What Does It Mean When a Company Goes Into Administration?

A Guide to Company Administration, What Happens to Directors and Employees, and the Possible Outcomes

When a company experiences serious financial difficulties, entering administration may provide an opportunity to protect the business, assess its financial position and explore potential solutions.

However, company administration can be a worrying prospect for business owners, directors, employees and creditors. Questions often arise about whether the business will continue trading, what happens to outstanding debts and whether the company can recover.

Understanding how administration works can help everyone involved make informed decisions.

This guide explains what happens when a company goes into administration in the UK, why businesses enter the process, how different stakeholders are affected and what outcomes may be possible.

What Does It Mean When a Company Goes Into Administration?

When a company goes into administration, it enters a formal insolvency procedure in which a licensed insolvency practitioner takes control of its affairs, business and property. The administrator aims to rescue the company as a going concern, achieve a better result for creditors than immediate liquidation, or realise assets for secured or preferential creditors.

Administration is governed primarily by the Insolvency Act 1986, as amended by the Enterprise Act 2002.

One of its main features is a statutory moratorium, which provides temporary protection against many creditor enforcement actions while the administrator assesses the company’s position.

Importantly, going into administration does not automatically mean a business will close.

Some companies continue trading during administration, while others may be sold, restructured or eventually liquidated.

Businesses experiencing financial pressure can seek guidance from insolvency specialists such as Purnells to understand the options available before their circumstances deteriorate further.

Why Would a Company Go Into Administration?

Companies enter administration for various reasons, but the underlying issue is usually financial distress.

A business may struggle to meet its financial obligations, experience a significant reduction in revenue or face pressure from creditors.

Common reasons include:

• Cash flow problems: Insufficient available funds to pay suppliers, wages, rent or other operating expenses.

• Outstanding debts: Increasing liabilities to lenders, suppliers or HMRC.

• Reduced profitability: Falling sales, rising costs or declining margins.

• Creditor pressure: Threatened legal action, statutory demands or winding-up proceedings.

• Unexpected financial difficulties: Loss of a major customer, contractual disputes or unforeseen operating costs.

• Business restructuring: A need to reorganise operations or explore the sale of the business.

In some circumstances, administration may offer an opportunity to preserve value that could otherwise be lost through an immediate closure.

However, it is not suitable for every financially distressed company.

Seeking professional advice early is important because alternative solutions may be available before formal insolvency becomes necessary.

How Does a Company Go Into Administration?

A company can enter administration through several legal routes.

Depending on the circumstances, an administrator may be appointed by the court, the company or its directors, or a qualifying floating charge holder.

The process generally involves the following stages.

1. Assessing the Company’s Financial Position

Before entering administration, directors should obtain professional advice and review the company’s financial circumstances.

This may include examining cash flow, outstanding liabilities, creditor pressure, available assets and the prospects of continuing to trade.

2. Appointing an Administrator

A licensed insolvency practitioner is appointed to act as administrator.

The appointment must follow the relevant statutory procedures, including any applicable notices and filing requirements.

3. Protection From Certain Creditor Actions

Administration generally provides a moratorium that restricts many forms of creditor enforcement without the administrator’s consent or permission from the court.

This can provide breathing space while the company’s position is assessed.

However, the moratorium does not remove the company’s debts or prevent every possible legal action.

4. Reviewing the Business

The administrator examines the company’s finances, assets, contracts and trading prospects.

They may continue operating the business, seek a buyer, negotiate with stakeholders or begin selling assets.

5. Developing Proposals

The administrator prepares proposals explaining how they intend to achieve the statutory purpose of administration.

These are generally circulated to creditors within eight weeks of appointment, subject to applicable extensions.

6. Implementing an Outcome

The administration may result in a business rescue, sale, restructuring, distribution to creditors or a move into another insolvency procedure.

The appropriate outcome depends on the company’s circumstances and the administrator’s statutory duties.

What Happens to Company Directors During Administration?

When a company enters administration, its directors generally remain in office, but control of the company’s business and assets passes to the administrator.

Directors cannot continue managing the company independently without the administrator’s consent.

They are also expected to cooperate with the administrator by providing financial records, explaining previous transactions and supplying information about the company’s affairs.

Administration does not automatically make directors personally responsible for company debts.

However, personal liability may arise in certain circumstances, including personal guarantees, overdrawn directors’ loan accounts or misconduct.

Directors who are concerned about their responsibilities should seek professional advice as early as possible.

Purnells provides specialist insolvency guidance for company directors, including advice on financial difficulties and potential personal liabilities.

