When small businesses face financial distress, it can feel like being caught in a storm with the walls closing in and the ship of the company foundering. However, there is a legal mechanism that can provide a lifeline and help steer the business back on course:
administration. In this blog post, we'll look into the administration process, exploring how it works, its benefits, and who qualifies. We'll also highlight how this administration can turn around viable companies and save jobs.
Understanding the administration process
Administration is a unique insolvency procedure that prioritises the rescue of viable businesses. Unlike other procedures, such as liquidation, administration provides an opportunity for companies struggling due to temporary setbacks or ineffective management to restructure and recover.
When a company enters administration, an
insolvency practitioner (IP) is appointed as the administrator to take control of the company's operations, assets, and affairs. The administrator's main objective is to ensure the survival of the company as a going concern. However, if this is not feasible, the administrator will work to achieve a better outcome for creditors compared to what would be expected in a liquidation scenario.
Moratorium: A protective shield
As soon as a
company is placed into administration, a protection known as a moratorium automatically takes effect. This legal protection temporarily halts actions against the company, such as:
1. Legal proceedings, including court actions by creditors to recover debts
2. Enforcement actions, like seizing assets or starting winding-up proceedings
3. Actions by secured creditors to enforce their security without consent or permission
The moratorium provides breathing space for the company and the administrator to assess the situation and develop a plan to rescue the business or achieve a better outcome for creditors. It allows the administrator to focus on the rescue process without interference from legal actions.
During the moratorium, the administrator can:
- Review the company's financial position and viability
- Engage with creditors and stakeholders
- Determine and implement the best course of action
It's important to note that the moratorium doesn't cancel the company's debts or legal obligations; it simply suspends them temporarily. Once the administration concludes, creditors may pursue their claims in line with the outcome of the process.
The moratorium is a vital aspect of administration, providing a stable environment for the administrator to work towards the best possible outcome for all involved parties.
Creditors: working together to save the business
During the administration process, the administrator works closely with creditors to find a solution that benefits everyone. By engaging with creditors and presenting a viable plan, the administrator can often secure their support in saving the business. This collaborative approach can be crucial in turning around a struggling company and is not as prominent in other insolvency procedures.
Employees: saving jobs and supporting the economy
Administration can be a valuable tool in saving jobs. By rescuing a viable business, the administration process helps preserve employment, which not only benefits the individual employees but also supports the overall economy. The administrator will work to ensure that the company can continue operating, protecting as many jobs as possible.
Drafting a business plan
One of the administrator's key tasks is to draft a business plan for the company. During administration, the "noise" of firefighting day-to-day issues is reduced, allowing the administrator to focus on creating a comprehensive plan to guide the company back to profitability. This plan will address the company's financial situation, identify areas for improvement, and outline a strategy for moving forward.
Reviewing the management team
As part of the administration process, the administrator will review the company's management team to ensure that the right people are in place to lead the business to success. This may involve making changes to the team or bringing in additional expertise to fill any gaps. By ensuring a strong management team is in place, the administrator can increase the likelihood of a successful turnaround.
Preserving assets
Another benefit of administration is that it can help preserve the company's assets. During the moratorium, assets cannot be seized or distrained upon by creditors. Distraint is a legal process that allows creditors to seize and sell a debtor's goods to recover money owed to them. However, when a company enters administration, the moratorium prevents creditors from distraining from the company's assets.
This protection is crucial, as it ensures that the company's assets remain available for the administrator to use in the rescue process. Without this protection, creditors could seize essential assets, making it more difficult for the administrator to turn the company around or achieve a better outcome for all creditors.
By preventing distraint during administration, the moratorium helps to preserve the value of the company's assets and increases the chances of a successful rescue or a more favourable outcome for all stakeholders.
This protection allows the administrator to maintain the value of the company's assets, which can be crucial in achieving a positive outcome for the business and its creditors.
Who qualifies for administration?
To enter administration, a company must be insolvent or likely to become insolvent. The process can be initiated by the company's directors, creditors, or the court. Once an administrator is appointed, they will assess the company's situation and determine the best course of action.
Turning around viable businesses
Administration is a powerful tool for rescuing struggling but viable businesses. By providing temporary relief from creditor pressure, engaging with stakeholders, and developing a comprehensive turnaround plan, the administrator can guide a company back to profitability. This not only benefits the company and its employees but also positively impacts various aspects of the wider economy.
Entering administration demonstrates a proactive approach to addressing financial challenges and protecting stakeholders' interests. This can help manage the company's reputation more effectively compared to other insolvency procedures that may be perceived more negatively.
Although administration involves costs, it can be more cost-effective than other insolvency procedures if it leads to a successful rescue. By preserving the business and its assets, administration can maximise returns for creditors and shareholders, making it a valuable tool for turning around viable companies facing financial distress.
Next steps
If your small business is facing financial distress, administration may be the lifeline you need. By collaborating with an experienced insolvency practitioner, you can effectively manage the process and increase your chances of a successful outcome.
To learn more about how administration could help your business,
contact Even Keel Solutions today for personalised advice for your situation.
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