What is administration?

Last week I wrote my ten predictions for the games industry in 2012.  One of them was that we would see more developer collapses in 2012.  Sadly, that’s already taking place, with news today that UK developer Monumental Games has gone into administration.
I thought you might find it useful to know a little about administration, which is the most frequently seen form of insolvency proceedings for businesses in the UK.  Here’s what I said when speaking with Gamesindustry.biz back in 2010:
Q: What is administration? 
Administration is a legal process which comes into play when a company finds itself in severe financial difficulties – and specifically when it finds it’s no longer able to pay its debts and continue as a going concern.
In those circumstances either the creditors or directors of the company – or the courts – can appoint an administrator. This is a licensed professional, usually an accountant, whose job it is to take over the trading of the company.
There is then a hierarchy of objectives that he or she then has to try to attain. The first is to try and rescue the company – to take control of it, find out where the inefficiencies and problems are, and turn it around.
If, however, that’s not possible then the administrator has a duty to look into trying to achieve the maximum possible return for the creditors – either by way of selling the company on and paying them out of proceeds or breaking the company up, and again, trying to make the most out of it.
In the worst case scenario there could be a fire sale, to sell anything you can in order to make money to pay those people owed. In those circumstances the process changes from administration to liquidation.
Q: How does a company decide when it’s necessary to enter administration?There are two key legal tests – the first is whether the company is able to pay its debts as they fall due (creditors, supply partners and so on); the other is whether its assets have become less than its liabilities, ie taking the company as a whole, is that still lower in value that the amount it owes to other people?
In reality there’s a great deal of investigative work that needs to be done with your accountants or lawyers to work out whether or not the company can continue or not.
Q: And who does the administrator actually work for? 
Although they can be appointed by different interested parties – perhaps a substantial creditor or the directors – the administrator answers to the court. They have responsibilities to both the court and the creditors of the company as a whole.
What that means is that when appointed the administrator has to put together proposals for what it wants to do with the company – and they then have to be voted on by the creditors or representative committee.
So they’re not acting for themselves, or necessarily for the person that appointed them – they’re acting for everybody that who is involved with the company.
Q: In terms of timescale for wrapping up administration proceedings, are we talking days, weeks, months or years?
It really does depend upon what kind of deal there is on offer for the company. Sometimes you see administrations being turned around extremely quickly if there is a buyer who’s standing by to take over the whole of the company. That does happen sometimes, in a matter of days.
However, if there isn’t already someone standing by then it can take quite some time, both for the administrator to work out what’s going to happen to the company going forwards, but also to liaise with the creditors to make sure that the people who need to be paid can be paid – and that includes creditors as well as employees.
It can take days, but sometimes it can can months or years. It really depends upon the company in question and how valuable an attraction it is for the market.
Q: What sort of rights do employees have in terms of unpaid wages or benefits?There are certain legal minimum amounts that the employees will be entitled to, but that depends on their exact employment status, how long they’ve been with the company and factors like that.
But those minimum amounts are protected by law, in that if the company isn’t able to pay them then the employees will have a limited right to effectively seek those amounts from the government.
Q: What happens if a partner or supplier enters administration?
If a partner or supplier of your business faces financial difficulties or even insolvency proceedings (of which administration is one type), it’s vital that you consider your legal position regarding them as soon as possible. This will usually focus upon the contracts and documentation in place as well as your trading relationship with them. In particular, well-drafted contracts will contain provisions setting out the procedure to be followed if one party is likely to or actually enters insolvency proceedings.
You should also consider carefully the asset position – ie what stock or monies of yours do they hold (or vice versa), what impact could this have on your business and what do you do about it? These can raise complex legal matters, so you would be well recommended to seek legal advice as soon as possible in order to protect your position.

You can read more about insolvency (for companies) and bankruptcy (for individuals) in the UK at http://www.bis.gov.uk/insolvency.
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1 comment

  1. Good article as always, an informative introduction to what is likely to become a common occurrence in the coming months and years. As such, I’d just like to add a little more about employment rights vis a vis administration and redundancy situations.

    (Disclaimer: The following is for information only and should not be construed as legal advice. If your employer has gone insolvent and you have been made redundant then you should seek independent advice, e.g. your local Citizens Advice Bureau)

    If a studio gets wound up the likely outcome is redundancy. Redundancy is when your work is no longer required. This can include when a business stops trading or goes into liquidation. Depending on your length of service you may be entitled to redundancy pay.

    If a business is transferred to a new owner it doesn’t automatically mean that you will be made redundant. Your employment contract is still valid with your new employer. You can’t be made redundant simply because of a transfer of ownership. You might however get made redundant if your workplace is no longer a going concern, or your job is no longer required.

    REDUNDANCY PROCEDURES
    If the employer or administrator is thinking about making you redundant, they should consult with you before making a decision.

    If the employer or administrator is making 20 or more employees at one workplace redundant this is called a collective redundancy. A more formal consultation procedure must be followed which includes consulting trade unions and/or staff representatives. Failure to consult with trade unions was the basis for the large employment tribunal award to former Woolworths employees last week.

    If individuals are being selected for redundancy, the selection procedure must be fair and based on evidence where possible (e.g. performance & disciplinary records.)

    It is illegal to select people for redundancy on the grounds of e.g. pregnancy, ethnicity, disability, or sexual orientation. This is unfair dismissal, and if you think you’ve been selected for redundancy for these reasons you should get urgent legal advice.

    WHO GETS REDUNDANCY PAY?
    If you’ve worked for your employer for at least two calendar years continuously since the age of 16 and you are a genuine employee (complicated criteria – best to get advice), you are entitled to statutory redundancy pay. It’s also worth checking your employment contract to see if this gives you any additional rights to severance pay.

    If the business cannot afford to pay you, your employer or the administrator/liquidator if they’ve been appointed, should give you an RP1 Form to claim redundancy pay. If your employer cannot afford to pay you redundancy then they or the administrator will pass the forms on to the Redundancy Payments Office (RPO) in order to claim it from the National Insurance Fund.

    You will also be able to claim other monies owed using the RP1 form (e.g. unpaid wages, holiday pay). However, you’ll be expected to show how you’ve mitigated your losses since losing your job. This can be complicated and it’s worth getting advice.

    HOW MUCH IS REDUNDANCY PAY?
    The calculation is a little complicated but basically, you have a right to

    • Half a week’s pay for each complete year of employment when you were below the age of 22
    • A full week’s pay for each complete year of employment when you were between the age of 22 and 40
    • A week and a half’s pay for each complete year of employment when you were above the age of 41

    There is however an upper limit of £400 per week for the purposes of redundancy.

    SOURCES/ADDITIONAL INFORMATION

    * http://www.adviceguide.org.uk/index/your_money/employment_index_ew/redundancy_an_introduction.htm
    * http://www.adviceguide.org.uk/index/your_money/employment_index_ew/redundancy_an_introduction/when_can_your_employer_make_you_redundant.htm
    * http://www.adviceguide.org.uk/index/e_selfhelp_redundancy.pdf
    * http://www.adviceguide.org.uk/index/your_money/employment_index_ew/redundancy_an_introduction/redundancy_pay.htm

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