CM October 2023

INSOLVENCY
THE FEAR INDEX
Trading in administration: is there reason to fear?
AUTHOR – Giuseppe Parla
FINDING out that a key customer
has entered administration
is understandably a
concerning time for credit
managers, particularly if
there are unpaid debts and
uncertainty about how or when they might
be paid. But what if the insolvent business
continues to trade? Will continuing to supply
them be detrimental to you?
When a company enters administration,
the appointed administrators, who are
licensed insolvency practitioners, must
achieve one of the statutory purposes of
an administration. The Insolvency Act
1986 states that an administrator must
perform their functions with the objective
of: (i) rescuing the business as a going
concern; or (ii) achieving a better outcome
for creditors than would have been likely
had it been wound up; or (iii) realising
property in order make a distribution
to one or more secured or preferential
creditors.
An administration offers the company
protection by way of a moratorium and
no legal action can be taken against a
company, without the administrator’s
consent or permission of the Court whilst
the moratorium is in place.
Change in personnel
So when might an administration process
be used? It may be that the business was
not being managed in the right way, and
a simple change of personnel at the top
of the organisation may be sufficient to
reset the business on a more viable path.
In other scenarios, the Board may have
been trying to expand the business too
quickly; taking on too much debt and
overstretching financially. Refocusing on
core activities and disposing of certain
assets could put the business back on the
road to recovery.
As a creditor, you will receive a set of
proposals within eight weeks from the date
that the company entered administration.
If the administrator decides to continue
trading the business in administration,
with the aim of rescuing the business as
a going concern, they will automatically
assume certain responsibilities as Officers
of the Court. An administrator will be
personally liable for the trading costs
incurred, so your post-administration
supplies will be paid as an expense of the
administration.
For credit managers, continuing to trade
with a business in administration could
‘It is likely that
an administrator
will want to enter
into new terms
of business with
you, which may
provide you with an
opportunity to revise
your credit terms
with this business.’
seem a high-risk. However, it is unlikely
to be as risky as trading with a business
that is continuing to rack up debts and
missing payment deadlines outside an
administration process. Credit managers
can take some comfort that when you are
dealing with an administrator, you are
dealing with an Officer of the Court, so
you are unlikely to be left with any further
unpaid debts for the administration
period.
As a credit manager, if you feel unable
to continue trading with a customer
going through an administration process,
because of the large amount outstanding,
you should consider speaking to the
administrators directly. While it may not be
possible for one creditor to be prioritised
over another, the administrators may be
willing to discuss ongoing trade with a
critical supplier.
It is likely that an administrator will
want to enter into new terms of business
with you, which may provide you with an
opportunity to revise your credit terms
with this business.
In summary, credit managers should
stay open minded about trading with a
company in administration. Any future
debts they run up will be met by the
administration estate, and a positive, longterm
commercial relationship may still be
possible.
Giuseppe Parla is a Business Recovery
Director and Licensed Insolvency Practitioner
at Menzies LLP.
Brave | Curious | Resilient / www.cicm.com / October 2023 / PAGE 10