Navigating financial difficulties is a common challenge for businesses in the 21st century, and for some, the path of company administration becomes a necessary avenue. When a business enters into administration, control moves to the appointed administrator who aims to find the most suitable course of action for the business.
There are a number of possible outcomes from company administration, including sale of the business and liquidation. These varied outcomes lead many businesses to find the administration process confusing and one pressing question that arises is whether a company can continue to trade while an administrator is in control. Businesses can continue to trade while in administration, but it is important to understand the advantages of doing so as well as the challenges that may be faced in the process.
What Is Administration?
Company administration is a formal insolvency process aimed at rescuing a company facing severe financial distress. To initiate this process, a licensed insolvency practitioner is appointed as the administrator and takes control to try and steer the company towards the best outcome for creditors.
Once the administrator has been appointed, a moratorium is put in place which gives the company 8 weeks to determine the best way forward without the threat of administration. During this period, companies can continue to trade providing it is in the best interests of creditors to do so. In fact, most will need to still trade in administration to keep cash coming into the business and retain any value which may make it more favourable in terms of rescue or sale.
Directors will not be in control of the business during administration, even if the business continues to trade. They will need to be willing to comply with plans and new structures put in place by the administrator should they regain control after the administration.
Benefits Of Trading In Administration
There are a number of advantages when it comes to trading in administration. The most obvious reason why businesses may opt for this course of action is in order to trade their way out of administration. However, trading can still be highly beneficial even if a sale or liquidation looks like a more likely outcome.
By keeping money flowing into the business, the company can not only improve its chances of meeting ongoing expenses and maintaining necessary operations but also make the business more attractive to prospective investors. Having cash coming in proves that there are elements of the business model that are viable and demonstrates that there is something worthwhile to invest in.
Trading during administration also provides a sense of reassurance for both employees and creditors. Continued operations will demonstrate to creditors that the business is acting in their best interests and trying to pay their debts, while employees may see the continuation of trading as a sign that they may be able to retain their jobs.
Challenges Of Trading In Administration
However, the decision to continue trading in administration is not one that should be taken lightly. The goal must always be to act in the best interests of creditors and if it looks like trading will reduce the chance that debts can be paid then the business should not continue to trade. Ultimately, the administrator will always decide on the best course of action.
Some of the biggest challenges of trading in administration apply to company directors. They will have to be prepared to lose control of the business while the administrator is in control and should expect existing trading agreements to be scrutinized and reevaluated.
Exiting Administration After Trading
If it is decided that the business is still viable as it trades its way through administration, the administration process will still need to come to a formal conclusion and it is important to prove that this upward trajectory can continue once the process has come to an end.
Typically, most companies in this position will exit administration through means of a Company Voluntary Arrangement (CVA). This is a legally binding agreement between the company and its creditors that ensures the company will repay some or all of its debts over an agreed period of time. When a CVA is agreed upon, creditors may be happy to waive some of the existing debt in the knowledge that the company has suitably restructured and is in a more favourable position.
Ultimately, trading during administration is both allowed and advisable for many businesses. However, the process is not without its hurdles and complexities and it is essential to speak to an expert before trying to make any kind of decision relating to your own business. If you are facing administration or want to discuss the options available to you, don’t hesitate to get in touch with the expert team here at Ballard Business Recovery. We can provide straightforward and honest advice if you are considering company administration.
