What happens when a company goes into administration
How administration works under UK insolvency law, what it means for staff, suppliers and customers holding gift cards, and who gets paid first.
Administration is one of the most common words in UK business news, and one of the least understood. It does not mean a company has shut down. It means control has passed from the directors to a licensed insolvency practitioner, whose job is to get the best result available from a business that can no longer pay its debts.
How a company enters administration
Directors can appoint an administrator themselves, usually after taking advice that the company is insolvent or about to be. A lender holding a qualifying floating charge over the company's assets can also appoint one, and creditors can apply to the court.
The process is governed by the Insolvency Act 1986. Once an administrator is in place, the company is protected by a moratorium. Creditors cannot start or continue legal action, landlords cannot simply take back premises, and suppliers cannot repossess goods without the administrator's consent or the court's permission. That breathing space is the main reason companies choose administration over other routes.
What the administrator is trying to do
The law sets out the administrator's aims in order. The first is to rescue the company as a going concern. If that is not reasonably practicable, the next aim is a better result for creditors as a whole than they would get if the company were wound up straight away. Failing that, the administrator realises property to pay secured or preferential creditors.
In practice, rescue of the company itself is uncommon. More often the business, or the parts of it worth having, is sold to a new owner, while the old company is left holding the debts and is later dissolved or liquidated.
A pre-pack is a version of this where the sale is negotiated before the administrator is formally appointed and completed immediately afterwards. It keeps trading disruption to a minimum, but it can be controversial when the buyer is connected to the old directors. Additional rules require independent scrutiny in some connected-party sales.
Staff, suppliers and customers
Employees often keep working while the administrator looks for a buyer. If the business is sold, employment rights may transfer to the new owner under the TUPE regulations. If staff are made redundant and the company cannot pay what they are owed, they can apply to the government's Redundancy Payments Service for statutory redundancy pay, notice pay, holiday pay and some unpaid wages, up to statutory limits.
Suppliers are usually unsecured creditors. They may get a small proportion of what they are owed, sometimes nothing. Some have retention of title clauses in their contracts, allowing them to reclaim goods that have not been paid for, provided they can be identified.
Customers with gift cards, vouchers or deposits are generally unsecured creditors too. Administrators decide whether to keep honouring gift cards, and often stop for a period. Anyone who paid by credit card for an item costing more than £100 and up to £30,000 may be able to claim from the card provider under Section 75 of the Consumer Credit Act. Debit card payments can sometimes be recovered through the chargeback scheme, which is a card network rule rather than a legal right.
Who gets paid first
Money raised is distributed in a set order. Broadly:
- Creditors with fixed charges over specific assets, such as a property.
- The costs of the administration itself.
- Preferential creditors, mainly employees' claims for wages and holiday pay up to a limit, followed by HMRC for certain taxes the company collected on the government's behalf, such as VAT and PAYE.
- Holders of floating charges, after a portion known as the prescribed part has been set aside for unsecured creditors.
- Unsecured creditors, including most suppliers and customers.
- Shareholders, who in most administrations receive nothing.
Administrators must report to creditors and file progress reports at Companies House, where anyone can read them. They are often the clearest account of what went wrong and how much is likely to be recovered.
