We are often asked – What does going into administration mean and what is its purpose?
A company administration order is intended to provide a moratorium to facilitate a rescue of a financially distressed business with a three-tiered statutory purpose in mind.
What is the three-tiered purpose of administration?
It is important to understand what happens if a company goes into administration.
- firstly, the administrators must consider rescuing the company as a going concern following the administration order. A distinction must be drawn between the company and its business, and the first part of the purpose is to keep the company as a legal entity trading its business (as opposed to selling its business to a new entity).
- should trading the company and improving the position of the company’s creditors through its ongoing trading not be viable, then the second part of the purpose is to achieve a better result for the company’s creditors as a whole than would be likely if the company was wound up. Often the company via its administrators will seek to sell its trading business to a new company as a trading business has more value as a going concern than if the business ceased trading and the assets sold piecemeal which is more likely to happen in a winding up of the company.
- in the event that neither of the first two parts of the purpose are likely then the third part is to realise (sell) property in order to make a distribution to one or more secured or preferential creditors (a statutory class of creditors who rank above ordinary unsecured creditors).