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What does an administrator really do?

With the news that BHS has entered into administration, many may be wondering what an administrator really does.  How can someone who knows very little about a company effect a business rescue or corporate restructuring?   Surely if there was a turnaround strategy available the directors would have carried that out long before the administrators were called in?

For some administration is seen as the beginning of the end, a way to asset strip the company leaving behind the creditors and the bad bits that no one wants.  In reality, it is a really useful tool to help a company which has an underlying successful business but either needs restructuring, new investment or new management.  When a company is experiencing cash flow issues, the directors will seek advice.  An insolvency practitioner will review the options available with the directors, if it appears that the business or company could be saved then administration may be chosen.

A company may suffer from a one off bad debt that causes cash flow difficulties or a slow decline as a result of increased competition and not keeping up with the times.  With the latter, often what is needed is new management and investment, however an investor would be reluctant to lend to a company with significant creditors, as the money would unlikely be used to make changes and would likely be lost through a very leaky bucket.  With the former the company just needs some time to get back on its feet.

An administrator can offer the opportunity for the business to be purchased or to give time to save the company itself.  By allowing the company to continue to trade, the goodwill is preserved.  Although having professionals running a company may seem unduly expensive, at Portland we work with the existing directors and management where possible.  We ensure that safeguards are in place to enable the directors to manage the day to day trading, whilst we ensure that the trading is for the benefit of creditors, ensuring that all funds are received and that the costs incurred are met.

As administrators we are usually able to get supplies that the company had been refused.  A supplier with an undertaking of payment from an administrator is more likely to supply, than they are to a company that has been in default for a long period of time.

As administrators, whilst overseeing the trading, we may also try to find a buyer for the business.  There are a lot of stakeholders involved at the early stages, directors need managing, employees need to be kept up to date, suppliers need managing and interested parties need to be corresponded with.  Overarching all of this is the need to ensure that the creditors position is being monitored to ensure that the work being carried out is worthwhile.

If it is clear that the company cannot be saved because of its debts, steps are taken to complete a sale as soon as possible.  The administrators are in a far better position than the directors were, as they can offer a relatively clean business and therefore the risk for the purchaser could be far lower than before administration.  As such, the administration could generate a higher price, particularly if we have competing bids.  As administrators we need to consider whether to advertise for offers, or whether the costs and length of time that will incur will outweigh any uplift in price.  We always have competing factors that we have to consider.

Once a sale is achieved, the funds can then be distributed in the order of priority to the creditors.

In some cases, it may be that the administration is used to protect the company whilst a solution to save it as a whole is found.  Once in administration a company has significant protection from the creditors taking any action.  During this time, without the threat of bailiff action or winding up, we are able to work with the directors (if appropriate) to put forward a plan to settle the creditors.  This could be by way of a Company Voluntary Arrangement.  A plan could be put forward to the creditors to pay them back over time, either in full or with some write off of the debt.  Before putting forward the CVA, we would need to ensure that the company could not only break even going forward, but that sufficient cashflow can be generated to make a contribution towards the arrangement.  We will review where to make cut backs, including redundancies and move to smaller premises in order to reduce the overheads.  We need to ensure that the company is viable going forward and that the company will not find itself back in the same position.

So what does an administrator really do?  The answer is a lot!  We look at all of the options available for the company and its creditors.  We review whether we can save the company or just parts of it and work to make the company and/or business as attractive as possible for investors or purchasers to maximise the return to creditors.

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