When a company is insolvent, the Administration procedure can be used to provide protection from pressing creditors whilst a rescue plan is formed.
The shareholders of a company, or its directors, can appoint an Administrator. Alternatively, a secured creditor (eg a Bank or Factoring Company) may decide to appoint an Administrator to protect their financial stake in the company.
Once an Administrator has been appointed, a moratorium is created meaning that no further legal action can be taken and no assets can be removed without Court sanction. This provides some breathing space whilst other options are considered.
Options for the Administrator are as follows:
– Continue to trade the business with a view to selling the business as a going concern
– Put forward proposals for a Company Voluntary Arrangement (‘CVA’)
– Effect a controlled wind-down of the business to maximise the value of the company’s assets
Depending on which option is explored, the company can survive and control is then returned to the directors and shareholders.
In certain circumstances it may be beneficial for the business to be sold immediately after an Administrator has been appointed. Usually this will be when trading the company in Administration would prove too costly or funding for trading is not available.
The business may be sold to an unconnected third party or to connected parties, such as the company’s current directors or shareholders.
As the sale of the business occurs immediately after the Administrator has been appointed, creditors (other than secured or the major unsecured creditors) are not normally consulted.
The Administrator must therefore be careful to follow strict guidelines to justify the reasons for the Pre-Pack Sale and ensure that creditors’ interests are not prejudiced.