Is Administration the Same as Insolvency?

Administration and insolvency are both words associated with financial difficulties, but is administration the same as insolvency? Although connected, it’s important to note that they are not the same as one another.

Think of insolvency as a ‘state of being’ or a description of the situation you, or your company, may find yourself in. It essentially means that your outgoing debts to your creditors are greater than the money you have coming in to pay off those debts.

This is not an unusual situation to be in, especially considering the post-COVID world we are living in, with rising energy and food prices and delays in the production and shipping of materials that may be critical to your business.

If you’re in this situation, you, or your company, are said to be insolvent.

If this is the case, administration is one action a company can take to try and resolve the situation. Liquidation and bankruptcy are other options to resolve insolvency, but they have very different outcomes compared to administration.

When you place your company in administration, an administrator (a licensed insolvency practitioner) will come in and run the company while it is under administration (for up to 12 months). The company director, board members, etc., will all have to step aside and allow the administrator to manage the company.

The administrator’s primary goal is to get the company out of insolvency and back in business. Administration, therefore, is only an option when the company is still in good standing but may be struggling for one reason or another. The administrator will work with your creditors in order to resolve any outstanding debts with an aim of making the company profitable again.

Is Administration an Insolvency Procedure?

Yes, administration is one action a company can take to resolve being in a state of insolvency.

Remember that the aim of administration is to get the company trading again and turning a profit.

Other options when insolvent are liquidation (the selling of a company’s assets to pay off debt) and bankruptcy (where the courts write off your debt). However, these options will mean the end of the company.

It is worth noting that in the UK, only individuals, not businesses, can file for bankruptcy. However, in the US, both individuals and businesses can file for bankruptcy.

What Is the Difference between Administration and Insolvency?

Insolvency is a state of being. It means your outgoings exceed your incomings, and it’s likely to only get worse over time if action is not taken to resolve the situation.

A company may be insolvent when they are regularly running behind on paying their creditors or are unable to pay their staff, building leases, etc.

If the situation has not gotten too bad, and there is a possibility of getting the business back on track, administration is often the best course of action.

Administration is, therefore, one possible action a company can take to resolve being insolvent.

What Is the Difference between an Administrator and an Insolvency Practitioner?

An insolvency practitioner (IP) is a job title just like an accountant or CEO. Essentially, an IP is an expert on the subject of insolvency and can assist with bankruptcy, liquidation and administration.

An administrator is just one role an insolvency practitioner can perform in the course of their job, which is why some people can get confused over the question, is administration the same as insolvency?

Insolvency practitioners are licensed by the Insolvency Service and are considered officers of the court. They can fulfil a number of various roles, which include:

• Carrying out bankruptcies (only for individuals in the UK)
• Winding up petitions
• Individual voluntary arrangement (IVA)
• Company voluntary arrangements (CVA)
• Creditors’ voluntary liquidations (CVL)
• Members’ voluntary liquidations (MVL)
• Company administrations

Becoming an IP is a long process that can easily take ten years and you must pass a number of exams managed by the Joint Insolvency Examination Board (JEIB), and be registered with one of a handful of recognised professional bodies (RPBs).

When a company goes into administration, an IP will come in, in the role of administrator, to manage the company through the administration process, and hopefully get it trading again.

In the role of administrator, an IP will assess the company’s situation and propose a way to repay any creditors. The administrator will work with the creditors to resolve the debt situation, and provide information such as a plan of action to repay the debts, the proposed route to exit administration, and the expected outcome of the process.

If the administrator can get agreement from all the creditors, the process moves forward as planned. If not, it may need to go back to court for further instructions.

Is Your Business in Financial Difficulty?

If you need further advice on administration, insolvency or any other aspect of business debt, Irwin Insolvency is here to help. Our team of experienced insolvency practitioners can assist your company with all insolvency matters, including entering into administration to help rescue your business.

Contact Irwin Insolvency today to find out more.