Leeds United fans will have followed the current crisis at the club with great interest. Most football fans have heard of Administration and know that any club choosing this path will be automatically deducted 10 points. However, how many fans know exactly what it means and what are the implications?
Q: What is administration?
A: Administration is a process where an insolvent company (i.e. a company that cannot pay its debts) is given breathing space from any action by creditors and can continue to operate, potentially without being forced to sell of its assets. The purpose of Administration is to enable the company to survive as a going concern which offers a greater chance of a better return to the creditors than a Liquidation*.
Q: Who appoints the Administrator?
A: The Administrator, who must be an authorised Insolvency Practitioner, is appointed by the court on foot of a petition by creditors or more commonly by the directors of an insolvent company. It is the Administrator’s responsibility to maximise the potential return to creditiors. This may involve the sale of assets (such as players in the event of a football club), a financial restructuring or as in the case of Leeds United a Company Voluntary Arrangement (CVA)* can be proposed.
Q: What are the objectives for an Administration?
A:The primary objective of an administration should be to rescue the company (as a going concern).
If that is not possible, the administrator should try to achieve a better result for creditors than would be obtained through liquidation*, by continuing to trade for a while and then selling the company as a going concern.
If neither of the above two objectives can be achieved the administrator can sell the companies assets and pay secured/preferential creditors.
Q: When does Administration end?
A: Should the restructuring of the company be successful the administrator applies to court for release, having placed the company on a firmer financial footing. If a CVA is approved the Administrator also ceases to act. If however, the Administrator is unable to achieve a successful restructuring or CVA then the company may be placed into Liquidation and it is wound-up. Should a club be wound-up then they would be forced out of the League. This last happened to Aldershot in 1992.
*Next month we will explain what a liquidation and a CVA are and their respective implications.
McCambridge Duffy are a firm of leading chartered accountants and one of the largest insolvency practices in the U.K. We specialise in helping self employed individuals. Should your business be experiencing any financial difficulties call free on 0800 043 3328 where one of our highly experienced staff will be available to help you.