Company administration: what it means and how it works
If your business is facing financial distress, entering administration may be an appropriate way to protect its value while exploring rescue options. But what does administration mean, and how does it differ from liquidation?
Here, we explain what administration is, what happens during the process, and how it impacts company directors, employees, and creditors. Whether you’re a business owner or simply looking to understand insolvency procedures in the UK, this article gives you the practical answers you need.
What is company administration?
Company administration is a formal and regulated insolvency procedure in the UK. When a company goes into administration, control of the business is passed to a licensed insolvency practitioner – known as the Administrator – who aims to rescue the company or achieve the best possible outcome for its creditors.
The process can provide legal protection from creditor action and give the business breathing space to explore value preserving options.
Why do companies go into administration?
A business may enter administration if it is:
- Insolvent and unable to pay its debts
- Facing pressure from creditors, such as HMRC or suppliers
- At risk of being wound up via a court order
Going into administration can offer a much better prospect of rescuing parts of the business and can lead to a better return for creditors rather than an immediate and unplanned liquidation. The business and assets can be transferred out of administration via a sale by administrators. In the UK, the practice of pre-pack administration is highly developed and has been effective in preserving thousands of jobs.
What happens when a company goes into administration?
Once a company enters administration, the following steps typically occur:
1. Appointment of an administrator
An insolvency practitioner is appointed to take control of the company and assess its financial position. This can happen through a court order or by directors, lenders or floating charge holders.
2. Moratorium on creditor action
Creditors are legally prevented from taking any action against the company without the administrator’s or court’s consent. This includes winding-up petitions, bailiff visits and legal proceedings.
3. Review of the company’s options
The administrator will consider several outcomes, including:
- Rescuing the business as a going concern
- Selling assets to repay creditors
- Proposing a company voluntary arrangement (CVA) to rescue the company
- Liquidating the company if no rescue is viable
4. Communication with stakeholders
The administrator must notify creditors, Companies House, and other stakeholders. They also publish proposals outlining the plan for the company within eight weeks.
What does administration mean for directors?
Directors lose day-to-day control of the company during administration, but they are still required to cooperate with the administrator and provide information about the business.
If the administration leads to a sale or restructure, directors may be invited to remain involved in the new entity. However, they could also be investigated if misconduct or wrongful trading is suspected.
How does administration affect employees?
Employees may be retained if the business continues trading or is sold as a going concern. However, redundancies are common, especially if the administrator decides to close parts of the business.
Employees are considered preferential creditors for certain unpaid wages and holiday pay, which gives them a higher priority in any asset distribution.
Can a company come out of administration?
Yes. A company can exit administration if:
- It is rescued and continues trading
- It enters into a CVA
- Its business and assets are sold to new owners
- The administrator applies for dissolution or liquidation
The outcome depends on the business’s financial health, interest from buyers, and potential to return to profitability.
How to start the administration process
Administration can be initiated by:
- Company directors – through a formal board decision and appointment of an insolvency practitioner
- Creditors – including lenders with floating charges
- The court – usually following a creditor application
At Azets, our licensed insolvency practitioners can guide you through the administration process, helping you understand your options and obligations at every step.
What is the difference between liquidation and administration?
The key difference between administrations and liquidations are that:
- Administration aims to rescue the company or preserve value.
- Liquidation (link to new insight) focuses on closing the company and distributing its assets to creditors. Fundamentally, liquidation is an end-of-life process.
Here is a summarised comparison of administration and liquidation:
Feature | Administration | Liquidation |
|---|---|---|
Goal | Rescue or restructure | Wind up and dissolve |
Company may continue? | Yes, possibly | No |
Directors remain in control? | No | No |
Can lead to business sale? | Yes | Yes (via asset sale only) |
Legal protection from creditors? | Yes | Yes (in compulsory liquidation) |
If you are unsure whether liquidation or administration is right for your business, it’s essential to seek professional advice early.
Get expert support with company administration
If your company is under pressure and you’re considering administration, early intervention is key. At Azets, we help businesses across the UK navigate financial distress with clear, confidential advice tailored to your situation.
Get in touch today for a free, no-obligation consultation with one of our restructuring and insolvency experts.