What Happens When A Company Goes Into Administration
Warwickshire sport suffered a severe economic blow in October 2022 when Coventry-based Wasps became the second Premiership Club to fall into administration with the loss of 167 jobs. Wasps Holdings Ltd holds Wasps Men, Wasps Women, Wasps Netball, the associated coaching and support teams, and the respective academies and pathways. The company is believed to have debts totalling £95 million, and dozens of local businesses are owed money. Coventry City Council has also been hit with £270,000 due, mostly in unpaid business rates.
Unsecured creditors are incredibly vulnerable when a business falls into administration. One way to protect yourself from such an event is to retain legal services, ensuring that if a company that owes you money shows signs of impending insolvency, you will be alerted well before administrators are appointed. It is also essential to use a well-supported, advanced debt-recovery service to swiftly deal with any outstanding invoices.
What happens when a company goes into administration?
When a company is placed under administration, an Insolvency Practitioner, known as an Administrator, takes over the operation of the business. The Administrator’s purpose is governed by paragraph 3(1)(a), Schedule B1 of the Insolvency Act 1986 (IA 1986), namely:
- Rescue the company so it can continue to trade as a going concern.
- If rescue is impossible, aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation.
- If a good result for creditors as a whole cannot be achieved, the Administrator must realise the company’s property to distribute it to secured or preferential creditors.
To achieve the above, an Administrator is granted vast legislative powers. They can do anything “necessary or expedient for the management of the affairs, business and property of the company” as long as they act quickly and efficiently and in the best interests of creditors as a whole.
How does a company administration affect creditors?
Once a company is placed into administration, creditors cannot bring legal proceedings against it or its assets. Although you may seek permission from the Administrator to bring a claim, in most cases, consent will be denied unless your claim is one of a proprietary nature.
Within eight weeks of the company entering into administration, the Administrator will circulate a proposal which will set out the following:
- The company’s state of affairs.
- How it ended up in financial difficulty.
- Which purpose under paragraph 3(1)(a), Schedule B1 of the IA 1986 (see above) is to be met.
- The Administrator’s fees.
- How the company will exit administration.
- The actions that were taken by the Administrator so far.
- How the proposal is to be approved.
- The anticipated amount each class of creditor is likely to receive.
In what order are creditors paid?
Generally, a secured creditor is repaid through the proceeds of the company’s secured assets and can claim as an unsecured creditor for any remaining balance. For example, if a lender has security over the vehicles belonging to the company, the Administrator can sell these to raise the funds to satisfy the debt.
Unsecured creditors are only paid once the secured liabilities have been satisfied. The Administrator will apply one of the most fundamental principles of insolvency, that of pari passu, when allocating a share of the assets to unsecured creditors. Pari passu means “equal in right of payment”. Under the principle, in any insolvency process, unsecured creditors must share equally in the available assets of a company or the sale of those assets, in proportion to the debts due to each creditor. Unfortunately, this sometimes means that unsecured creditors receive next to nothing in terms of repayment, making it all the more crucial to retain legal advice and/or have access to a modern debt recovery portal.
How Askews Legal can help
Register on our Debt-Claims Portal or email info@debt-claims.com if you have unpaid invoices to minimise the risk of getting caught up in a company administration.
To talk to us about company administration and/or retained legal support, please call us on 02476 231000 or email enquiries@askewslegal.co
Please note that this article does not constitute legal advice.
