Business is easy – as long as your assets exceed any liabilities. But what happens when they don’t? Pádraig Floyd explores the unsettling subject of administration.
Administration is a word that
strikes fear into business
owners and employees alike. It
signifies the end of a company,
employment and all the associated hard
work – even if that is not necessarily the
reality. And there’s a lot of it about.
The high street is suffering sustained instability as it adjusts to different consumer shopping patterns and the onslaught of online traders.
The casual dining sector – pubs, cafes and restaurants – is also struggling. In the past year, TV chef Jamie Oliver lost one of his Barbecoa restaurants – and very nearly his Jamie’s Italian chain but for a company voluntary arrangement. Meanwhile, Patisserie Valerie imploded after a financial scandal was discovered (see A bitter-sweet tale) and fell into administration.
Travel is also under intense pressure from rising fuel prices, Brexit and currency fluctuations. FlyBMI recently entered administration, while Flybe was sold to Connect Airways.
Insolvency is quite simply the inability of a business to cover its debts. There are two tests. The first is assets not exceeding liabilities, but the most common one used is the cash flow forecast.
In 2018, company insolvencies rose to 17,439 and administrations increased by 11.2% (see table). But what exactly is administration?
The high street is suffering sustained instability as it adjusts to different consumer shopping patterns and the onslaught of online traders.
The casual dining sector – pubs, cafes and restaurants – is also struggling. In the past year, TV chef Jamie Oliver lost one of his Barbecoa restaurants – and very nearly his Jamie’s Italian chain but for a company voluntary arrangement. Meanwhile, Patisserie Valerie imploded after a financial scandal was discovered (see A bitter-sweet tale) and fell into administration.
Travel is also under intense pressure from rising fuel prices, Brexit and currency fluctuations. FlyBMI recently entered administration, while Flybe was sold to Connect Airways.
Insolvency is quite simply the inability of a business to cover its debts. There are two tests. The first is assets not exceeding liabilities, but the most common one used is the cash flow forecast.
In 2018, company insolvencies rose to 17,439 and administrations increased by 11.2% (see table). But what exactly is administration?
Decisions, decisions
A business enters administration with
the appointment of an administrator as
ordered either by a court, a qualifying
floating charge holder (for example, a
bank) or the company/directors.
The administrator oversees the process, which is designed to save the business as a going concern. It protects the company and prevents any legal action against the company from proceeding, unless authorised by the administrators or the court. Creditors may not take legal action to recover outstanding sums while a company is in administration.
The administrator oversees the process, which is designed to save the business as a going concern. It protects the company and prevents any legal action against the company from proceeding, unless authorised by the administrators or the court. Creditors may not take legal action to recover outstanding sums while a company is in administration.
Timing is everything
The decision a business makes about
insolvency should be based on hard facts.
It revolves around the stage at which
solvency will return or an injection of
capital or credit – and the sooner a
decision is taken the better. Insolvency
practitioners (IPs) say that far too
many businesses wait too long before
seeking advice.
“If you leave it too late, it could very well be terminal,” says Allison Broad, senior manager, professional standards at ICAEW. “By then, liquidation may be more appropriate than administration.”
In order for a recovery or sale, you need a good underlying business with assets someone will want that aren’t charged to the hilt – something that fewer businesses have in these days of asset finance and invoice finance. “The earlier you enter that process, the greater the flexibility,” adds Broad.
ICAEW conducted a project in 2018 to encourage directors to engage with professionals at a much earlier stage to keep their options open, with a series of real-life business case study videos available at Marketing your restructuring and insolvency services.
“If you leave it too late, it could very well be terminal,” says Allison Broad, senior manager, professional standards at ICAEW. “By then, liquidation may be more appropriate than administration.”
In order for a recovery or sale, you need a good underlying business with assets someone will want that aren’t charged to the hilt – something that fewer businesses have in these days of asset finance and invoice finance. “The earlier you enter that process, the greater the flexibility,” adds Broad.
ICAEW conducted a project in 2018 to encourage directors to engage with professionals at a much earlier stage to keep their options open, with a series of real-life business case study videos available at Marketing your restructuring and insolvency services.
Not the end of the road
If a business cannot raise money, then
administration is an obvious route to
rescue a company as a going concern.
