An administration is an insolvency process which is intended to achieve either the rescue of a company as a going concern, a better result for the company’s creditors than would be likely if the company was wound up or the realisation of property so that a distribution can be made to secured or preferential creditors.
After an administrator is appointed the administrator will usually attempt to sell the company’s business and assets. The sale may have been pre-planned and may be completed immediately following the administrator’s appointment, or it may be completed after a period of trading while the business is under the administrator’s control.
An administrator will often conclude that a sale of the company’s business and assets to the company’s existing owners will produce the best result for the company’s creditors.
When the business is sold, the buyer will only acquire those assets that the buyer chooses to acquire and will only become responsible for those liabilities that the buyer chooses to accept (in addition to those liabilities that transfer to the buyer under legislation, such as certain liabilities to employees). Because of this a sale of the business to its existing owners can be controversial, but administrators are highly regulated and other measures exist to prevent abuse.
In normal circumstances, the buyer will not need to make any payments to the company’s creditors. The creditors submit their claims to the administrator and may receive dividends from the administrator, if realisations allow.
Some of the key considerations for businesses considering administration and for business owners considering acquiring a company’s business and assets from an administrator are likely to be:
- Is the company insolvent (in that its liabilities exceed its assets or in that it is or will become unable to pay its debts as they fall due)?
- What effect would an administration have on key contracts and relationships?
- Would the company’s business be viable if the company did not have its current liabilities?
- Bearing in mind that the administrator should attempt to achieve the best result for the company’s creditors, will the current owners be able to demonstrate that their offer for the company’s business and assets is better than any other offer?
- Do the owners have the support of key employees, suppliers and landlords?
- Have the owners addressed the causes of the company’s insolvency and can any changes be made to reduce the risk of a future insolvency?
- Is there funding available for the business, bearing in mind that many suppliers may change their credit terms?
- If the company enters into administration and the owners acquire the business, will they have access to the new financial measures and will these be sufficient?