What Happens to Employees When a Company Goes Into Administration?

Employees do not automatically lose their jobs when a company enters administration.

If the business continues trading, some or all employees may remain in their existing roles.

However, redundancies may become necessary if the administrator decides that parts of the business cannot continue operating.

Where employees are made redundant and their employer is insolvent, they may be eligible to claim certain statutory payments through the government’s Redundancy Payments Service, subject to the applicable limits and eligibility rules.

These may include redundancy pay, unpaid wages, holiday pay and statutory notice pay.

If the business is sold, the Transfer of Undertakings (Protection of Employment) Regulations, commonly known as TUPE, may apply. The position depends on the nature of the sale and insolvency proceedings.

Employees should seek appropriate advice about their individual circumstances.

What Happens to Creditors When a Company Enters Administration?

One of the principal features of administration is the protection it provides against many creditor enforcement actions.

Once administration begins, creditors are generally restricted from taking certain legal steps against the company without consent or court permission.

However, this does not mean outstanding debts disappear.

The administrator assesses creditor claims and determines how available funds should be distributed in accordance with insolvency law.

Different categories of creditors have different legal rights and priorities.

Secured creditors, preferential creditors and unsecured creditors may receive different levels of repayment depending on the assets available and the circumstances of the administration.

Unsecured creditors may recover only part of the money owed to them, or potentially nothing.

For more information about the process, read Purnells’ guide to what administration means and how it works.

How Long Does Company Administration Last?

Company administration normally ends automatically after 12 months, unless it finishes earlier or is extended in accordance with insolvency legislation.

An extension may be agreed by the relevant creditors for a permitted period or authorised by the court.

The actual duration depends on factors such as the complexity of the company’s finances, whether the business continues trading and whether assets need to be sold.

Some administrations conclude relatively quickly, while more complicated cases may take considerably longer.

What Are the Possible Outcomes of Administration?

Entering administration does not necessarily mean the company will close permanently.

Several outcomes are possible.

Company Rescue

If the underlying business is viable, administration may provide an opportunity to restructure operations and return the company to a sustainable financial position.

Sale of the Business

The administrator may arrange the sale of the business or its assets to another company.

In some circumstances, a sale may be negotiated before the administrator is appointed and completed shortly afterwards. This is commonly known as a pre-pack administration.

Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) may be proposed where appropriate, allowing a company to reach a formal agreement with its unsecured creditors.

Liquidation

If rescuing the company or selling the business is not viable, the administration may be followed by liquidation.

The company’s remaining assets are realised and available funds distributed according to the statutory order of priority.

Dissolution

In certain circumstances, a company may be dissolved following administration without a separate liquidation.

The appropriate route depends on the administrator’s assessment and the requirements of insolvency law.

Is Administration the Same as Liquidation?

No. Administration and liquidation are different insolvency procedures.

Administration is generally focused on achieving one of its statutory objectives, with rescuing the company as a going concern taking priority where reasonably practicable.

Liquidation is primarily concerned with bringing the company’s affairs to an orderly conclusion.

Frequently Asked Questions About Company Administration

Can a company recover after going into administration?

Yes. A company may recover through restructuring or an appropriate arrangement with creditors. Alternatively, the underlying business may survive through a sale, even if the original company does not.

Can a company still trade while in administration?

Yes. The administrator may allow the company to continue trading if doing so supports the objectives of the administration.

Does administration mean the company is bankrupt?

No. Bankruptcy generally applies to individuals in England and Wales. Administration is a formal insolvency procedure for companies.

Can HMRC force a company into administration?

HMRC may apply to the court for an administration order in appropriate circumstances, but it cannot simply appoint an administrator through the directors’ out-of-court appointment procedure. HMRC may also pursue other enforcement routes, including winding-up proceedings.

Are directors personally liable when a business goes into administration?

Not automatically. However, directors may face personal liability for guarantees, certain outstanding debts or misconduct, depending on their circumstances.

Get Professional Company Administration Advice From Purnells

If your company is experiencing financial difficulties, acting early can make a significant difference to the options available.

Administration may provide valuable breathing space from creditor pressure, but it is important to understand whether the process is appropriate for your business.

At Purnells, our licensed insolvency practitioners provide professional guidance to company directors and business owners facing financial uncertainty.

We can help you understand the company administration process, assess your circumstances and explore potential solutions.

If your company is struggling with cash flow, HMRC arrears or creditor pressure, contact Purnells for confidential insolvency advice before the situation becomes more difficult to manage.