Theoretically, company administration allows it to strategically review its business activities and often make major changes to enable it to be profitable in the future. Legally, customers and suppliers must be informed about the position of the company, which will lead them to consider other options that make the goal of the administration more difficult. This article discusses the problems and alternatives of company administration.
If a company has financial difficulties but still has potential, its directors and/or shareholders can bring the deal to the administration by contacting the court. The company administration gives the company a breathing space from its creditors for a period of up to one year. Legal action against the operation, such as liquidation, will be cancelled and creditors will not be able to initiate new claims during the administration period.
If a company is in administration, current customers may be worried about what will happen to the business in the future and start looking elsewhere to find more reliable long-term suppliers. It is equally disturbing that potential new customers are deterred from trading with the business as they worry about their long-term future.
If present and future customers turn their backs on the company, their value, especially in terms of good will, can be severely compromised. The same applies if the suppliers of the company become nervous, that they are not paid, they can refuse to deal with the company or do so only in cash. This situation will put pressure on the cash position of the company, which is already likely to be heavily burdened.
The negative effect that a company administration process can have on customer and supplier relationships often means that the process has exactly the opposite of what it should achieve. Goodwill declines and any value that could have been attributed to the business based on customer and supplier contracts is significantly reduced. The most likely result of taking a company into the administration is the sale of valuable assets, with the remaining parts of the business liquidated. The original business is rarely salvaged and a significant number of jobs within the original company will be lost.
What alternatives are there in the situation outlined above?
The disadvantage of pre-pack liquidation is clearly that creditors are faced with unpaid debts. However, I think that would have been the same result if the company had been included in the business administration, but with the added likelihood that the company would not be saved and more jobs lost. In the current economic climate, the failure of businesses and the associated loss of jobs is a stark reality for many people. We must, therefore, be open to the solutions available to try to reverse the situation and pull the economy out of recession.