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What does ‘going into administration’ actually mean?
When a company enters administration, it means it cannot afford to continue trading due primarily to too much debt and/or the inability to generate or borrow more cash quickly enough. In this process, all control of a company is passed to an appointed administrator, who has to be a licenced insolvency practitioner. Their goal is to leverage the company's assets and business to repay creditors.
Once the administrator has taken over, a moratorium is placed around the company and stops all legal actions. After the administrator takes over, there isn't much that can be done to reverse the process.
How long does administration last?
The administrators take on the employment contracts of the company after 14 days so efforts will be made to try and ensure the business is sold out of administration before that date. The insolvency practitioners are not allowed to run the business at a loss which would make the creditors position worse off. If there are large amounts of money to collect in or substantial realisable assets then they may trade for longer periods. During this time they will need to report to the creditors at regular intervals.
What happens after a retailer has been placed into administration?
The primary role of an administrator is to try and rescue some or all of the business so it can continue trading and repay its debts in full. This may be through a restructure or sale of part of the business, partial store closure or even things like sales or stock clearance offers; all options are considered to try and keep the business a viable option.
Is something called a CVA relevant here?
Yes. A CVA, or company voluntary agreement, is a consensual agreement between a company and its creditors. The aim of a CVA is to offer some or all creditors a compromise which allows the company to avoid administration or liquidation and, in doing so, producing a better outcome for all creditors.
A CVA means a retailer can close underperforming stores, negotiate rent reductions with its landlords, restructure its debts and make alterations to its management team while continuing to trade.
A business will only enter into a CVA when the only other likely alternative is to enter administration. CVAs alone cannot fix a struggling business, rather they provide an opportunity for it to take stock, rethink its strategy and rejig its operations so it can have another go before collapsing entirely.
What else do retailers or their administrators need to think about?
As part of the process of going into administration, it’s necessary to understand the value of the business. This means knowing the realisable value of the retailers’ inventory as well as identifying the goods that are supplied to the retailer on terms that could have an impact on the continuity of the business. There will also need to be valuations prepared for the purposes of effecting a turnaround or going concern sale.
There may be the additional consideration of any in-store devices, information systems, equipment, decor and fittings that are licensed (or otherwise made available) to the retailer and whether they are capable of being withdrawn in the event of financial distress or the commencement of insolvency proceedings in a way that would be detrimental to the continuation of the business as a going concern (for example, contracts with suppliers of payment services devices such as card readers or electronic points of sale).
Where a retailer trades as a concession, it will be important to understand the terms on which the arrangements and related rights and privileges can be terminated and payments due under the relevant agreements withheld.
What if a viable way forward can’t be agreed upon? The final stage after administration is liquidation. In this scenario, all stock and company assets are sold, or liquidated, to raise funds to contribute to creditor debts. The company is then wound up in its entirety.
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