How A Company Exits From Administration May Be Affected By The Reasons For It Going Into Administration In The First Place

The aim of Administration as an insolvency procedure is to attempt to rescue the Company as a trading business but this might not always be achievable and this can affect how to exit from Company Administration.

SUMMARY OF KEY FACTS

    There are four ways that a company can exit from Administration:

  • Creditors Voluntary Liquidation can follow Administration when there are funds available to make a distribution to unsecured creditors.
  • If there are considered to be insufficient funds to make a distribution to creditors the Administrator can dissolve the company.
  • Compulsory Liquidation can follow Administration by a order of the Court such as for example if the Administrator’s Proposals put to creditors have been rejected.
  • A Company Voluntary Arrangement (“CVA”) can follow Administration after a CVA has been approved by the creditors.

When a company goes into administration, there are a few different ways that it can exit from that process.  These include Liquidating the Company, such as by entering into a Creditors Voluntary Liquidation or Compulsory Liquidation, or alternatively, if the Company can be rescued a structure needs to be put in place so that can be made to happen.

Why Does A Company Go Into Administration?

There are only three reasons that a company can go into Administration. These reasons are set out in paragraph 3(1) of Schedule B1 of the Insolvency Act 1986.

Paragraph 3(1) of the Insolvency Act 1986

3(1) The administrator of a company must perform his functions with the objective of—
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
(c) realising property in order to make a distribution to one or more secured or preferential creditors.

The objectives of Administration do not dictate the exit route but certain exit routes are more likely for a given purpose.

Rescuing The Company As A Going Concern

If the statutory objective set out in paragraph 3(1)(a) of Schedule B1 of the Insolvency Act 1986 is achieved it is possible that when a company rescue has been successful, by returning the company to solvency, that the company can return to normal trading without going into another insolvency procedure or being dissolved.

This is the ideal scenario and the dominant purpose that Administration was initially introduced as an insolvency procedure in the Insolvency Act 1986.

Although it might not be the most common outcome of an Administration process, there are instances in which a brief period of Moratorium will give a company sufficient breathing space to enable it to return to profitability and solve a short-term solvency problem.

Liquidation v Dissolution As Exit Routes From Administration

Both Liquidation and Dissolution are very common ways for an Administration to be brought to an end.

Liquidation v Dissolution Exit From Administration

Liquidation After Administration

Upon a company going into Administration, a Licensed Insolvency Practitioner known as the Administrator steps in and oversees the running of the company in Administration. The Administrator will undertake an investigation into the financial affairs, dealings and property of the company, aiming to enable the company to develop a strategy to move forward.

However, it might not work out for many reasons and so the Administrator may decide that the only way forward is to Liquidate the assets of the company. As a result, he or she will then place the company into Compulsory Liquidation, possibly by way of a Winding Up Petition. This will include an application for his or her appointment as the Liquidator. A court would then usually appoint the Liquidator for the company who must then co-operate with the Official Receiver to wind up the company in an orderly manner.

If the Administrator considers that there are or will be sufficient realisations to make a distribution to unsecured creditors then the company can be placed into Creditors Voluntary Liquidation as set out in paragraph 83(1) of Schedule B1 of the Insolvency Act 1986.

Paragraph 83(1) of the Insolvency Act 1986

83(1) This paragraph applies in England and Wales where the administrator of a company thinks

(a) that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and

(b) that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a).

Dissolution After Administration

A company can avoid Liquidation after going into Administration and go straight into dissolution if it has no assets or property available for creditors by virtue of paragraph 84(1) of Schedule B1 of the Insolvency Act 1986.

Paragraph 84(1) of the Insolvency Act 1986

84(1) If the administrator of a company thinks that the company has no property which might permit a distribution to its creditors, he shall send a notice to that effect to the registrar of companies.

CVA Route Away From Company Administration

Some company directors prefer to go down the Company Volunary Arrangement (“CVA”) process. In such a case, a proposal for a CVA will be put forward for creditors to consider. Whilst this might take a while to put together, it can be an attractive procedure giving the Insolvency Practitioner time to prepare a workable proposal that he or she anticipates will appeal to creditors. This can be particularly useful if creditors have started the process of a Winding Up Order.

A key aim of many CVA proposals is to enable business survival, typically be enabling a core business to succeed going forward after often coming to a form of compromise with creditors in respect of the historic debts.

The advantage for Directors is that the business typically stays in their control during the whole process depending upon the terms of the CVA.

A Turnaround Exit For Company Administration

Whilst insolvency processes are generally unwelcome, they can through Administration have the advantage of a fresh pair of eyes review the financial position. A turnaround specialist who is not emotionally constrained can add their expertise and work with the existing management to formulate a strategy for a rescue package so that the business can be returned to profitability and solvency.

Administration can also provide an insolvent company with further opportunities to turn the business around by attracting outside investors who specialise in helping and financing such business opportunities. Whilst such parties may adopt a robust approach in return for their assistance, their involvement can save a company and return it to solvency.

What Next?

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Disclaimer: How To Exit Company Administration

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