Falling into administration – should you be worried?

Since the beginning of a new decade, we have heard of many high-profile retailers such as Made, Missguided, Joules, Paperchase, M&Co and Kath Kidston fall into administration to varying degrees of success. This is no coincidence; during 2022, administrations were actually 55% higher than the previous year, according to government statistics, while the number of companies in administration rose by 31% in the final quarter of 2022.

According to the same statistics released, one in 202 active companies also entered insolvent liquidation in 2022 at a rate of 49.5% per 10,000 active companies. This was an increase from the 32.9% of companies that entered liquidation in 2021, and was higher still than the 41.9% in 2019.

Although liquidation and administration are both formal insolvency proceedings, tells Julie Palmer, regional managing partner at Begbies Traynor, they are very different processes that serve very different functions; liquidation shuts down companies and removes their names from Companies House, achieved through a Creditors’ Voluntary Liquidation (CVL). 

“While liquidation always means the end of a company, administration does not,” Palmer says. “Administration, however, does give a company the breathing space and legal protection needed to formulate a workable plan for the future. In order for a company to enter administration there must be a realistic chance of rescuing the business as a going concern, or else achieving a better return for creditors than would be possible if the company went straight into liquidation.”

As a result, Palmer says that it is difficult for a company to continue trading as usual while in administration, because “it doesn’t automatically have a bottomless pit of cash”. She describes trading during this process as both quite difficult and rare. 

“What you often see as a precursor to administration,” she continues, “is something called a notice of intention to appoint administrators, which will be filed in court and puts a moratorium around a retailer for an initial period of 10 days. That can often be extended.”

The moratorium period means that no creditors can take action against a retailer. As Palmer describes it, the business is “collecting the income, but not paying a lot of the outgoings apart from two suppliers”. Typically, that is all that is seen by accountancy firms in terms of trading retailers in an insolvent or pre-insolvent position. 

An unsecured creditor refers to credit card companies, landlords, and certain lenders that issue personal or student loans, among other things. When it comes to dealing with an unsecured creditor, Palmer notes that the HMRC has preferential status for any unpaid liabilities that they claim first. 

“Everybody receives the same pension appended to the unsecured creditors,” she explains. “At the moment we see an awful lot of companies in the fixed charge position, as a lot of HMRC liabilities haven’t been paid means that it’s increasingly rare that there’s an outcome to the unsecured creditors. It still happens, but it doesn’t happen in that many instances.”

A CVL tends to be more appropriate than administration when a company has few assets, mounting liabilities, and no realistic chance of effecting a successful turnaround. In part, this explains why the staggering number of companies that have faced insolvent liquidation in recent years is so worrying.

Looking back at recent administrations, Luke Morgan, a director at Palmers Solicitors, says the collapse of both Joules and Made was “indicative of the inability of some larger retailers to be flexible to changing trading conditions”. 

He said: “Rather like a juggernaut, large companies sometimes find it hard to quickly alter course when economic conditions demand a new approach.

“However, for many medium and smaller retailers, there is an opportunity to learn lessons from these failed business models. Business flexibility is key. It is also vital to keep a careful eye on cash flow and not endanger the business by overstocking. Last, but certainly not least, seeking advice at the right time before things get out of hand can be the crucial difference between success and failure.”

Palmer believes that the circumstances that bring about administration for retailers are quite fickle, saying, “quite often what you see is fashions change very quickly in retail. Stores need to be kept looking current, retailers feel they need to keep offering what it is that people want to buy with the appropriate prices. The challenge for retail is that it moves very quickly, because tastes change very quickly, so if you sit on your laurels and don’t keep things current, somebody else will occupy that space and your consumers will migrate to another business.”

Fortunately, bankruptcy (in a corporate sense) never comes into the conversation, because as Palmer states, there’s no concept of corporate bankruptcy in UK insolvency law. 

Palmer says: “Where it does come into it potentially, is: if you have a director who has given guarantees to some of the creditors. Those personal guarantees can pierce the veil of the corporate protection of trading within the limited company.” 

Considering how many systems there are in place to assist businesses during this process, it certainly shows how “administration is not the end of a company’s existence”. For any operators, Palmer stresses that if things seem bad, “they are often not as bad as they seem” and that businesses ought to reach out to professionals as early as possible.