The Retail Crisis – What is Administration?

As the retail crisis depends in 2013, many businesses are facing the risk of both themselves, their customers and their suppliers hitting financial difficulties. We hear lots about "going bust". In recent months, following financial problems for Comet, Jessops, HMV and now today, Blockbuster, the buzz word appears to be "Administration". So what is Administration?

Administration is an insolvency procedure which allows for the reorganisation of a company or the realisation of its assets under the protection of a statutory moratorium – this is a barrier under the law that prevents creditors enforcing their claims against the company which has hit financial problems. Essentially, the statutory moratorium provides a company in administration with a "breathing space" during which the administrator can reorganise the company's affairs or conduct an orderly realisation of the company's assets.

The moratorium restricts the ability of third parties (particularly the company's creditors) to enforce their rights against the company, without the prior consent of the administrator or the consent of the court. The moratorium does not alter the substantive rights of a party against a company in administration, but simply suspends the exercise of those rights during the administration.

For a creditor landlord, it means the landlord cannot forfeit, by peaceable re-entry, the company's lease of a property without leave of the court or consent of the administrator.

The Objectives of Administration

The administration of a company must achieve one of the following objectives:

 1)       A rescue of the company (as distinct from the business carried on by the company) as a going concern (called the primary objective)

2)       The achievement of a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration) (called the second objective)

3)       The realisation of some or all of the company's property to make a distribution to one or more secured or preferential creditors (called the third objective)  

The Administration therefore can lead to a new owner of all or parts of the business, or be a method which maximises the recovery to secured creditors, often the company's bankers.

As the recession continues, the word "Administration" is probably one we'll come used to hearing.

For more information about insolvency issues, administration, winding up and creditor's rights, please contact Greg Hollingsworth, director at Hollingsworths Solicitors.