If that cannot be achieved, the next
target is to achieve a better result for the
company’s creditors as a whole than
is likely to be achieved by liquidating
the company.
If that, too, is untenable, an administrator must release property in order to clear some of the debts held by the secured or preferential creditors. To have a realistic prospect of selling a business requires more than just attractive assets, says Stuart Frith, president of R3. “The first is the integrity and reliability of management,” says Frith. “Then, and this is crucial, you need good and reliable management information.”
This covers not only trading, but profit and loss, and most critically, cash flow forecasting. It is one of the most basic of requirements for running a business. Yet IPs regularly encounter businesses where the directors have delayed seeking advice and yet haven’t done the numbers to know how bad things might actually be.
“If they haven’t got a cash flow forecast, you don’t have the most basic tool for turnaround management or even assessing how long the company has before if hits the brick wall of insolvency,” says Frith.
After that, a supportive workforce and a recognised and supportive customer base are important qualities that will make a business saleable.
If that, too, is untenable, an administrator must release property in order to clear some of the debts held by the secured or preferential creditors. To have a realistic prospect of selling a business requires more than just attractive assets, says Stuart Frith, president of R3. “The first is the integrity and reliability of management,” says Frith. “Then, and this is crucial, you need good and reliable management information.”
This covers not only trading, but profit and loss, and most critically, cash flow forecasting. It is one of the most basic of requirements for running a business. Yet IPs regularly encounter businesses where the directors have delayed seeking advice and yet haven’t done the numbers to know how bad things might actually be.
“If they haven’t got a cash flow forecast, you don’t have the most basic tool for turnaround management or even assessing how long the company has before if hits the brick wall of insolvency,” says Frith.
After that, a supportive workforce and a recognised and supportive customer base are important qualities that will make a business saleable.
“If you leave it too late, it could very well be terminal. By then, liquidation may be more appropriate than administration”
Time is not on your side
Once a business enters into administration,
the clock is ticking: creditors need to be
informed and alternatives pursued.
Administrators will want a swift resolution as they will become personally liable for operational costs, such as payroll and tax if a buyer is not found. There is also a danger that goodwill seeps away the longer the company remains in administration. Graham Bushby, head of RSM Restructuring Advisory, says that though it may seem counterintuitive, administration can be a good way to preserve a company’s goodwill. “We often sell the goodwill of the business as part of administration, purely on the basis it is the only way of keeping the business trading. You don’t actually have to shut the doors.”
Bushby recently sold an online education business purchaser, took on all the existing customers, all the existing courses, kept the goodwill and paid for it outright. A major advantage of administration is that the seller does not need to offer any warranties, says Bushby. In particular, the buyer doesn’t need to do as full a due diligence exercise, which keeps the cost down and makes the sale quicker and easier. It might even increase the price because the buyer isn’t taking on the risk of all the liabilities.
Administrators will want a swift resolution as they will become personally liable for operational costs, such as payroll and tax if a buyer is not found. There is also a danger that goodwill seeps away the longer the company remains in administration. Graham Bushby, head of RSM Restructuring Advisory, says that though it may seem counterintuitive, administration can be a good way to preserve a company’s goodwill. “We often sell the goodwill of the business as part of administration, purely on the basis it is the only way of keeping the business trading. You don’t actually have to shut the doors.”
Bushby recently sold an online education business purchaser, took on all the existing customers, all the existing courses, kept the goodwill and paid for it outright. A major advantage of administration is that the seller does not need to offer any warranties, says Bushby. In particular, the buyer doesn’t need to do as full a due diligence exercise, which keeps the cost down and makes the sale quicker and easier. It might even increase the price because the buyer isn’t taking on the risk of all the liabilities.
Show me the money
Many insolvencies are prompted by banks
making a decision where directors have
failed to, or agencies – such as HMRC –
fear they won’t see any money unless a
company is wound up.
Banks have greatly reduced the amount they lend to business, especially SMEs, in recent years, but there is still money available from assets lenders, investment funds and private equity houses. “They’re driving a hard bargain, but there’s quite a lot of money looking for opportunities,” says Bushby. In particular, he is seeing more mandates for what he calls accelerated sales for businesses that are not looking for funding, but an exit.
