Administration is the procedure in which a company that is, or is likely to become, insolvent can be reorganised or have its assets sold for the benefit of creditors. When a company goes into administration, an insolvency practitioner takes over the control of the company’s affairs from its directors.
The main aim of administration is to rescue the company so that it can continue trading as a going concern. If this cannot be achieved, there are two other reasons why a company may go into administration: to achieve a better result for the company’s creditors as a whole than would be likely if the company was put into liquidation, or to sell the company’s property to make a distribution to the company’s secured or preferential creditors.
A secured creditor is, in general terms, entitled to be repaid from the proceeds of the secured assets. Preferential debts include certain employee claims and contributions to occupational pension schemes.
In the majority of cases, the administration of a company leads to the sale of its assets. Administration may achieve a better result for the company’s creditors than immediate liquidation, because, for example, the company may be able to continue trading allowing greater value to be achieved for its assets as part of a sale on a going concern basis.
Pre-pack administration is the process in which the sale of the company’s assets is agreed before the company goes into administration, and is then completed immediately after the start of the administration.
The administration of a company must be completed within one calendar year unless the creditors or the court agrees to an extension. In practice, many companies remain in administration for more than one year and administrations can last several years.
When the purposes of the administration have been achieved, the company may come out of administration and continue normal trading, although this is unusual in practice. More commonly, the net proceeds of the company’s assets are distributed to the company’s creditors, often by a subsequently appointed liquidator.
When the net proceeds are distributed, creditors whose debts are not secured or preferential may receive a percentage of their debt by way of dividend. This may be as little as one or two pence in the pound, and can be nothing at all.