Where a company is struggling but still has potential, its directors and / or shareholders can apply to the court to put the business into administration. Company Administration gives the business a breathing space from its creditors for a period of up to a year. Any current legal action being taken against the business such as a petition for winding up is cancelled and creditors are prevented from initiating new actions during the administration period.

The theory behind company administration is that it allows a business time to review its operations strategically and implement often major changes to put it back onto a sound footing. Legally customers and suppliers must be told of the company's position.

Where a company is in administration, current customers may start to worry about the future viability of the business and start to look elsewhere to find more reliable long term suppliers. Just as worryingly, potential new clients may be put off from contracting with the business as they are worried about its long term future. If current and future clients start to turn away from the company, its value particularly in terms of good will may be severely impacted. The same is true if suppliers to the business become nervous that they will not be paid, they may refuse to trade with the company or only do so on a cash basis. This situation will put increased pressure on the business' cash position which is likely to be already under significant strain.

The negative effect of client and supplier relationships in administration can mean the process will have exactly the opposite effect to what it was supposed to achieve. The business goodwill starts to diminish and as such, any value that could have been attributed to the business based on its client and supplier contracts is significantly depleted. As a result, the most likely outcome when a business is put into administration is the sale of any valuable elements with the remaining areas of the company being liquidated. The original business will rarely be saved and a significant number of jobs within the original company will be lost.

Given this situation, what are the alternatives?

One obvious solution is to consider a Pre-Pack liquidation, also known as a Phoenix. In this situation, the valuable assets of a business are purchased by a new company which can then start to trade in the old company's place without the burden of legacy debts. In this way, the new business is given the best possible start and employment is protected. Employees are transferred to the new business under TUPE rules (Transfer of Undertakings and Permanent Employment). R3 (the Association of Business Recovery Professionsionals) published some information in June 2009 that showed that nearly 5000 UK jobs have been saved already in 2009 thanks to pre-package liquidations. The research discovered that out of 5,478 jobs at risk, 4,846 (88 per cent) were saved in 89 pre-pack case studies, with the business owner remaining in charge in 59 per cent of cases.

Clearly, the downside of the pre-pack liquidation is that creditors are left facing unpaid debt. However, in my view, this outcome would have been exactly the same had the business been put into company administration but with the additional likelihood that the business would not be saved and that more jobs would be lost. In the current economic climate, the failure of businesses and subsequent loss of employment is a stark reality for many people. We must therefore be open minded about the solutions available to try to reverse the situation and pull the economy out of recession.

By: Derek Cooper

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Derek Cooper is Managing Director of Cooper Matthews Limited coopermatthews.com and a member of the Turnaround Management Association UK. With significant experience in working with small to medium sized businesses, Cooper Matthews specialise in providing straight forward insolvency advice for businesses with financial problems. More information on alternatives to Administration at coopermatthews.com/business-recovery-services-advice.html

Company Administration Is Not The Best Solution To Save A Failing Company