Seeing the term ‘company administration’ in the press and hearing it in the news has certainly not been an uncommon occurrence in recent months. Indeed, due to the COVID-19 pandemic and subsequent lockdowns, some big High Street names have been listed as ‘gone into administration’ including Debenhams, Jessops, Paperchase, New Look, the Arcadia Group, Dune, Jaeger, Moss Bros. and Hotter Shoes.
There are several aspects that all of these companies have in common – they are all insolvent and they have all entered a voluntary administration process. But what exactly does the term administration mean for a company, and what is the process?
What is company administration?
Firstly, let’s clarify insolvency; just because a company owes money to creditors’ which is more than it has in cash and/or assets, it doesn’t necessarily mean the company has to liquidate, i.e. shut down. As long as the company has sufficient funds to pay for essentials, such as employees, and their creditors are not demanding repayment, the business is able to continue trading.
If a company is basically viable but is struggling with cash flow, they will generally seek the help of an insolvency practitioner to identify their options, such as administration. The main reasons for a company to enter a voluntary administration process are:
- The company is struggling with severe cash flow issues; however the business is basically still viable.
- The company is technically insolvent and needs to be sold as quickly as possible.
- The company’s creditors have refused to agree to a company voluntary arrangement to pay back the arrears, or it is not possible to meet the time frame.
Generally, entering administration is a voluntary decision that is taken by the directors or shareholders of a company that is in financial difficulty. It is also possible for any qualifying floating charge holder, such as a secured lender, to start the administration process if they feel their capital is at risk.
When entering a company administration process, the court-appointed licensed insolvency practitioner(s) take over the management of the company and a moratorium period of 20 days commences. This stops the creditors from taking any legal action during this period and allows the company to agree a rescue option, such as renegotiating leases with landlords or sourcing a buyer.
Whilst the company is under administration, the company and directors, or a priority creditor, like a bank, is able to apply to the court in order to place the company into a streamlined administration process. However, according to UK law, any provider of the finance that has sufficient security must be in discussion with the company and approve the administration. In addition, the court requires the finance provider to have a fixed and floating charge, such as a debenture, and must have five days’ notice before agreeing.
The insolvency practitioner(s), or administrator(s), take on the responsibility of the company’s employment contracts after a 14 day period. In general, a buyer is often sought before the 14 day period starts. One point to note is that the administrators are not allowed to run the company at a loss, thereby making the financial position worse, and they will need to regularly report to the company’s creditors.
What is pre-pack administration?
Also known as an administration pre-pack sale, and a common form of business rescue at the moment, it is essentially where a company that is struggling financially enters into the administration process but sells its assets to a new company – a ‘newco’ – or to another existing third party company. Whilst this process can protect the company, in practice the old company – the ‘oldco’ – is subsequently liquidated.
Pre-pack administration is a form of insolvency process. The company agrees to sell its assets to a new buyer prior to the administrator(s) being appointed. Alternatively, the owners or shareholders of the company are able to agree to sell the entire company to the existing directors but under a new company (a ‘newco’). Whilst it is legal, many creditors are often left unhappy at the procedure. However, the ‘newco’ must:
- Have sufficient funds in place;
- Be viable; and
- Buy the assets from the ‘oldco’ at a fair market value.
One point to note is that if the company has already been issued with a winding up petition via the court from creditors, it is not allowed to enter a pre-pack administration process.
It is generally larger companies that consider a pre-pack administration process because their corporate structure is likely to be complex, and it can be expensive. When considering a pre-pack administration procedure, there are a number of aspects to consider before going ahead:
- Does the qualifying floating charge holder accept a pre-pack administration process? Some clearing banks won’t support this type of administration procedure.
- Will the company’s landlord accept the new company as their tenant in the property?
- Are the company’s suppliers, and possibly creditors of the company, happy to supply a ‘newco’?
- What will the company’s creditors think of this option and will they be happy with a ‘newco’ approach?
One of the biggest hurdles to overcome with a pre-pack administration process is sourcing the finance to buy the insolvent company’s assets and start a ‘newco’. There are various financing options including:
- Venture capital.
- Asset-based loans.
- Invoice factoring.
However, many of these options will require personal guarantees from the directors, and potentially other personal securities. If sourcing via private equity or capital buyers, they may insist on directors being removed as part of the funding.
Once the finance is in place and agreed, the administrator(s) will app0ly to the court with their proposals. But the administrator(s) must also put forward other business rescue options, such as a company voluntary arrangement, refinancing, creditor’s voluntary liquidation and administration, according to the new SIP 16 rules.
Company insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.