Every year, thousands of UK businesses go under. Indeed, official figures from public body the Insolvency Service released on Tuesday 31 January showed the number of company failures last year - 22,109 - was the highest since 2009 and 57% above the number recorded in 2021.
While most of these insolvencies will have involved smaller firms, we tend to see several household names, including football clubs, fall into administration every year - often putting hundreds of jobs at risk.
The stationary retailer brought in administrators on 31 January after it was unable to find a buyer for its operations. Tesco has since stepped in to buy its brand and intellectual property - but its portfolio of 106 high street stores face an uncertain future.
As well as putting jobs at risk, company administrations can see consumers lose out. Money left over after a business goes under does not necessarily translate into refunds for customers. But what exactly does it mean when a company goes into administration - and what can happen during the process?
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, who are sometimes known as insolvency practitioners, take over the running of the company from its executives and must hold a licence to perform the role. They either work towards saving the business, or carve it up so creditors are paid at least some of the money 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 for the company in question. 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 type 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, it is granted legal breathing space from the creditors (including banks, suppliers and customers) who are chasing up their money.
Administrators use this period to put together plans for how to financially restructure the business to keep it running, and may keep day-to-day operations running as usual. They might also put the company in a shop window to encourage other businesses to buy up the business.
Should they find a way to keep the firm 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 is in too dire a situation to rescue as a whole entity, 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 can involve the sale of the company’s assets, like equipment, software or customer databases, or of its divisions or brands.
The administrators can also opt to entirely liquidate the business - i.e. close its doors and sell everything the business owns - to generate money. When this happens the proceeds go to secured (i.e. insured) or preferential creditors (usually employees) in the first instance.
Administrators have eight weeks to put plans together for either of these three options and then must present them to the firm’s creditors, who then get to 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.