Administration – a Powerful & Positive Tool

The economy is still turbulent, and unemployment is still rife, partially due to companies becoming insolvent and having to close or lay off staff. Many insolvency tools exist to minimise the number of failed businesses disappearing into liquidation, or administration and to preserve jobs.

Of those insolvency tools, administration is one of the most powerful. It is a temporary arrangement whereby insolvency practitioners are appointed by the court to take control of the company, with the intent of restructuring it and allowing it to continue.

Unless you have an insolvency-related career or have been unfortunate enough to have experienced severe financial problems, there is a good chance that you will have limited knowledge of what services are available from an insolvency practitioner.

More than closing companies

Many people see headlines about large employers “going into administration and immediately assume the worst. It all sounds grim and terminal, and it’s not an ideal scenario, particularly if business owners fail to take early advice when they face financial difficulty. But the insolvency industry does much more than just closing companies.

During their period of office, administrators look into the viability of the business to see if they can salvage all or part of it. While the company is in administration, it is in a protective bubble, until they find a solution. The company is then safe from potential actions taken by creditors, such as bailiffs seizing essential equipment.

A good example of this, is former the retail group ‘Peacocks’ who went into administration in 2012. Part of that group was the women’s clothing retailer Bonmarché, which was sold for an undisclosed sum. Although there were some job losses, 2,400 jobs were preserved. Without administration, the company would have ceased to exist, and all the staff would have been unemployed.

What will the outcome be?

Although administration intends to save the company, the outcome can vary tremendously. In theory, the administrators could manage the business until it has recovered and then hand it back to the directors, where it will trade on without its crippling debts. In reality, there are usually underlying problems which frequently result in the selling of the healthy parts of the business. If no improvements or sales can be brought about, the administrators’ role can usually extend to that of liquidators.

In summary

Not all insolvency procedures are designed to close businesses. Administration is a procedure intent on keeping a company operating while restructuring work takes place, providing protecting from creditor action for the duration. Historically, administration has saved companies, preserving the jobs of many employees. While a positive outcome isn’t guaranteed, and many factors will determine whether or not the procedure will be successful, without administration, a lot of insolvent companies would have to be liquidated.