Convenience shop chain McColl’s went into administration last week but appears to have been saved by a Morrisons buyout (image: AFP/Getty Images)
Every year, thousands of UK businesses go under.
While most of these insolvencies are small companies, we tend to see several well-known businesses, including football clubs, go into administration each year - often putting thousands of jobs at risk.
Most recently, the biggest names to struggle have been Derby County, fashion and homeware retailer Studio Retail Group (which was rescued by Mike Ashley’s Frasers Group) and convenience shop chain McColl’s (which has been rescued by supermarket chain Morrisons).
So what exactly does it mean when a company goes into administration - and what happens during the process?
Here’s what you need to know.
What does administration mean?
‘Going into administration’ is a business term for when a company can’t meet its financial obligations to its lenders - insolvency - and has to call in administrators.
Administrators, also known as insolvency practitioners, take over the running of the company from its executives and have to hold a licence to perform the role.
They either work to find a way to save the business, or carve it up so creditors are paid at least some of what they’re owed.
Basically, while administration creates a lot of uncertainty for those who work for the firm as well as its customers, it does not necessarily mean it’s the end.
What the administrators work towards achieving depends on whether the company is viable or not.
There is also a different sort of administration known as a ‘pre-pack administration’.
This tends to be used in instances where a company’s principal value relates to a brand it owns - the value of which would likely be severely dented should the company go into full administration.
Not only would this reduce the chances of the firm being rescued, but it could also hit creditors in the pocket.
A pre-pack essentially allows the company to line up a full or partial sale with the help of an administrator before the company formally goes into administration.
How does administration work?
When a company first goes into administration, it gets a statutory moratorium - essentially, legal breathing space from the creditors who are chasing up their money.
Administrators will use this period to draw up plans on how to financially restructure the business to keep it going, and may keep day-to-day operations running.
They might also put the company in a shop window in a bid to attract potential suitors who could buy it out.
Should they find a way to keep the business going, the insolvency practitioners will eventually hand control of the company back to its directors and some jobs will be saved.
If, however, the firm in its existing form is in too much trouble to adequately rescue, the administrator’s focus will turn to hiving off parts of the business with the aim of giving its creditors the best return possible.
This process could see the sale of the company’s assets, like equipment, software or customer databases, or of its divisions or brands.
The administrators could also opt to liquidate the business - basically, wind up its affairs - and give the proceeds to its secured (i.e. insured) or preferential creditors (usually employees) should there be no viable alternative.
They have eight weeks to put plans together for either of these three options and then must present them to the firm’s creditors, who will vote on them.
Overall, the administration process can take a maximum of 12 months to complete - unless the administrator is granted an extension by a court or creditors.
Where does administration money go?
Should administrators opt for a full or partial sale or a liquidation, the money will go to the company’s creditors.
There is a pecking order for who receives the money they are owed first.
Generally it is:
- Secured creditors (e.g. banks who have provided mortgages or loans)
- Preferential creditors (HMRC for unpaid taxes and employees who are owed wages, holiday pay and pension contributions)
- Unsecured creditors (suppliers and customers)
- Shareholders or members
So, if you’re a customer of a business, you might not be guaranteed a full refund if that business goes under because the money generated from any sale or liquidation is likely to go towards the companies and people in the first two categories.