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How easy is it to prove a company is bust?

Date Added: 23/12/2013  

Newspapers seem to be constantly filled with stories about companies, large and small, going into administration or liquidation. 

A big factor in the amount of firms entering administration has been the economic climate and companies that rely on consumer spending power have been particularly affected.

The sheer number of companies that have recently gone bust would suggest that the administration process is simple. But is it?

What is administration?

Many people confuse administration with liquidation, but the two are completely different processes.

The main aim of administration is to protect a company from its creditors while a debt restructuring plan is carried out. Once agreed upon, this is then presented to the creditors and the courts.

Liquidation is when the company is brought to an end and all assets and properties are sold off or redistributed to pay off any debts owed.

How does a company go into administration?

When a company becomes insolvent and has insufficient money to pay any bills owed to third parties, such as suppliers, then the administrators are called in.

A legal process must be followed and it is not a case of officials turning up at the company and taking over. 

There are two ways in which this can happen. Firstly, by a court order made at a formal hearing or secondly, by interested parties that lodge a series of prescribed documents at court. The latter is seen as the out-of-court route.

What is the role of the administrator?

Although the administrator is acting in the interests of the creditor, their main focus is getting the company back on track and to remove the threat of liquidation.

The administrator is an officer of the court and has a duty to act in good faith, fairly and honourably.

He or she must be independent and impartial in the management of the company and its property. 

The director of the company can take action if they feel the administrator is not performing their role adequately.

A high court ruling from earlier this year also means that directors have been given more control in deciding whether to go into administration or not.

Many administrations last for more than a year and complex ones can last for several years.

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