What happens when a company goes into administration?

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Insolvency:

In any dealings in
business you want to ensure that you are dealing with businesses that
are basically solvent, whether this is a contractor you have engaged
to do work, a customer you supply goods or services to, or as
landlord or tenant.

It is always prudent to do due diligence checks on the party you intend to enter into a business arrangement with, as well as ongoing checks occasionally while the arrangement continues, for example while a business tenancy is ongoing.

Companies House now supplies free and quite comprehensive information regarding a company’s officers, reporting and accounts, but this information is invariably several months out of date.

Nevertheless, a pattern of behaviour and financial performance can usually be discerned by comparing several years’ worth of the online accounting reports. Alternatively, using one of the specialist credit reference agencies to check-out the company could be very worthwhile.

If the worst should happen and the commercial landlord appoints debt collectors or High Court Enforcement Officers then one remedy open to them is to seize a debtor’s goods. This often stops them trading and usually brings things to a head quickly – speed is usually of the essence and gives creditor first movers an advantage.

When a company goes into administration it has entered a legal process (under the Insolvency Act 1986) which aims to rescue or sell the business as a going concern if at all possible.

After a licensed
insolvency practitioner has been appointed either by the directors, a
creditor or a court the administration process, it puts in place a
statutory moratorium. This gives the company a ‘breathing space’
freeing it from its creditors’ enforcement actions while
restructuring takes place to rescue the company as a going concern
wherever possible.

If the business
cannot be saved, the administrator will seek to minimise creditors’
losses, perhaps by allowing it to continue to trade for a period
while seeking a sale of the business, or its assets piecemeal. For
example: goodwill, trademarks, patents, equipment, the customer
database, software

content or websites
may have value and there may be a ready market, so the proceeds can
be returned to the creditors.

Pre-Pack
Administration

The main value in a
company is often its good name (goodwill) or the company’s brand,
which, when a company enters into administration will quickly
dissolve into thin air, or be highly diminished and reduce the
chances of a sale. The practice of pre-packaged administration has
evolved to combat this.

So, before going
into full administration, and where potential purchasers for a
business and its assets can be found, or where a part of the business
can be sold or closed down, the a sale of all or part of the
company’s business and assets can be negotiated.

Purchasers may be
directors, shareholders, others connected with the insolvent company
or outside purchasers, or it may be possible for the company to
simply be slimmed down and continue to trade on a reduced scale.

Landlords often come
up against administrators when an insolvent tenant company owes them
money, rent arrears, service charges etc.

What to do when
your debtor enters administration

David Asker, Director of The Sheriffs Office writes:

“The starting
point for enforcement is not good for creditors, but the
administrator does not have the power to turn back time. If you have
instructed a High Court Enforcement Officer (HCEO) and are
mid-enforcement, i.e. you have a controlled goods agreement which is
not the subject of fixed charges, then the moratorium acts to protect
you, i.e. the administrator cannot ignore your enforcement.
Similarly, if you have taken control of goods, then you must hold
them pending confirmation from the administration that they may be
disposed of.”

The strength of your
position is very specific to your case writes Mr Asker.

“If the
administrator has a desperate need for the goods you have taken
control of or the debt secured is materially less than the value of
the goods, then the administrator will come up with a strategy to
ensure you are paid.”

More often that not the goods are just not worth anything like as much when sold second hand as they cost originally, particularly when auctioned off. In this scenario, the administrator is likely to either allow the enforcement to continue, leaving you with an unsecured claim in administration in respect of any balance remaining from the sale, or they will value the items and suggest they be sold by the administrator. When the goods are sold, an agreed sum would be paid to the creditor via the HCEO.

“I have always
found it best to consider the law as it relates to Insolvency as
being continually in flux. The certainties of life that we all crave
just cannot exist long-term in an area of the law where so much pain
can be metered out!”, says Mr Asker.

Conclusions

The appointment of
an administrator is designed to protect the position of creditors and
to stop individual creditors taking matters into their own hands,
thereby destroying value which, if better handled would benefit all
creditors. By its nature, it is a process which is very case specific
and claimants in the midst of enforcement are advised to seek legal
advice before finalising their strategies, says Mr Asker.

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