Tuesday, 21 March 2017 14:16

Company Administration: What Creditors Need to Know

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    When a client starts to miss payment deadlines and debts mount up, it is natural to start to wonder - do they have the means to pay?

    When companies get into financial difficulties, it can leave suppliers who are owed money in a tricky situation. As the saying goes, you can’t get blood out of a stone. If a business does not have any ready money available, debts will go unpaid.

    When this becomes more than a temporary cash flow problem, the next stage is insolvency. A company is legally insolvent when it is deemed unable to pay its debts, but insolvency is often used as as shorthand for the various procedures which exist for managing it. The purpose of insolvency procedures is to settle debts between an insolvent company and its creditors, and can range from a company being closed down to mediation.

    Liquidation, for example, whether compulsory or voluntary, involves a company being wound up so its assets can be sold off to pay debts. Company voluntary arrangements (CVAs), on the other hand, involve a process of formal, managed negotiation between parties to reach an agreement on payment plans.

    Company administration sits somewhere in the middle. Its aim is to avoid liquidation and keep a business running as a going concern, whilst also achieving the best deal possible for creditors.

    How Company Administration Worksclosing down

    Administration can be entered by company directors voluntarily or it can be ordered by a court, usually following an application by creditors.

    Once administration has been entered, a business is protected from any further action to recover debts, such as a winding up petition. However, control of the company is taken out of its directors’ hands. A qualified insolvency practitioner is appointed as administrator to manage the business and resolve its outstanding debts.

    An administrator’s main task initially is to assess how viable the company is as a going concern. This includes evaluating all relevant aspects such as turnover, profitability, debt burden, number of employees, contracts with suppliers and clients, market value and so on.

    Once that has been completed, the administrator must form a plan for settling outstanding debts and bringing the company out of administration. This may involve any combination of restructuring, finding a buyer to invest, selling off assets or liquidation. Some procedures, known as Pre-packaged Administrations, see the sale of a company or its assets agreed before administration is entered, fast tracking the whole process.

    What Does Administration Mean for Creditors?

    Administration is intended to strike a fair balance between the needs of struggling companies and creditors.

    If a client who owes you money goes into administration, you will be notified by the administrator. The most immediate effect this will have on your recovery efforts is that any legal proceedings will cease, and you will not be able to launch any more.

    However, the administrator is obliged to achieve the best possible outcome for creditors. They will write to you within 8 weeks outlining their proposed course of action, whether this involves sale of assets, restructuring, sale or closure. They may also recommend entering a CVA, and invite you to start negotiations.

    Ultimately, there is no guarantee that you will be able to recover the full value of your debts from a company in administration. But this also applies to liquidation - if the value of a company’s assets does not match its debt burden, creditors will not get all of their money back.

    The advantage of administration is that it looks at all available options before closure, and puts a trained professional in charge whose job is to get the best deal possible for everyone.

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    Closing Down by Newtown Grafitti is licensed by CC under 2.0

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