Author: Barry Stewart, Personal and Corporate Recovery Specialist and Director at 180 Advisory Solutions Limited (see whole article).
Earlier this year, Alfreton-based packaging company Charapak entered administration after key client losses and bad debt rendered them unable to pay their bills.
Judging by previous newspaper reports about administration failures, you’d be excused for thinking Charapak was destined for the scrap heap with a raft of job losses looming.
However, that couldn’t be further from what happened.
On 13th March, Charapak was bought out of administration by its bosses, saving 85 jobs and the business.
In this article, I’m going to explore what happens to a business when it enters administration (or another form of insolvency) and a buyer can be found.
What is administration?
An administration is a formal rescue procedure designed to provide a better outcome than a liquidation. An administrator can be appointed by the company’s directors or its creditors, including the bank.
An administration can be thought of as throwing a safety net over a business to protect it from its creditors while the administrator (who must be an insolvency practitioner) assesses the business and tries to rescue it. Once they have been appointed, the administrator takes over control of the company and, in effect, replaces the directors.
During an administration, the creditors (including landlords and HP companies) are restricted in taking any action against the company. An administration can normally last up to 12 months, although this can be extended.
What happens when a company goes into administration?
When a company enters administration, the administrator assumes complete control over the company’s business and assets.
The administrator takes over responsibility for running the company with the key goal of getting the best possible outcome for its creditors.
If the business, or parts of it, are viable, the best outcome for creditors will be for the business or parts of it to be saved as a going concern.
(The simple fact is that higher prices are paid by purchasers for ongoing businesses rather than simply buying assets from a closed down business.)
Therefore, a good insolvency practitioner will always consider whether the business can be continued and sold eventually as a going concern — or even whether the company itself can be rescued and returned to profitable trading.
Exit Routes out of administration
The company itself may be rescued and exit administration in one piece.
Alternatively, if the company itself cannot be rescued, the business (or parts of the business) might be sold as a going concern.
The last resort is that no part of the business can be rescued as a going concern and the business is closed down and its assets are sold off.
The outcome of an administration is totally dependent on the company’s individual circumstances but can be influenced positively by appointing a good insolvency practitioner at an early enough stage.
To Be Continued…