“There are plenty of businesses around the world putting money into the UK, looking to purchase businesses that are heading towards distress on the basis they think it presents a good opportunity,” he says. “A lot of it is American money at the moment as there is a good exchange rate for them.”
In recent years, peer-to-peer funders have become very prominent, but just because they know how to lend money doesn’t mean they are as proficient at collecting it. Michael Mulligan, a partner at law firm Shakespeare Martineau, says: “They’re not generally insolvency-savvy nor geared up to enforce and deal with defaults. That part of the lending sector has a real need for insolvency practitioners and advisers to hold their hand through increasing defaults as the economy suffers and heads towards a recession.”
Banks have greatly reduced the amount they lend to business, especially SMEs, in recent years, but there is still money available from assets lenders, investment funds and private equity houses. “They’re driving a hard bargain, but there’s quite a lot of money looking for opportunities,” says Bushby. In particular, he is seeing more mandates for what he calls accelerated sales for businesses that are not looking for funding, but an exit.
“There are plenty of businesses around the world putting money into the UK, looking to purchase businesses that are heading towards distress on the basis they think it presents a good opportunity,” he says. “A lot of it is American money at the moment as there is a good exchange rate for them.”
In recent years, peer-to-peer funders have become very prominent, but just because they know how to lend money doesn’t mean they are as proficient at collecting it. Michael Mulligan, a partner at law firm Shakespeare Martineau, says: “They’re not generally insolvency-savvy nor geared up to enforce and deal with defaults. That part of the lending sector has a real need for insolvency practitioners and advisers to hold their hand through increasing defaults as the economy suffers and heads towards a recession.”
Pre-packs may be the answer
If an administrator cannot find a buyer
for the business as a going concern, a
pre-packaged administration – or pre-pack
– may be possible.
Pre-packs have attracted considerable flak in recent years. Creditors often don’t like them, as they have no control over the process and hear about the sale relatively late in the proceedings. Some also suspect a more thorough sales process might have brought them better returns.
The other concern surrounds phoenix companies rising from the embers of the previous one, says Broad. “The concern has been that they’ve been sold back to the directors of the previous company,” she says. “One day you’re trading with ABC Ltd. Then it becomes insolvent and, after a pre-pack, you could be trading with the same people the next day.”
It must comply with a Statement of Insolvency Practice 16 (SIP 16) that clearly sets out the requirements for making such a sale. The creation of the pre-pack pool, an independent panel of business experts to provide a view on the deal, has also provided greater protection against phoenix companies, adds Broad.
While not every company can be saved, administration offers a safe and structured environment that helps directors to secure the business’s future, even if it brings their involvement to an end.
Pre-packs have attracted considerable flak in recent years. Creditors often don’t like them, as they have no control over the process and hear about the sale relatively late in the proceedings. Some also suspect a more thorough sales process might have brought them better returns.
The other concern surrounds phoenix companies rising from the embers of the previous one, says Broad. “The concern has been that they’ve been sold back to the directors of the previous company,” she says. “One day you’re trading with ABC Ltd. Then it becomes insolvent and, after a pre-pack, you could be trading with the same people the next day.”
It must comply with a Statement of Insolvency Practice 16 (SIP 16) that clearly sets out the requirements for making such a sale. The creation of the pre-pack pool, an independent panel of business experts to provide a view on the deal, has also provided greater protection against phoenix companies, adds Broad.
While not every company can be saved, administration offers a safe and structured environment that helps directors to secure the business’s future, even if it brings their involvement to an end.
A bitter-sweet tale
Patisserie Valerie is a lesson in
how an insolvency event can
escalate very quickly indeed.
Last autumn, the group, owned by Risk Capital, had 206 stores, 2,500 staff and was worth £446m. However, on 10 October, its shares were suspended at 429p after “significant, and potentially fraudulent, accounting irregularities” surfaced in the wake of a HMRC winding-up petition for £1.14m of unpaid taxes. Instead of the £28.8m supposedly in the bank, the company was £10m in debt.
Majority shareholder Luke Johnson pumped in £20m while external shareholders contributed an extra £15.7m.
