Do You Have To Pay A Company In Administration?

When a company enters into a formal insolvency process, such as a creditors’ voluntary liquidation (CVL) or administration, it is often a difficult time for all parties involved. Creditors, for instance, may be left wondering whether they will be paid, while employees will likely be concerned about job security and their financial stability. On the other side of the coin, you have customers and stockists who might owe the company money and may be wondering whether they still need to pay for goods or services that have been provided.

Whether or not customers and stockists of companies that have entered into administration are still obligated to pay for goods or services that have been provided is not straightforward and depends on several factors. Firstly, it is important to understand that a company in administration is protected by a moratorium, which prevents legal action against the company from being carried out by creditors without the permission of the administrator or the courts. This is intended to give the company time to restructure its affairs and to prevent creditors from taking advantage of the situation by seizing assets or pursuing legal action.

However, the moratorium does not absolve customers or stockists of their obligations under existing contract and they are still obligated to fulfill the contractual obligations of any contract entered into with the company prior to its entry into administration. That is, of course, unless the contract has been terminated or varied with the agreement of both parties.

In some circumstances, the administrator may try to reach an agreement with creditors to vary or terminate existing contracts, which can provide some relief for all parties involved and may allow the company to continue trading. These arrangements can be mutually beneficial but we strongly recommend you get legal and financial advice before entering into any formal agreement.

Moving on, if the administrator decides to continue trading the business, payment for any goods or services provided are required to continue. This itself isn’t a straightforward situation, however, and it’s essential to ensure that the company in administration is still able to deliver on its obligations before you continue paying. You see, payments made to a company in administration are treated differently from those made once a company has entered into administration, with the most significant consideration being how easily the payment can be recovered should the need arise.

Payments made to a company prior to entering into administration would be treated as an unsecured debt and the payee would be considered an unsecured creditor. Unfortunately, unsecured creditors are generally at the back of the queue when it comes to recovering money so it is unlikely that the full amount could be recovered. Payments made to a company after it has entered administration are a little more complex, however.

You see, administrators have the authority to decide whether or not to accept payments and have a duty to ensure that all creditors are treated fairly. It’s up to them to determine whether accepting payment is in the best interests of the company and may decide to return the payment, particularly if the payee was not aware of the company’s insolvency at the time of payment. That said, administrators are also perfectly within their rights to decide to keep the payment and use it to pay off the company’s outstanding debts.

So whether payment can be recovered from a company in administration depends on a number of things, including the type of payment made, when it was made, and whether the payment was made before or after the company entered administration. This is why even deciding whether or not to pay a company in administration is not a simple matter. Another factor to consider is whether the company in administration is able to provide a valid VAT invoice, as if it is not then you may be unable to reclaim the VAT and that can result in an additional financial burden for your business.

As you have undoubtedly gathered from the above, the question of whether you have to pay a company in administration depends on a myriad of factors, including the terms of your existing contract, the status of the company’s business, and the administrator’s plans for the company’s future. Due to the sheer number of variables and considerations, it is essential to seek professional advice in situations like these so that you are fully aware of your legal obligations and your rights. While it is understandably tempting to withhold payment or seek to recover payments already made, it is important to act within the bounds of the law to avoid legal repercussions and to ensure the best possible outcome.