When a business faces a period of financial distress, directors often worry not only about survival, but also about how the steps they take will affect their company’s reputation with customers, suppliers, employees and shareholders. After all, a company’s reputation is invaluable, as a poor reputation directly leads to a loss of trust and a reduction in business.
When faced with financial distress, one route you might pursue is company administration, which can be a strong tool to help you get your business on track. But how will it affect your reputation? Let’s take a look at both company administration and pre-pack administration to find out more.
What is Company Administration?
Company administration is a formal insolvency process designed to give a financially distressed company some more breathing space by imposing a freeze on any legal action from creditors. In exchange, a licensed insolvency practitioner will take over control of the business and begin making significant changes to secure the best result possible for the company’s creditors – whether that be to continue trading or arrange for the sale of some or the entirety of the business.
Considerations For Your Business’s Reputation
Pros:
- Protection From Legal Trouble – Company administration prevents legal action from creditors, helping maintain continuity of trade where possible and stopping reputational loss from public legal proceedings.
- Show Creditors You Take The Problem Seriously – Stakeholders may see professional oversight as a sign of responsible management and that you’re working to protect their interests.
Cons:
- Signals Company Distress – The formal announcement of administration is itself a public indicator of financial trouble, which may unsettle customers, suppliers and creditors.
- Loss Of Control – Directors lose control during the process, which can be perceived externally as a failure of governance – even where the administrator is acting in the best interests of the company and its creditors.
What is Pre-Pack Administration?
A pre-pack administration is a specific type of company administration where the sale of the business and assets is negotiated and agreed before the administrator is formally appointed. Once the administrator takes control, the sale completes immediately or shortly thereafter. The fundamental aim is to preserve the business as a going concern with minimal disruption.
Can Pre-Pack Administration Protect My Reputation?
Pros:
- Continuity – Because the transition can be almost seamless, customers should see minimal interruption – an important factor in public reputation preservation.
- Preserves The Brand – The business can retain its trading name, key contracts, intellectual property and relationships, reducing the outward appearance of failure and giving it a better standing for future success.
Cons:
- Creditor Mistrust – Some creditors, particularly unsecured creditors, can view pre-pack administration with suspicion because the sale is agreed before the company administration is announced. This can be perceived as a lack of transparency.
- Concerns Over “Phoenixism” – If the business continues with essentially the same management through a new entity, it can be seen as “phoenixing” – shedding liabilities and continuing as before – which can attract negative attention.
Overall, it can be tricky to pinpoint exactly how company administration will affect your business’s reputation. A lot of it comes down to context – creditor attitudes, severity of financial trouble and company history all play a major role.
If you’re looking to partner with a reliable and experienced insolvency practitioner to help with company administration and help you consider the long-term implications of any decisions you make, reach out to us at Ballard Business Recovery. Our team of experts have years of business rescue experience and can navigate you through the administration process effectively.
