What happens when a business goes into administration?

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Thousands of businesses file for bankruptcy each year – with McColl’s, Derby County and Studio Retail Group being the latest high-profile casualties

Convenience chain McColl’s went bankrupt last week but was apparently saved by a takeover by Morrisons (Image: AFP/Getty Images)

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While most of these bankruptcies are small businesses, we typically see several well-known companies, including football clubs, file for bankruptcy each year – often putting thousands of jobs at risk.

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So what exactly does it mean when a company goes bankrupt – and what happens when it happens?

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Here’s what you need to know.

What does administration mean?

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Administrators, also known as insolvency practitioners, assume leadership of the company from its executives and must be licensed to perform this role.

They’re either working to find a way to bail out the company, or they’re splitting it up so creditors get at least some of their debt.

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Basically, while administration means a lot of uncertainty for those who work for the company and its customers, it doesn’t necessarily mean it’s the end.

McColl’s is the latest high-profile company to go into administration (Image: AFP/Getty Images)

What admins are working toward depends on whether the business is viable or not.

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There is also another mode of administration known as “pre-pack administration”.

This is typically used in cases where a company’s core value relates to a brand it owns – the value of which would likely be severely impacted if the company went into full bankruptcy.

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Not only would this lower the chances of the company being bailed out, but it could also pocket creditors.

A pre-pack essentially allows the company to complete a full or partial sale with the help of an administrator before the company officially goes bankrupt.

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How does the administration work?

When a company first files for bankruptcy, it’s given a legal moratorium — essentially a legal breather from creditors chasing their money.

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Admins will use this period to create plans to financially restructure the business to keep it running and able to maintain ongoing operations.

You could also put the company in a showcase to attract potential suitors who might buy it out.

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Mike Ashley bought House of Fraser out of administration back in 2018 (Image: PA)

Eventually, should they find a way to keep the business afloat, the liquidators will return control of the company to its directors and some jobs will be saved.

However, if the company in its current form gets into too much trouble to bail out adequately, the trustee’s focus will be on spinning off parts of the company in order to offer its creditors the best possible return.

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This process could involve the sale of the company’s assets, such as equipment, software, or customer databases, or its divisions or brands.

Administrators could also choose to liquidate the company – basically winding up its affairs – and give the proceeds to its secured (i.e. insured) or preferred creditors (usually employees) if there is no viable alternative.

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They have eight weeks to create plans for any of those three options, and then they must present them to the company’s creditors, who will vote on them.

In total, the resolution process can take a maximum of 12 months – unless the administrator is granted an extension by a court or creditors.

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Where does the administration money go?

Should the administrators decide to sell all or part of it, or liquidate it, the money will go to the company’s creditors.

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There is a pecking order as to who gets the money owed first.

  1. Secured creditors (such as banks that provided mortgages or loans)
  2. Preferred creditors (HMRC for unpaid taxes and employees who owe wages, holiday pay and pension contributions)
  3. Unsecured creditors (suppliers and customers)
  4. shareholders or members

So if you are a customer of a company you may not be guaranteed a full refund if that company goes under as the money generated from a sale or liquidation is likely to go to the companies and individuals in the first two categories.

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