Debitoor's accounting dictionary

Administration – What is administration?

Administration is the process of selling off assets to recover a company’s debt.

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Administration creates legal protection for businesses, as their creditors cannot take legal action towards recovering the money they are owed while the debtor is in administration.

Why does a business go into administration?

Businesses may go into administration if they have serious problems with their cash flow and cannot pay their creditors the money they owe them.

Company directors might start the administration process themselves, but creditors might also force a company to go into administration via a court order.

The process of a company going into administration

When a company goes into administration, there is a specific process that needs to be followed:

1. Appointing an administrator

The first step in the process of going into administration is to appoint an administrator. The administrator that you appoint must be a professional ‘insolvency practitioner’, and your company must cover their fees.

While you’re in administration, the administrator has control over your business and your assets. This not only means that they can sell any of your company assets to pay off your debts, they can also renegotiate or cancel contracts, and they can also make employees redundant.

2. Informing relevant parties

Once you’ve appointed an administrator, they’ll write to your creditors and Companies House. They’ll also publicise their appointment in The Gazette, which is an official journal of statutory notices.

3. Planning

The goal of the administrator is to repay the company’s creditors as quickly and fully as possible by leveraging (or selling) the company’s assets. They have eight weeks to come up with a statement that explains how they plan to achieve this.

Once they have a full plan, a copy needs to be sent to creditors, employees, and Companies House, inviting them all to support or amend their plans at a meeting.

The most common plans involve:

  • Negotiating a Company Voluntary Arrangement (CVA)
  • Selling your business to another company as a ‘going concern’
  • Selling your assets, paying your creditors, and then closing your company
  • Closing your company if you have no assets to sell

4. Ending administration

The process of going into administration ends when either:

  • The administrator decides that the goals of the administration have been achieved.
  • The administrator’s contract comes to an end. This automatically happens after a year unless the contract is renewed.

Once your administration period has ended, you won’t have protection from any legal action your creditors might take.

Differences between going into administration and liquidation?

Administration and liquidation are both processes that happen when businesses are struggling to repay their debts; however, there are some important differences between going into administration and liquidation.

Firstly, businesses go through administration when they have issues with cash flow but might still be viable in the long-run. On the other hand, liquidation occurs when a business is no longer viable. In other words, while administration might result in the closure of a company, liquidation almost always ends with a business closing.

Secondly, the purpose of administration is to avoid the closure of a business, whereas liquidation is the process of selling assets so that a company can close. Administration therefore deals with avoiding closure, whereas liquidation involves preparing for closure.

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