Within days FD Chris Marsh was arrested and released on bail before he resigned. The cause of the collapse was two overdrafts totalling £9.7m neither the board nor auditors were aware of. The scale spooked creditors, and on 22 January, Patisserie Valerie fell into administration with the closure of 70 sites and the loss of over 900 jobs.
A £15m Sports Direct offer was rejected by administrator KPMG as being £2m too low.
However, on 14 February, a management buy-out, backed by Dublin-based Causeway Capital, acquired 96 Patisserie Valerie cafes. Food wholesaler AF Blakemore acquired sister business Philpotts, securing 210 jobs across 21 shops. The two transactions raised £13m.
A day later, the Department of Coffee & Social Affairs acquired its coffee shop chain Baker & Spice for £2.5m. In all, the deals saved 2,000 jobs.
Last autumn, the group, owned by Risk Capital, had 206 stores, 2,500 staff and was worth £446m. However, on 10 October, its shares were suspended at 429p after “significant, and potentially fraudulent, accounting irregularities” surfaced in the wake of a HMRC winding-up petition for £1.14m of unpaid taxes. Instead of the £28.8m supposedly in the bank, the company was £10m in debt.
Majority shareholder Luke Johnson pumped in £20m while external shareholders contributed an extra £15.7m.
Within days FD Chris Marsh was arrested and released on bail before he resigned. The cause of the collapse was two overdrafts totalling £9.7m neither the board nor auditors were aware of. The scale spooked creditors, and on 22 January, Patisserie Valerie fell into administration with the closure of 70 sites and the loss of over 900 jobs.
A £15m Sports Direct offer was rejected by administrator KPMG as being £2m too low.
However, on 14 February, a management buy-out, backed by Dublin-based Causeway Capital, acquired 96 Patisserie Valerie cafes. Food wholesaler AF Blakemore acquired sister business Philpotts, securing 210 jobs across 21 shops. The two transactions raised £13m.
A day later, the Department of Coffee & Social Affairs acquired its coffee shop chain Baker & Spice for £2.5m. In all, the deals saved 2,000 jobs.
My experience of administration
Tom Rodgers co-founded
salfordonline.com, a
hyper-local news site in
2008 offering daily news to
the city of Salford’s
226,000-strong population.
The innovative model involved using social media to gather news and involve the local community. Rodgers and his business partner ran the enterprise for nine years. While it picked up many readers, it never really generated enough revenue, leading to the difficult decision of shutting down the business.
“It can be very stressful when you’re facing the destruction of everything you’ve grafted so hard for – 70 hours a week for nine years,” says Rodgers. “When it’s all coming to a close, everything looks very bleak.”
He took the sensible route and sought advice from his accountant, who agreed that they would probably not trade out of the situation and that they should not trade irresponsibly. “That was sound advice I‘d pass on to anyone who’s in the same situation,” says Rodgers.
The rest of the process was relatively easy to navigate. As there were few creditors and few staff, the process was made simpler.
Rodgers admits to being nervous about the announcement. He says: “I had absolutely no idea what the process would look like and imagined creditors lined up outside the offices banging on the door waving bits of paper. In the end, it wasn’t like that at all.”
As the administration process is highly structured, he found it to be straightforward, and justified what he sees as a good decision made at the appropriate time. “It still hurt, because it was my baby,” Rodgers says. “But looking back, I can see that it was absolutely the right decision to make. It was a loss to the community – and not to forget my ego – but time heals.”
He adds: “You’ve got to be realistic about what’s left in the business and how far you might be able to go to trade out of it. But if you want to protect people, and your reputation, then you’ve got to make the right decision. For us, that was to go through administration and be wound up.”
The innovative model involved using social media to gather news and involve the local community. Rodgers and his business partner ran the enterprise for nine years. While it picked up many readers, it never really generated enough revenue, leading to the difficult decision of shutting down the business.
“It can be very stressful when you’re facing the destruction of everything you’ve grafted so hard for – 70 hours a week for nine years,” says Rodgers. “When it’s all coming to a close, everything looks very bleak.”
He took the sensible route and sought advice from his accountant, who agreed that they would probably not trade out of the situation and that they should not trade irresponsibly. “That was sound advice I‘d pass on to anyone who’s in the same situation,” says Rodgers.
