Company Administration in theory allows a business time to review its operations strategically and implement often major changes to put it into a position to allow it to trade profitably in future. Legally Customers and suppliers must be told of the company's position and this will start to cause them to consider other options making the aim of the Administration harder to achieve. This article looks at the issues and alternatives of Company Administration.
Where a company has financial troubles but still has potential, its directors and / or shareholders can put the business into administration by applying to the court. Company Administration gives the business a breathing space from its creditors for a period of up to a year. Any current legal action being taken against the business such as a petition for winding up is cancelled and creditors are prevented from initiating new actions during the administration period.
Company Administration in theory allows a business time to make a strategic review and implement often major changes to put it onto a sound financial footing. Legally customers and suppliers must be told of the company's position
If a company is in administration, current customers may start to worry about what is going to happen to the business in future and start to look elsewhere to find more reliable long term suppliers. Just as worryingly, potential new clients may be put off from trading with the business as they are worried about its long term future. If current and future clients start to turn away from the company, its value particularly in terms of good will may be severely impacted. The same is true if suppliers to the business become nervous that they will not be paid, they may refuse to trade with the company or only do so on a cash basis. This situation will put increased pressure on the business' cash position which is likely to be already under significant strain.
The negative effect that an administration procedure can have on client and supplier relationships means that often, the process will have exactly the opposite effect to what it was supposed to achieve. The business goodwill starts to diminish and as such, any value that could have been attributed to the business based on its client and supplier contracts is significantly depleted. As a result, the most likely outcome when a business is put into administration is the sale of any valuable elements with the remaining areas of the company being liquidated. The original business will rarely be saved and a significant number of jobs within the original company will be lost.
With the situation outlined above, what are the alternatives?
A solution that springs to mind is Pre-Pack liquidation, commonly known as a Phoenix. In this situation, a new business is setup to trade in the companies place, purchasing the valuable assets of the company and without the burden of legacy debts. In this way, the new business is given the best possible start and employment is protected. Employees are transferred to the new business under TUPE rules (Transfer of Undertakings and Permanent Employment). R3 (the Association of Business Recovery Professionsionals) published some information in June 2009 that showed that nearly 5000 UK jobs have been saved already in 2009 thanks to pre-package liquidations. The research discovered that out of 5,478 jobs at risk, 4,846 (88 per cent) were saved in 89 pre-pack case studies, with the business owner remaining in charge in 59 per cent of cases.
Clearly, the downside of the pre-pack liquidation is that creditors are left facing unpaid debt. However, in my view, this outcome would have been exactly the same had the business been put into company administration but with the additional likelihood that the business would not be saved and that more jobs would be lost. In the current economic climate, the failure of businesses and subsequent loss of employment is a stark reality for many people. We must therefore be open minded about the solutions available to try to reverse the situation and pull the economy out of recession.
What happens to the directors if a company is wound up?
Once a company is being wound up a Liquidator will be appointed. The liquidator will undertake an investigation into the conduct of the directors to see whether they have knowingly allowed the business to trade while insolvent thus making the creditor's position worse. If this is the case, a director may face being disqualified and held personally liable for the company's debts. As a Director we look at the options you have.
What will having a County Court Judgement do to my company
If a county court judgement remains unpaid, this could lead to more serious action being taken against the business. We look at the impact and what you can do.
Company debt restructure to improve cash flow
Ensuring that enough cash is available to maintain their business must be a priority for companies. Those that do it well will survive. Those that do not are likely to fall. As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority. We discuss some of the solutions available.
