A lot of businesses have gone into administration over the last few years. In February alone, 31 construction firms went into administration, while a well-known Glasgow city center hotel was put up for sale recently.

Much of this can be put down to the events of the last two years. The economy and our buying habits have changed drastically.

Plus, now with the cost of living crisis making an impact, it’s likely that companies will have to rethink their models and revisit their business plans in order to move forward.

For those that are finding things tough, it could be crunch time and administration could be on the cards.

Why enter administration?

A company usually goes into administration when it is declared insolvent as a result of cash flow issues. Rather than selling up and closing its doors completely, the business is deemed viable by an administrator – also known as an insolvency practitioner.

The administrator is either called in by the company’s directors, creditors who are hoping to retrieve their money, or they could be court-appointed.

Once the administrator is on board, a moratorium is put in place to postpone any actions taken by creditors to seek payments. While this pause is in place, financial restructuring could be introduced to rescue the business.

This is one of the main reasons why business owners might want to enter administration. If a buyer is found, the creditors can be paid and the business saved.

However, it’s worth entering administration even if the business can’t be rescued. This is because the administrator will oversee conversations with creditors to get a better return for them.

My business is in administration. What next?

Should your business be in the administration process, you will be told that you can trade as normal, but you’ll no longer have control of the company. That responsibility falls to the administrator.

Proposals will be made and then the creditors will vote on these proposals. The creditors will then receive proceeds from any sale of the company, whether that’s all of it or parts of the business.

There’s a hierarchy here, with secured creditors receiving their payments first and shareholders seeing payments after preferential and unsecured creditors have settled up.

HMRC is also factored into this process. Outstanding debts will also be settled up.

This can be overwhelming for you and your directors. It’s worth seeking legal advice to make sure you are fully represented and the process is clear.

What is pre-pack administration?

So far, we have looked at a standard administration process. However, there is another type to be aware of. A pre-pack administration process is the same as a standard one apart from one key detail: the sale of the business and assets are agreed upon before the administrators are appointed.

There are several pros to doing things this way. First, it can be business as usual as there’s a new owner to take on the company. Additionally, debtors are less likely to be anxious about settling up if the business and assets are already sold.

Similarly, if the buyer is already lined up, the brand’s reputation is preserved as the publicity that comes with going into administration can put workers and suppliers off. In this case, it looks more likely that jobs will be saved.

After administration

The administration process ends when the administrator decides the goals they set have been met. Alternatively, if the administrator’s contract has ended, the process may end at the same time.

Once this happens, creditors may be free to take legal action. However, this isn’t always the case.

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