The rest of the process was relatively easy to navigate. As there were few creditors and few staff, the process was made simpler.
Rodgers admits to being nervous about the announcement. He says: “I had absolutely no idea what the process would look like and imagined creditors lined up outside the offices banging on the door waving bits of paper. In the end, it wasn’t like that at all.”
As the administration process is highly structured, he found it to be straightforward, and justified what he sees as a good decision made at the appropriate time. “It still hurt, because it was my baby,” Rodgers says. “But looking back, I can see that it was absolutely the right decision to make. It was a loss to the community – and not to forget my ego – but time heals.”
He adds: “You’ve got to be realistic about what’s left in the business and how far you might be able to go to trade out of it. But if you want to protect people, and your reputation, then you’ve got to make the right decision. For us, that was to go through administration and be wound up.”
Football - the not-so beautiful game
It may be considered “a
funny old game”, as the
Jimmy Greaves saying goes,
but football is definitely one
of those businesses where
the heart often (over)rules
the head.
It is certainly a game of two
halves – the haves and have
nots – a separation that has
become more pronounced
as money has flooded into
the Premier League, but also
the Championship.
A Herculean task
Since 1984, more than 40 clubs in the football league, and others just outside it, have spent time in administration. Clubs that have entered administration often face a greater struggle to get out of it again and be able to continue for two key reasons. The first is that the league imposes a points penalty on any club entering administration. This is designed to prevent any club making use of the protections of administration to gain an advantage over their sporting rivals.
It’s only fair
With the adoption of the financial fair play rules, which European football governing body UEFA established, this penalty rose from 10 points to 12 in 2015. In most cases, this causes a struggling team to face relegation at the end of the season.
The other obstacle is the football creditors rule. This prevents any club that comes out of administration from rejoining the league until all debts to players and clubs have been discharged.
Portsmouth is the only Premier League club to have entered administration and is now languishing in the third tier of British football.
The once-mighty Leeds United fared no better following two consecutive deductions – one of 10 points for entering administration, the second of 15 points for failing to leave it before the start of the new season with a company voluntary association.
Play to the whistle
As with all businesses, administration does not mean the end for football clubs. Leeds are again riding high in the second tier and a strong contender for the playoffs, if not automatic promotion this season. Huddersfield Town may be nailed to the bottom of the Premier League, but 15 years ago the club was minutes from liquidation before it turned itself around. All of which goes to show that things aren’t always as bad as they may seem.
A Herculean task
Since 1984, more than 40 clubs in the football league, and others just outside it, have spent time in administration. Clubs that have entered administration often face a greater struggle to get out of it again and be able to continue for two key reasons. The first is that the league imposes a points penalty on any club entering administration. This is designed to prevent any club making use of the protections of administration to gain an advantage over their sporting rivals.
It’s only fair
With the adoption of the financial fair play rules, which European football governing body UEFA established, this penalty rose from 10 points to 12 in 2015. In most cases, this causes a struggling team to face relegation at the end of the season.
The other obstacle is the football creditors rule. This prevents any club that comes out of administration from rejoining the league until all debts to players and clubs have been discharged.
Portsmouth is the only Premier League club to have entered administration and is now languishing in the third tier of British football.
The once-mighty Leeds United fared no better following two consecutive deductions – one of 10 points for entering administration, the second of 15 points for failing to leave it before the start of the new season with a company voluntary association.
Play to the whistle
As with all businesses, administration does not mean the end for football clubs. Leeds are again riding high in the second tier and a strong contender for the playoffs, if not automatic promotion this season. Huddersfield Town may be nailed to the bottom of the Premier League, but 15 years ago the club was minutes from liquidation before it turned itself around. All of which goes to show that things aren’t always as bad as they may seem.
Download pdf article:
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The business administration process
Business & Management Magazine, Issue 273, April 2019
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Changelog Anchor
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Update History
- 04 Oct 2019 (12: 00 AM BST)
- First published
- 21 Sep 2022 (12: 00 AM BST)
- Page updated with Related resources, adding further reading into company administrations. These additional articles and eBook provide fresh insights, case studies and perspectives on this topic. Please note that the original article from 2019 has not undergone any review or updates.