The second quarter of 2023 has unveiled a significant snapshot of the business landscape in the UK. With 6,342 registered company insolvencies during this period, it becomes apparent that economic challenges and uncertainties continue to loom over the corporate world.
For small businesses, understanding the concept of administration is vital. Shareholders often lose the value of their shares and debts are categorised as secured or unsecured, with secured creditors taking priority when a company goes into administration.
Existing contracts may be reviewed and directors may face various outcomes, depending on their actions. Employees' fate during administration varies, with some continuing employment, others facing redundancy or their employment being transferred to new owners.
In this article, we’ll explain what happens when a company goes into administration, offering a simple guide for small business owners.
What is administration in business?
Administration in business is a legal process designed to rescue a financially troubled company, safeguarding its future while balancing the interests of its creditors. It’s a vital component of the UK's insolvency framework, governed by the Insolvency Act 1986.
When a company enters administration, it signals that the company is unable to pay its debts and this step is often taken in the best interests of the creditors and the company itself.
How does business administration work?
The administration process involves appointing an administrator, typically a licensed insolvency practitioner, whose primary duty is to act in the interests of the company's creditors as a whole. The administrator assesses the company's financial position, formulates a plan and executes it.
During the administration process, the administrator gains control over the company’s assets, including selling the business if it's deemed the best way to maximise returns for the creditors. The administrator can also renegotiate or terminate contracts, make staff redundancies and decide on the future direction of the company.
How does a business go into administration?
A company can enter administration through various means. It can be initiated by the company's directors, its secured or preferential creditors or through a court-ordered process as follows:
- Company directors – the company's directors recognise the financial distress and voluntarily decide to appoint an administrator to assess and potentially rescue the company
- Secured or preferential creditors – if a company is unable to pay its debts and is facing pressure from secured or preferential creditors, a creditor can appoint an administrator through a court-ordered process
- Court-ordered – the court can also order the administration of a company if it's clear that the company is insolvent and administration is the best way to protect the interests of the creditors
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What happens to directors when a company goes into administration?
When a company enters administration, the directors often relinquish control to the administrator. The administrator becomes responsible for managing the company's affairs during the administration process, including making key decisions about the company's operations and future direction.
Directors may be involved in the administration process to varying degrees, depending on the circ*mstances. If it’s determined that the directors have acted wrongfully or negligently, they may face personal liability or disqualification from acting as directors in the future.
What happens to shares when a company goes into administration?
When a company enters administration, the shares held by the shareholders usually become worthless. Shareholders are often left with no claim to the company's assets or future profits. However, in certain cases, shareholders may have the opportunity to purchase the company's assets during the administration process, but their original shares typically hold no value.
Can a dissolved company still trade?
Once a company has been dissolved, it cannot legally continue to trade. When a company is dissolved, it ceases to exist as a legal entity, and its assets and business operations are terminated.
What happens to debts when a company goes into administration?
Debts owed by the company are categorised into two groups: secured and unsecured. Secured creditors have a charge over the company's assets, giving them priority in the event of insolvency. Unsecured creditors, on the other hand, have no such security and are often at greater risk.
During administration, the administrator will assess the company's debts and prioritise payments accordingly. Secured or preferential creditors are typically paid first, followed by unsecured creditors. However, it's important to note that not all debts may be repaid in full, and some may not be paid at all, depending on the company's financial position.
What happens to contracts when a company goes into administration?
When a company enters administration, existing contracts may be subject to review and potential renegotiation. The administrator has the authority to terminate or modify contracts, depending on what is in the best interest of the company and its creditors.
For example, if a contract is financially burdensome and terminating it would benefit the company's financial recovery, the administrator may choose to do so. However, essential contracts may be retained to ensure the company's continued operation.
What does administration mean for employees?
Employees are a vital part of any business and their fate during administration is a matter of concern. When a company enters administration, staff members may face various scenarios:
- Continuation of employment – in some cases, the administrator may decide to continue the company's operations and retain staff (this often happens when maintaining the workforce is necessary for the company's recovery)
- Redundancy – if the company's operations are significantly scaled-down, staff redundancies may be necessary to reduce costs and increase the company's chances of recovery
- Transfer of employment – in certain cases, the company's assets and business may be sold during the administration process, and employees may be transferred to the new owner
It's important to note that employees' rights are protected during the administration process. Employees are considered preferential creditors for certain claims, such as wages and holiday pay. However, the extent to which these claims can be met depends on the company's financial position.
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Understanding what happens when a company goes into administration is important for all small business owners. Company administration serves as a lifeline to financially distressed businesses, offering a chance at recovery and a fair distribution of assets to those owed money.
It’s a legal process that aims to balance the interests of the company's creditors while striving to rescue the business from insolvency. You need to have a clear understanding of what administration entails and how it could impact your operations and future prospects.
If you have any questions or need assistance regarding company administration, book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.
Additional resources
- Scheme of Arrangement - everything you need to know
- What is a Company Voluntary Arrangement (CVA)?)
- Business insolvency - what you need to know
- What is a debt moratorium?
- Pre-litigation process for commercial disputes
In closing
Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.
