With a turbulent economic climate, sometimes the worst happens, and a company can enter administration. Here, Olswang associate Jas Purewal explains the general process of administration - what it means, and what's likely to happen if a company enters into it.
The processes described here relate specifically to English law, although there are unlikely to be any significant differences to the processes found under Scottish law.
Q: What is administration?
Jas Purewal: Administration is a legal process which comes into play when a company finds itself in severe financial difficulties - and specifically when it finds it's no longer able to pay its debts and continue as a going concern.
In those circumstances either the creditors or directors of the company - or the courts - can appoint an administrator. This is a licensed professional, usually an accountant, whose job it is to take over the trading of the company.
There is then a hierarchy of objectives that he or she then has to try to attain. The first is to try and rescue the company - to take control of it, find out where the inefficiencies and problems are, and turn it around.
If, however, that's not possible then the administrator has a duty to look into trying to achieve the maximum possible return for the creditors - either by way of selling the company on and paying them out of proceeds or breaking the company up, and again, trying to make the most out of it.
In the worst case scenario there could be a fire sale, to sell anything you can in order to make money to pay those people owed. In those circumstances the process changes from administration to liquidation.
Q: How does a company decide when it's necessary to enter administration?
Jas Purewal: There are two key legal tests - the first is whether the company is able to pay its debts as they fall due (creditors, supply partners and so on); the other is whether its assets have become less than its liabilities, ie taking the company as a whole, is that still lower in value that the amount it owes to other people?
In reality there's a great deal of investigative work that needs to be done with your accountants or lawyers to work out whether or not the company can continue or not.
Q: And who does the administrator actually work for?
Jas Purewal: Although they can be appointed by different interested parties - perhaps a substantial creditor or the directors - the administrator answers to the court. They have responsibilities to both the court and the creditors of the company as a whole.
What that means is that when appointed the administrator has to put together proposals for what it wants to do with the company - and they then have to be voted on by the creditors or representative committee.
So they're not acting for themselves, or necessarily for the person that appointed them - they're acting for everybody that who is involved with the company.
Q: In terms of timescale for wrapping up administration proceedings, are we talking days, weeks, months or years?
Jas Purewal: It really does depend upon what kind of deal there is on offer for the company. Sometimes you see administrations being turned around extremely quickly if there is a buyer who's standing by to take over the whole of the company. That does happen sometimes, in a matter of days.
However, if there isn't already someone standing by then it can take quite some time, both for the administrator to work out what's going to happen to the company going forwards, but also to liaise with the creditors to make sure that the people who need to be paid can be paid - and that includes creditors as well as employees.
It can take days, but sometimes it can can months or years. It really depends upon the company in question and how valuable an attraction it is for the market.
Q: What sort of rights do employees have in terms of unpaid wages or benefits?
Jas Purewal: There are certain legal minimum amounts that the employees will be entitled to, but that depends on their exact employment status, how long they've been with the company and factors like that.
But those minimum amounts are protected by law, in that if the company isn't able to pay them then the employees will have a limited right to effectively seek those amounts from the State.
Q: What happens if a partner or supplier enters administration?
Jas Purewal: If a partner or supplier of your business faces financial difficulties or even insolvency proceedings (of which administration is one type), it's vital that you consider your legal position regarding them as soon as possible. This will usually focus upon the contracts and documentation in place as well as your trading relationship with them. In particular, well-drafted contracts will contain provisions setting out the procedure to be followed if one party is likely to or actually enters insolvency proceedings.
You should also consider carefully the asset position - ie what stock or monies of yours do they hold (or vice versa), what impact could this have on your business and what do you do about it? These can raise complex legal matters, so you would be well recommended to seek legal advice as soon as possible in order to protect your position."
Jas Purewal is an associate at Olswang LLP. Interview by Phil Elliott. Image courtesy of Jonathunder, used under Wikimedia Commons license.