An administration can be used as a tool to enable the restructuring or sale of a business, to allow it to continue trading.
The administration process can be instigated by directors, shareholders or creditors of a company by making an application to court. In many circumstances this application is a “paper exercise” and no hearing actually takes place. This means that it can be brought into effect very rapidly.
Once instigated the executive powers of the company transfer from the directors to the Administrator (an independent Insolvency Practitioner) and he or she becomes responsible for the operation of the company.
To enable it to continue trading (if appropriate) a moratorium is granted to the company which prevents creditors taking or continuing with legal action against the company without the permission of the court or of the Administrator.
This moratorium provides time for the correct decision to be made about the company’s future. This might be for the company to be restructured in order that it can exit administration and continue to trade, for the business to be sold or for the assets of the business to be sold separately.
Sometimes it is clear at the outset that the trading of the company in administration will not be possible, notwithstanding the moratorium. In those circumstances, a sale from administration can be brokered prior to the company formally entering into administration with the sale agreement being signed almost as soon as the administration takes place. This is known as a pre-pack administration.
The benefit of such an arrangement is that business operations can continue almost seamlessly, the knowledge of the financial position of the business in its market does not impact on the business’ value and the return to creditors is often, therefore, far better than if a purchaser is sought once the administration has commenced.
These upsides need to be carefully balanced against the possible perception that the sale has been in some way underhand. It is therefore crucial to ensure that the process is followed correctly and that the details of the sale are as transparent as possible.