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Going into administration is when a company becomes insolvent and is put under the management of an insolvency practitioner. The directors of the company and the secured lenders may appoint administrators through a court process in order to protect the company and protect value in the business.
Administration is a robust process which allows insolvency practitioners to gain control of a company often when it has experienced major cashflow problems, is balance sheet insolvent, or is facing serious threats from creditors. The process provides for the appointment of a licensed insolvency practitioner as administrator. This places a moratorium on the company and prevents all legal proceedings.
The administration must have an objective and the use of company rescue mechanisms after administration is encouraged
Under the administration process, it is possible for the company and its directors (or a creditor such as the bank or other lender) to apply to the court to put the company into administration.
Finance providers, such as banks or asset based lenders with the appropriate security, must be contacted and the aims of the administration must be agreed. The financial stakeholder must have a fixed and floating charge, usually under a debenture, and the charge holder will need to give permission for the nominated insolvency practitioners to proceed. Five days’ notice is required.
It depends on the circumstances. The administrators may continue to trade a business in administration, but any expenses which are incurred are payable as a priority from the sale of the company’s business or assets. Therefore it is often desirable that, unless profitable trading is possible, the business is sold out of administration in a short period of time or where appropriate, closed down. The primary objective of the Administrators will be to rescue the company as a going concern and/or realise the company’s assets. During this time, the administrators must report to the creditors at regular intervals. It is not uncommon for an administration to run for over a year.
A pre-pack administration sale is a popular process involving the accelerated sale of the assets of a company. In doing so, the directors, under the guidance of an insolvency practitioner, prepare the company to enter administration and negotiate the sale of assets to a third party before the company is placed into administration. This process can protect business value and is a type of business rescue. The old company is typically liquidated following the sale.