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If a creditor goes into administration, do I have to pay the money I owe them?

The article has been co-produced with Shaun Barton a partner at Company Closure. Shaun boasts a wealth of experience in helping directors of distressed companies understand their options. A director-facing adviser, Shaun is often the first point of contact for business owners in financial distress.

Administration is a formal procedure for companies that are insolvent but potentially viable for the future. The process is often used by larger companies experiencing extreme pressure from their creditors, as it provides a breathing space for an administrator to decide upon the best route forward.

This might involve restructuring debts or assets, for example, or entering liquidation if the business can’t be rescued. It only affects you in that your trading relationship may end if the company has to close.

If one of your creditors enters administration you may be wondering if you’ll need to pay the debt you owe them. The answer is that you do, as the appointed administrator collects in all monies owed to the company to improve its chances of survival.

Why do you still need to pay a company in administration?

A company that’s entered administration doesn’t necessarily have to close down. Sometimes it just needs to restructure – perhaps by selling a few assets to improve cash flow or entering into an official instalment plan with its creditors.

Generating cash for the business underpins this process and as the administrator works in the best interests of creditors, they must collect in all monies that are owed. Your debt is an asset of the company and must be paid.

At the point of entering administration, the directors lose control of their company and the administrator takes over. The officeholder assesses the best way forward for the business and chases any outstanding payments, which is why you’ll be approached by the administrator for payment rather than your usual point of contact within the company.

It’s in your best interests to pay the debt

As the administrator has the power to pursue you through the courts for payment of your debt even though your creditor isn’t currently trading, it’s in your best interests to pay the money your business owes.

Any legal action taken by the officeholder can lead to serious problems - being in arrears on any commercial debt adversely affects your credit rating and makes it difficult to obtain borrowing in the future. It may also damage your business’s reputation and can lead to other suppliers or trading partners limiting their credit or refusing to carry on business with you.

But what happens if your creditor cannot continue and has to close?

Owing money to a creditor in liquidation

If your business creditor cannot be rescued, the administrator will place it into voluntary liquidation, which means that the company will close down permanently. As far as your debt is concerned, the situation doesn’t change as the officeholder has to collect any debts to provide a better return for unsecured creditors.

This means you’ll have to pay the debt in full as contractually agreed, although if your debt is sold during the liquidation process, as sometimes happens, you may have to pay a new creditor.

Considerations when a creditor goes into administration

Although insolvency and administration are complex issues, the legal requirements to meet your financial obligations as a debtor are clear. Failing to do so can have serious repercussions for your own business and leave you facing the risk of financial decline.

It’s always advisable to focus on cash flow within your own business and prioritise debt collection so you can pay your debts and bills as they fall due. This helps you avoid slipping into insolvency and potentially having to close down in similar circumstances to your creditor.

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