Administration is a familiar process in the world of business and, unfortunately, a well-trodden path for companies that have encountered serious financial difficulties and are facing the prospect of folding.

Put simply, it is a process in which a company is placed under the control of an insolvency practitioner to enable it to achieve objectives laid down by statute.

The prime objective of any administration is to rescue the company so that it can continue trading. If that rescue proves unattainable, the aim of that practitioner – the administrator – is to achieve a better result for creditors than is likely to be the case if the company were to reach the end of the road entirely and enter liquidation.

To help the administrator achieve the optimum outcome, creditors are prohibited – via a moratorium – from taking or pursuing legal proceedings against the company while it is in administration.

First of all, however, how does a company go into administration? There are in effect two routes. The first of those is by a court order made at a formal hearing, after an application is made to the court by one or more creditors of the company, the company itself, its directors or a liquidator.

Alternatively, a company can be put into administration by the filing at court of a notice of appointment and supporting documents. This is usually instigated by either the company or its directors, or a bank or lender which has a floating charge.

There is one guiding principle behind this process: a company cannot go into administration unless it is insolvent or likely to become insolvent.

The administrator

The administrator must be a qualified insolvency practitioner. It is often the case that more than one administrator is appointed and they must act jointly.

The formal status of the administrator is key: they are an agent of the company and an officer of the court, and they must act in good faith, fairly and honourably. They must also be independent and impartial in their management of the company and its property.

Once appointed, the administrator must take all of the company’s property into their control and they can thereafter do anything ‘necessary or expedient for the management of the affairs, business and property of the company’.

An administrator has a duty to perform their function as quickly and efficiently as is reasonably practicable and with regard to the interests of the creditors as a whole. In most cases, the administration of a company leads to the sale of the company’s assets.

The end of the process

The administration of a company automatically ends after one calendar year unless the creditors or the court agree to an extension. If the administration leads to the rescue of the company as a going concern, the administrator hands control of the company back to the directors.

It can also end in the company moving into liquidation if the administrator fails to turn the business around, although the company can be dissolved without a liquidation if the assets have been distributed to the creditors.

From a people perspective, liquidation results in all employees having their contracts of employment terminated. Whether the full redundancy pay is made depends on whether there are enough funds. If there aren’t, employees can make a claim and there are national insurance funds in place for this scenario – although those only cover to a certain limit.

For any business that fears insolvency is looming, the best first step is to seek professional advice and guidance as it assesses its options and looks for the most appropriate route out of its travails.

Aberdeen-based Elaine Elder, is a Senior Associate in Aberdein Considine’s Dispute Resolution team. Her specialisms include complex recoveries in relation to business and commercial debt, professional negligence, insolvency, and commercial property disputes.