Administration is a process that allows the realisation of a company’s assets by firstly creating a statutory moratorium. This prevents creditors from enforcing their rights to recover debt in order to give the company some breathing space. The Corporate Insolvency and Governance Act 2020 now extends this to all companies for a short period of time without the need for them to enter administration. Administration can also enable the company to be reorganised in order to trade more profitably going forward, as JD Sports have done in relation to Go Outdoors just last week.
An administrator is appointed who then takes control of the business to try to save it while the company continues to trade, although the directors are still officially appointed, they cease to have any authority over the company during the administrator’s appointment. The aim is to save the business where possible as this is likely to achieve the best result overall for its creditors. If this is not possible then the administrator will sell the assets and try to achieve a better result than liquidation would produce.
Recent high-profile examples of this include Debenhams and Laura Ashley with Debenhams announcing that a number of shops will be permanently closed as a result and Laura Ashley making redundancies both trying to cut costs to save the businesses.
In some cases, the answer may be a pre-pack administration.
This is the name given to the process by which a sale of the business is agreed before a company is put into administration and immediately sold on appointment of the administrator. Generally this would be the sale of the whole business, but it could simply be some of the assets with the company then put into liquidation to realise the rest.
The reason for using this method might be to provide a quick transfer and reduce the impact of administration on the business as well as reducing the costs of administration. Customers, suppliers and employees might lose confidence in a business in administration and more jobs might be saved by a pre-pack sale rather than in a long period of administration.
Pre-packs have been criticised due to their lack of transparency, with unsecured creditors often not finding out about the sale until it has already happened and therefore not having the opportunity to protect their interests. As advertising the financial difficulties of the company widely would damage the reputation and therefore reduce the value of the company it is often not public knowledge until after the sale has been completed. This could mean the best price might not be obtained, as potential buyers would be unaware of the opportunity, but where there is not the available cash for a prolonged period of administration the only other option may be liquidation, and therefore the end of the business, which would likely produce a much worse result for all concerned.
For more information on pre-pack administration click here.