Helping Businesses in Financial Distress: The Role of Administration

For companies facing financial hardship, administration provides a formal legal process to rehabilitate and work towards restoring solvency. With an insolvency practitioner (IP) appointed as administrator, the business gains valuable breathing room through a statutory moratorium on creditor action.

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The Role of the Administrator

During administration, oversight and management of the company transfers to the insolvency practitioner acting as administrator. Their primary goal is rescuing the company as a viable going concern wherever possible.

The administrator thoroughly reviews the finances, operations, debts, and assets to determine the optimal path forward. They may take steps to revamp business operations, sell off any unnecessary assets not central to core operations, and restructure company finances in order to ease the debt burden. These measures aim to stabilise the business and support its continuation as a going concern.

Effective communication with creditors is a key responsibility of the insolvency practitioner while acting as the administrator. They act as a central point of contact, providing transparency around the company's current circumstances and the proposed recovery strategy. The administrator is also responsible for organising creditor meetings to vote on turnaround plans.

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Seeking the Best Outcome for Creditors

If rescuing the company is simply not a viable option, the administrator will pursue the secondary purpose of administration - achieving a better outcome for creditors than immediate liquidation would produce. With their oversight and authority, the administrator can keep trading while working methodically to sell off assets in a way that maximises value.

The business itself may potentially be marketable to a buyer who can turn fortunes around and restore it to profitability. But even if selling the company as a whole proves impossible, substantial value remains in its component assets. The administrator can seek purchasers for intangible assets like goodwill, trademarks, patents, software, and websites. Tangible assets like equipment and the customer database may also attract strong buyer interest.

By keeping operations running during the administration period, the company maintains credibility with customers and suppliers, while preserving the perceived value of its assets. This helps optimise sale prices and returns for creditors. The breathing room allows the administrator time to identify the right buyers willing to pay fair market value, rather than holding rushed 'fire sales' at heavily discounted prices.

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Winding Down When Necessary

If the insolvency practitioner acting as the business administrator determines that piecemeal asset sales combined with continued trading operations will still fail to produce better returns for creditors than immediate liquidation, they can pivot to arrange an orderly wind down of the business. Where rescue or sale are clearly not viable options, the administrator's focus shifts to methodically liquidating assets and fairly distributing the proceeds to settle creditor debts.

When saving the company ultimately proves impossible, a skilled administrator can still maximise creditor pay outs by thoroughly exploring all alternatives before concluding that closure is necessary. Even where liquidation is the only feasible outcome, the structured administration process helps preserve asset value and creditor returns far better than a chaotic insolvency without oversight would achieve.

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When Administration is Appropriate

Administration is generally most effective for businesses with financial issues but an otherwise viable underlying business model. For instance, it can be an option for companies facing cash flow problems, trading losses, excessive debts, or legal action from creditors that threatens the entire business.

Administration allows these companies time to stabilise trading, restructure or sell off underperforming assets, and renegotiate financing terms - all within a legally protected moratorium environment. Essentially, it prevents creditors forcibly placing the business into terminal liquidation and opens up options to restructure finances, resize operations, and negotiate a path back to solvency.

With the right insolvency practitioner such as Even Keel Solutions guiding the process, administration provides a valuable lifeline for companies to trade through financial challenges and re-emerge in a stronger position. Business directors should not tackle serious financial troubles alone, but instead lean on the expertise of an experienced insolvency practitioner to steer the company through administration and onto firmer footing.

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Key Considerations

While administration can serve as a vital lifeline, directors need to carefully weigh whether the disruption and risks are justified by the chance to turn fortunes around. Key considerations include:

• Reputational damage - Entering administration can harm brand perception and stakeholder trust in the business. Proactive communication is vital to maintain confidence.
• Loss of control - Directors lose a degree of control as administrators take over management of the company and handle major decisions around operations, asset sales, etc. Director input is limited to advising administrators.
• Job losses - Administrators may need to cut staff and reduce other costs in order to stabilise the finances of the distressed business. The administration process itself can also prompt remaining employees to look for jobs elsewhere due to the uncertainty.
• Asset sales - Administrators may opt to quickly sell assets below optimal value in order to urgently generate funds for satisfying creditor debts. This could negatively impact long-term value.
• Professional fees - The costs and professional fees charged by the appointed insolvency practitioner can be substantial, reducing the resources available for turnaround efforts.
• Creditor dissatisfaction - Creditors usually receive less than full repayment of amounts owed. This can permanently damage supplier relationships.
• Risk of failure - Administration does not guarantee a successful turnaround. The company can still ultimately fail and require full liquidation if restructuring proves unworkable.
• Restrictions - Numerous constraints around financing, contracts, litigation, asset sales and other transactions apply during the administration period.

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While potentially right for some companies, administration involves considerable disruption and risks that directors need to carefully evaluate. Seeking professional restructuring advice is absolutely vital when weighing administration among turnaround options

Experienced insolvency practitioners can guide distressed companies through thoroughly assessing all available paths before deciding on the optimal recovery strategy. If your business needs rescue advice, an initial consultation presents no cost or obligation. Call us on 01202 237337.

We’re an experienced team with strong values. We like to understand your needs and ensure you have the best advice possible. We’re experts in all areas of insolvency; you can read more about us on our website here.