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Business focus special: Administration
ADMINISTRATION. Few words are as likely to strike dread into the heart of the average business owner, their creditor or their employee.
After the economic turmoil and high profile high street collapses of recent years, the term has, more than ever, become a byword for ‘imminent doom’.
Many assume it to be the commercial equivalent of a death sentence – let the administrators come in like vultures, scavenge the business for any last scraps of worth and then leave a rotting commercial corpse behind.
But as Wycombe furniture maker Stewart Linford's recent business experience proves, that is far from the whole story.
Michael Goldstein, Insolvency Practitioner and Head of Business Recovery at Myers Clark in Watford thinks too many people have the wrong impression of what administration means. Far from being the iceberg that sinks the Titanic, administration can be the lifeboat that keeps core parts of a business alive and able to trade another day with its employees, in a better condition to withstand the economic storm.
It forms a ‘rescue regime’, says Mr Goldstein, , who recently dealt with the Stewart Linford (Chairmaker) administration.
And, he says, it has three main purposes - 1) to rescue the business as a going concern.
2) To pay more to creditors than they would get in the absence of administration.
3) To pay at least something to a preferential or secured creditor.
Mr Goldstein, who stressed he was discussing companies generally instead of any one specific case, explained the point at which a business enters administration is usually pressurised to say the least: “It’s normally complete chaos. The directors are under pressure and can’t think straight. Often the bailiffs are alerted, VAT and employees have gone unpaid, suppliers and landlords are awaiting payment.”
A common problem faced by insolvency practitioners, however, is that businesses almost always leave it too long before sounding the alarm.
Administration can be used when companies need protection from creditors. It offers the shelter of a moratorium on the firm’s debts – no creditor can take any enforcement action without the permission of either the administrator or the court.
Mr Goldstein said: “The landlord can’t shut the doors, but often we agree to pay the employees.
“It gives you time to consider the best alternatives – it just gives everybody breathing space.
“And one luxury you don’t have when you’re back’s against the wall is time.”
The administrator must then decide whether to shut the business, trade the business or sell it.”
A “Pre-Pack” is where a sale of the business or its assets is negotiated prior to the Administration and executed shortly thereafter. The Administrator will have a professional agent market the business prior to accepting the best offer. While pre-packs have their critics, they can be “a very powerful tool”, says Mr Goldstein. It means the assets of the old company can be quickly sold to another company, having the net effects of preserving value and jobs.
Another option is the Company Voluntary Arrangement, which can be used if the business still has sufficient potential. This is where the troubled business reaches a compromise with its creditors – negotiating a payment plan while it continues to trade as normal. The business will contribute money into the CVA for the benefit of its creditors, who would receive a dividend being a percentage of the monies they are owed.
The third option is the bleakest – liquidation. Here, if the situation is dire enough to warrant it, the business would be closed down with its assets sold. Thereafter the company would be deregistered from Companies House.
Then –more rarely – there is the possibility of a new cash injection or investor for the beleaguered business, that will help it steer out of the troubled waters.
Mr Goldstein explained his role could be challenging. He said: “It’s almost like being a divorce lawyer. Nobody goes into business thinking it’s going to be insolvent.
“I want to do it (act as administrator) in a sympathetic, empathetic, even-handed, ethical way.
“The people who are hurt the most are often the employees. We always do what we can to help minimise redundancies and unemployment.”
But – despite the doomful overtones of the term, Mr Goldstein said administration was designed as a way to help businesses through troubled times – a far cry from the Victorian option of debtor’s prison.
He added that insolvency itself is a process – a streamlined and efficient one – and is pursuant to the 1986 Insolvency Act, designed to give people and companies a second chance.
Mr Goldstein said: “For insolvent companies, the Insolvency Act is not designed to punish. It’s designed to give a nation of shopkeepers a second chance. It used to be there was no debt forgiveness, but now we have this.”
Michael can be contacted at firstname.lastname@example.org or on 01923224411