What it Means for a Business to be in Administration - Image

What it Means for a Business to be in Administration

As the week was being wrapped up last Friday, the news came out that Pontin’s, the holiday camp firm, had gone into administration. This followed hard on the heels of builder Rok, who went into administration on Monday.

But while there’s talk of Rok being broken up and sold off, the news from Pontin’s is much more optimistic. Chairman Graham Parr was reported by the BBC as saying that the business was profitable and that the administration had been forced on them because their bank had withdrawn its rolling credit facility.

Accounting firm KPMG, brought in to run the administration process, are apparently optimistic about saving the “iconic British brand.”

So what does going into administration really mean and why do some businesses emerge from it apparently intact while others disappear?

Why companies go into administration

The purpose of administration is to enable the company to be rescued as a going concern. Through being in administration an insolvent company is protected from its creditors and given time to restructure itself in a way that will allow it to survive.

The company directors might choose to go into administration, or it could be forced on them by creditors or their bank.

The process of going into administration involves the appointment of an insolvency practitioner, often an accountancy firm, to run the business. They have a statutory duty to work on behalf of all the creditors and they will investigate what actions are available to save the business.

At the same time they will do what they can to keep the business operating as normal, although sections that are clearly losing money will be shut down very quickly. They will do what they can to cut operating costs, which is why a round of redundancies often occurs shortly after their appointment.

How companies come out of administration

A period of administration can last for as long as a year, sometimes longer. However, the administrator will want to resolve the situation as quickly as possible.

A successful administration results in the company being rescued and continuing to operate. It may be in a different form, with some elements having been sold off, and it may have different owners.

Good examples of businesses that survive administration are football clubs. Over the years a number of clubs have entered administration and the club has survived, although the ownership and legal structures may have changed.

An unsuccessful administration sees the company going into liquidation while its assets and business are sold off.

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