A company may consider administration as an alternative to liquidation if it believes things can be turned around. Therefore, it is an option for potentially viable businesses, which can deliver the best possible outcome for all stakeholders if it is successful. A successful administration can result in a solid business that is trading profitably and can engender confidence that its affairs are under control and that its prospects for continuing success are based on solid foundations.
There are advantages and disadvantages of administration that you need to be aware of when considering the options for your company.
Advantages of business administration:
1) Protection from legal action
During administration, a moratorium is placed on all legal actions against the company, even an HMRC winding-up petition. That means that creditor enforcement action will be stopped, unless they obtain consent from the court or the administrator.
2) Restructuring opportunity
The breathing space afforded by the moratorium on legal action is intended to provide the time required to turn things around. Bearing in mind that the administrator would only propose that course of action if the company has a genuine chance of recovery, it should indicate a reasonable probability of potential success. A company in administration may still propose a Company Voluntary Arrangement with its creditors to schedule repayments and ease any cash flow pressures.
3) Best deal for creditors
Simply put, a strading business is worth more than an insolvent one that is liquidated. Creditors are likely to receive a better dividend in an administration rather than a liquidation.
4) Expert advice for turnaround
Administrators are licensed insolvency practitioners with experience of business management and a recognised ability to turn failing businesses around. You may think of it as expert business consultancy. They bring an objective outsider’s perspective to the affairs of the company, which can help to cut through the causes of failure to introduce new and better processes and decisions.
Disadvantages of business administration:
1) Loss of control
The directors’ hand over the running of the company to an insolvency practitioner who acts as Administrator. This is a big decision for directors to make and can be a difficult one when they may have invested several years in building up the company.
Administration is more expensive than liquidation. The administration process can take several months or even a year when affairs are complex or difficult to resolve. There is also the aspect of investigation to consider because the administrator will examine the trading history while assessing what went wrong and what the best course of remedial action is.
3) Reputation hit
Loss of confidence by suppliers, financiers, customers and potential new customers is an unavoidable aspect of going into administration. Administration is a period of uncertainty and nobody can guarantee that the outcome will be a successful trading company. The company could still potentially end in a liquidation scenario.
For more information on this and other options, feel free to contact us for a free initial professional consultation.