The pros and cons

We do not live in a perfect world.  Every insolvency process involves compromises.

Pros

• As creditor actions are stayed, time is bought to formulate a plan for rebuilding the business, free of its debt burden;
• The administrator has significant powers, including to close down unprofitable divisions and make redundancies.  Claims arising from his actions often don’t get paid, they form claims in any eventual liquidation;
• A prepack sale will often protect the business, save more jobs, and secure a better return to creditors than would be the case if the company went straight into liquidation.

Cons

• It’s always a costly process, typically upwards of £20,000;
• Like all insolvency processes, some value is lost;
• It can be difficult, if not impossible, to trade on while in administration.  Suppliers and bankers cannot be forced to extend more credit; administrators won’t give any guarantees; customers can be difficult.  If it’s not possible to trade on, the only option may be a prepack;
• Most payments falling due after the start of the administration for rent and under hire purchase and operating lease agreements have to be paid following the Goldacre v Nortel case.  This inflexibility can create difficulties financing the administration;
• Administrative receivership can sometimes be a better option where there is to be some ongoing trading. Corporation tax is payable on profits made in the administration, but in administrative receiverships, such tax forms an unsecured claim in any liquidation;
• There are major problems where the company has or had a ‘defined benefit’ pension scheme.  Any ‘Financial Support Direction’ (an order to make good any shortfall on the scheme) made after administration has to be paid as an administration expense following the Nortel and Lehman judgment.  This could make any administration option completely unworkable;
• Unlike liquidators, administrators cannot disclaim onerous property such as leases;
• Suppliers and some banks will not support phoenix operations, particularly if they have been prepacked.  It can be impossible to finance a phoenix to the level you’d like to trade at.