Benefits of Trading a Company in Administration
When a company is in administration, trading activities can still continue under the control and supervision of the administrator. However, there are certain considerations and restrictions to be aware of when trading a company in administration:
- The administrator has the authority to make decisions regarding the company's trading activities. Any significant trading decisions, such as entering into new contracts or incurring substantial expenses, typically require the administrator's approval even when the administrator is operating light touch supervision where the management retain day to day control of trading.
- The administrator's primary duty is to act in the best interest of the company's creditors as a whole. This means that trading decisions should be made with the objective of maximising the return for creditors.
- Trading activities may continue to maintain the value of the business, preserve jobs, and potentially facilitate a sale or restructuring of the company. The administrator will assess the viability of the business and determine whether it is feasible to continue trading, which will include an assessment as to whether support is available from key stakeholders including employees, suppliers, customers and funders, where required.
- Existing contracts and agreements that the company entered into before administration may still be binding. The administrator will review these contracts and determine whether they should be honoured or terminated.
- Typically administrators will communicate with key stakeholders to keep them informed about the company's trading position and any changes that may affect their interests.
- Trading activities in administration must comply with relevant laws and regulations. This includes fulfilling obligations related to tax, employment, health and safety, and other legal and regulatory requirements.
- Trading expense takes priority to creditors, including preferential creditors and creditors secured by way of a floating charge over the assets but not creditors with a fixed charge unless by express agreement. It is possible for such expense to be funded by the administrator or a third party. Cork Gully is one of few firms who are prepared to fund such expense.
- Working with an experienced administrator is crucial when trading the company in administration. The administrator will need to make commercial decisions often at short notice to preserve and enhance value.
It’s important to note that the specific details and implications of trading a company in administration can vary depending on the circumstances, the nature of the business, and the applicable laws and regulations.
Continuing to trade a company in administration can serve several purposes and be beneficial in certain situations. Here are a few reasons why trading may continue during the administration process:
- By continuing to trade, the administrator aims to preserve the value of the business. Trading activities can help maintain the value of the company's assets, customer relationships, and market presence, which could potentially lead to a better outcome for the company's creditors.
- Trading may provide an opportunity to generate revenue and cash flow, which can be used to repay creditors. If the business has viable operations or valuable assets, such as inventory, contracts, or intellectual property, trading can help realise the maximum value from those assets.
- By reducing overheads and streamlining the business any cash burn can be significantly reduced, assuming that the business is loss making. The administrators will only be obliged to pay for the services that they use. While the option remains to reduce costs prior to administration such cost reduction usually has a short-term cash requirement. Where the company doesn’t have the cash available this may not be a viable option.
- Employee numbers can be reduced during administration making the business more attractive to a buyer provided that the redundancies aren’t linked to the sale and are based upon economic considerations. The costs of any redundancies will be an unsecured claim against the company and will not impact the sale. In a pre-pack the employees contracts would automatically transfer to the buyer.
- Trading can make the business more attractive to potential buyers and allow additional time to market the business for sale. By demonstrating ongoing operations, customer relationships, and revenue generation, the administrator may be able to find a buyer who is interested in acquiring some or all of the business. This can result in a higher recovery for creditors compared to a liquidation scenario or a pre-packaged sale of the business and assets. By trading the business in administration, the administrators can run an accelerated sales process ensuring that the opportunity is brought to the attention of the wider market.
- The administrator also has certain powers to compel critical suppliers to continue to provide services in a trading period however the supplier may attempt to make it a condition that the administrator personally guarantees the payment of charges in the trading administration period.
It’s worth noting that the decision to continue trading a company in administration is not taken without extensive analysis. The administrator will evaluate the financial viability of the business, potential risks and rewards, and the likelihood of achieving a better outcome for creditors. Ultimately, the goal is to strike a balance between preserving value, meeting obligations, and maximising recoveries for the benefit of all stakeholders involved.