What Does It Mean If a Company Goes into Administration?

When a company goes into administration, it often raises alarm bells for employees, creditors, and other stakeholders. However, understanding the intricacies of company administration, its differences from insolvency and liquidation, and its potential outcomes can provide clarity in these uncertain times. 

Here, we aim to demystify the concept of company administration, explain what insolvency entails, and highlight the difference between liquidation and administration. 

What is company administration?

Company administration is a legal process that occurs when a company is unable to pay its debts and seeks protection from creditors to restructure its affairs, repay debts, or ultimately, avoid liquidation. This process is overseen by an appointed administrator, typically an insolvency practitioner, whose primary goal is to rescue the company as a going concern.

What is insolvency?

Insolvency is a financial state where a company cannot meet its debt obligations as they fall due. Insolvency can be shown  in two ways:

  • Cash-flow insolvency: When a company cannot pay its debts on time.
  • Balance-sheet insolvency: When a company's liabilities exceed its assets.

Insolvency is a precursor to more formal proceedings like administration or liquidation, where legal mechanisms are used to address the financial distress of a company.

Administration vs. liquidation

So, where does administration and liquidation come to play? Understanding the difference between liquidation and administration is crucial for stakeholders to grasp the potential outcomes of a troubled company. Let’s look at the key differences between administration and liquidation. 

Administration

According to Gov.UK “When a company goes into administration, they have entered a legal process (under the Insolvency Act 1986) with the aim of achieving one of the statutory objectives of an administration. This may be to rescue a viable business that is insolvent due to cashflow problems.”

So, the aim of administration is to rescue the company as a going concern, meaning the company still has the ability to be financially stable. If this isn't possible, the administrator will attempt to achieve a better result for the company's creditors than would be likely if the company were liquidated without first being in administration. 

If neither is achievable, the goal is to “realise property to make a distribution to one or more secured or preferential creditors” (Gov.UK).

Once appointed, the administrator takes control of the company's operations, freezes creditor claims, and devises a plan to restructure the business or sell its assets. This can involve selling parts of the business, renegotiating debts, or finding new investments.

Administration can lead to the company being rescued, sold, or moved into liquidation if any of the above-mentioned solutions are not successful.

Liquidation

With liquidation, on the other hand, the primary goal is to wind up the company's affairs, sell off assets, and distribute the proceeds to creditors. It signifies the end of the company's operations and existence, resulting in a more definite ending. 

Liquidation can be initiated voluntarily by the company's directors or compulsorily by creditors through a court order. A liquidator is appointed to oversee the sale of assets and distribution of proceeds.

The company ceases to exist post-liquidation. Creditors are paid in a predetermined order of priority, and any remaining assets are then distributed amongst shareholders. 

Administration vs. insolvency

While administration is a legal process, it’s important to understand that insolvency is a financial state. Administration is a legal response to insolvency, aimed at restructuring the company, protecting it from creditor claims, and finding a path to recovery or orderly wind-up.

Insolvency is the financial condition which prompts the need for administration or liquidation and is characterised by an inability to meet debt obligations.

Benefits of administration

Administration can offer a few benefits and it’s important to consider this over liquidation straight away. 

  • Breathing space: Administration provides temporary protection from creditors, allowing the company to restructure and find a viable path forward.
  • Continuity: Administration attempts to keep the business operational, preserving jobs and customer relationships.
  • Better returns: Administration often results in higher returns for creditors compared to liquidation, as the business or its assets can be sold as a going concern.

When is administration the best option?

Administration is usually considered the best option when the company has a realistic prospect of being saved as a going concern. Also, it is the best option when the business or its assets can be sold for more than its liquidation value. 

Administration is also considered the best option when immediate liquidation would result in a significant loss in value. 

Company administration is a critical process for businesses facing financial distress, offering a potential lifeline to restructure and survive. Understanding the nuances of administration versus liquidation and the state of insolvency is key for stakeholders to be able to solve these challenging problems. 

While administration aims to rescue the company and preserve its value, liquidation marks the end of the road, focusing on selling off assets to repay creditors. Each path has its own implications, and choosing the right one depends on the specific circumstances and potential for recovery.

By comprehending these processes and their differences, stakeholders can make informed decisions and work towards the best possible outcomes in times of financial uncertainty.

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