Can my company use Administration or Pre Pack?
- Your company needs to be insolvent
- There needs to be a viable part of the business that holds value and is worth saving
If your business is having cash flow problems then you should contact us as soon as possible. Do this before your company enters administration or makes any decisions.
Administration can be an excellent tool but you want to be 100% sure that it is the right choice for your company. Talk through all your alternatives but most importantly, do not leave it until it is too late and your situation becomes a winding-up order from the court.
There are two ways your company can be placed into administration:
- With a court order;
An application is made to the court and this can be done by the company and its directors or by one or more creditors. If the company is in liquidation already then the liquidator can ask the court.
- Without a court order;
Company directors can appoint an administrator directly or certain preferential creditors also have the power.
Why use the administration process in Scotland?
The process is very useful for companies who are experiencing serious financial difficulty but whose business still has parts which are viable. Directors and shareholders invest considerable time, effort and expense acquiring assets, training staff and negotiating contracts.
These areas of the business still retain considerable value even though the company may not be able to pay its bills. It is for this reason that so many companies that go into administration look to use the Pre Pack process which allows the current owners (or a third party) to buy these valuable assets back via a new company.
Sometimes this can seem unfair for creditors and to the benefit of the shareholders but the arrangement is also to the benefit of all the staff and other businesses who have contracts with the original company. Trade is able to continue and the staff do not need to look for new employment.
Well known examples of these procedures can be seen in the Scottish football sector with five clubs having been helped via administration; Dundee (2x), Dunfermline, Hearts, Livingston and Motherwell while Rangers and Gretna were actually forced into liquidation.
What is the difference with Pre Pack & Administration?
The main difference between administration and Pre Pack is that the sale of the business and any of its assets are negotiated before the administrator is assigned. When the administrator, who is a licenced Insolvency Practitioner is assigned they will have the business independently valued to confirm that the sale is in the best interests of the creditors.
Once confirmed and agreed by the creditors, the company can then sell off the viable part of the business. This can be to a third party or back to the original owners via a new company. The company would then enter liquidation where all remaining assets are sold to pay creditors before the company is closed down.
What should I do before entering a Pre Pack Administration?
Prior to officially starting the process company directors should;
- Get the business and its assets independently valued.
- Market the business to see if anyone is interested in buying.
- Try and secure a buyer.
- The administration process must make more financial sense for creditors than a liquidation or they will not consider it.
- Or arrange to buy back the part of the business that is successful via a new company or a third party (Pre Pack).
Who gets paid first when a company goes into Administration?
The payouts are made according to the Insolvency Act, 1986 which lists creditors in the following order;
- Secured creditors with a fixed charge & Insolvency Fees
- Preferential Creditors
- Secured creditors with a floating charge
- Unsecured Creditors
How long does the Administration process take?
If a Pre Pack is used and everything is in place then it can be done in a few days. A more typical administration can be anything from a few weeks up to a year depending on your companies individual circumstances. The court is able to grant an extension for a further six months should it be necessary.