Is administration an option for a business which is in trouble?

Businesses and the current financial climate

Currently in the United Kingdom many small businesses are struggling to stay afloat. With a decrease in public spending many businesses are being hit where in hurts – in the potential revenue which they can earn. Larger businesses are in many cases struggling but due to their size and potential reserves they are able to keep ticking over. However, the financial problems currently suffered in the UK are causing notable problems in relation to much smaller business.

This has caused many businesses to go into administration.

What is meant by the term administration?

When a company of any size gets into financial trouble and is unable to pay the debts which it owes to various bodies, an administrator or administrative receiver may be appointed.

What is the main goal of the administrator?

The main goal of the administrator is to rescue the company as a going concern. However, this is not always possible so in situations where this is not possible the administrator will attempt to get a better result for the creditors than would be achieved if the company was wound it. This is achieved by rescuing parts of the business.

What happens if this is not able to be done?

If the company as a whole will not be able to be rescued nor will parts of the company be able to rescued then the administrator will sell the assets of the company to at least make a partial payment to the creditors.

Is this a desirable position for a business?

Being in financial difficulties is certainly not a desirable position for a business to be in but administration may prove a better option than the company simply going out of business as in some cases it may enable the business to continue to operate in the chosen industry rather than ceasing to exist. The previous owner may not still be in control of the company but if it can continue to run then this may provide a better alternative for individuals still involved with the company.

Administration in the context of a football club

If we take the example of a football club going into administration we can certainly see the benefits over the club ceasing to operate. Although there are certain penalties for football clubs in England and Wales which go into administration the fact that the club is able to continue in existence is of huge benefit to the fans.

Furthermore, a football club like any other business going into administration is provided with a second chance. If an administrator comes in and resurrects the fortunes of the business the creditors may be able to be paid off and the business is able to continue after this. However, this is not always the case.

Are there any other positives for a business going into administration rather than being wound up?

Although this may not be of an advantage to the original owners of the company, when a company goes into administration it will be able to be bought by another individual at a knock-down price. Details of businesses which go into administration are continually published online which enables potential investors or owners to become aware of them and purchase them at a knock-down price.

If this happens it will enable the business to possibly go in another direction and in some cases be salvaged by a new owner.