself or their floating charge holder. Ultimately, the administrator has to steer the company towards the most appropriate end course of action, whether it be resurrecting it by reducing debt, resale, or dissolution.
Within 8 weeks of the administration order, the administrator must contact all of the company's creditors to set out their proposals in the form of a written report. If more than 10% of the creditors want to meet to discuss the plans, they need to coordinate a meeting within 2 weeks.
Whatever the administrators suggested proposal, they need to work on a strategy to materialise these plans through measures like:
- Making redundancies, whether it be of individual posts, whole branches or divisions.
- Selling elements of the business to new owners.
- Selling off assets to generate more funds to pay the creditors.
- Continuing trading to boost the company's value.
When the administration process ends, the company will either:
- Be saved and continue business again with a stronger cash flow and financial strategy to repay their remaining debts.
- Have their business and assets saved through a sale to new owners, but the original company shell will not be saved.
What options does a company have after it goes into administration?
Companies entering into administration have a few options, which I've listed below:
This is a form of selling, often referred to as a pack sale, that is coordinated before the administrator is actually appointed. When a buyer has been agreed on, the administrator then oversees the remainder of the sale process.
The buyers of the company can be the existing directors with a new company called a "newco". They will receive the assets but the old company will keep their debts. This is only a viable option if it can be proven that it's the most profitable option, providing the best outcome for the creditors.
Pre-pack sales have taken some flack as it can appear that it's a roundabout way of the company ditching their debt and carrying on trading. In fact, they are very tightly controlled, so the price paid by the buyers should be far higher than an open sale later on in the administration process, which is beneficial for the creditors.
If the administrator believes that the company has the potential to become profitable again in the future, there is the option to sell it on to new ownership. Before the sale, the administrator will take steps to improve the sale value so the company can generate a greater cash lump sum to pay their creditors with.
Company Voluntary Arrangement (CVA)
During the administration period, the company can try and raise money to pay off a significant portion of their debt. They may devise an agreement (a CVA) with their creditors to develop a repayment schedule and to restructure their business to boost future profitability. This might involve exiting certain markets, renegotiating agreements with their landlords of suppliers. A CVA allows the company to carry on independently out of administration with a battle plan to ensure they keep their debt low.
How long can a company be in administration?
The initial administration process can last up to a year, but in certain circumstances, the company can ask for an extension.
The administrator appointment stage can last anywhere between a couple of hours to two weeks.
The administrator is expected to carry out their plans at a "reasonably practicable" speed, but they must meet their first 8 week deadline to get their proposals out to creditors after their appointment to the case. If the case lasts longer than 6 months, the administrator has to give the creditors a progress report and submit files to the Company House.
After a year, the administrator's contract automatically ends, though it can be renewed. The company cannot be in administration permanently and must follow through with their proposals to creditors at a reasonable speed.
What are the advantages of administration?
A business doesn't need to go into administration when they become insolvent - they could opt for another route, like immediate insolvency. Here are some of the advantages of entering into administration:
- It provides temporary protection from legal action. The stress of catching up with repayments and fielding off notices from creditors can become overwhelming. When an insolvent company is trying to get back on their feet with a concrete plan, the protection of being in administration allows them to create a recovery plan without the fear of being forced into compulsory liquidation.
- An expert takes the reigns. Having an administrator appointed to take control of your business means that you have access to an unbiased, objective, expert perspective on your business affairs. They might identify opportunities to raise capital or release assets that your own team might overlook.
- It avoids immediate, unnecessary liquidation. Some businesses in these strained financial situations may fear that liquidation is the only option. Entering into administration gives you the time and resources to consider alternative routes so you can still salvage parts of or all of your business.
- Good for creditors. The administrator's role is to ensure that as much of your business's debts are paid off as possible, which is music to your creditor's ears and helps to wipe your business's slate clean.
What are the disadvantages of administration?
Whilst there are many positive points to this business rescue procedure, there are some downsides which might concern businesses entering into it:
- Directors lose control. During the process, the administrator is in the driver's seat. The directors play a secondary role and if the administrator believes the best option is to close up shop and sell the business on, they can lose their position of power to a third party.
- It's a public event. When a business goes into administration, it's not a well-kept secret. It's publicly available information. For businesses looking to revive themselves at the end of the process, they may have to work hard to build trust with their customers, suppliers, and shareholders.
- It can be very expensive. Since the process of administration can be very lengthy, your company may have to raise funds to pay off creditors and pay the administrator's fees for several months, and sometimes over a year. If your company is sold or liquidated, this reduces the overall amount that the creditors receive, one of the main aims of the process. It can take its toll on a small business.
Are you insolvent or heading for insolvency?
It is a difficult area to navigate when your business becomes insolvent. With creditors demanding payments, employees needing paid, and day-to-day business to resume, it can become very overwhelming and liquidation might start to look like your only option.
It's important that you seek professional advice as soon as possible to ensure that your business stands the best chance of remaining viable if you decide to go through the process of administration. If you're unsure what steps to take, please contact the team at 180 Advisory Solutions today for confidential, non-judgemental, free initial advice.