It can be a scary time when a business hits critical financial difficulty and needs to seek professional assistance. Adding to the stress is the legal ‘jargonese’ that starts being thrown your way as you start talking to professionals about next steps for the business.
One of the most common areas of misunderstanding is in the difference between liquidation and administration. These terms represent two very different things, but for a company that won’t be able to return from the brink due to financial stress, it will be important to consider which path to go down.
Liquidation
Of the two options, liquidation represents the more dramatic solution to a company’s problems. Under a liquidation, all of the company’s operations will be immediately ceased, and any assets that the company possesses will be sold off in order to repay the money that the organisation owes.
This is always the final stage of the company, as it does mean the company will cease to trade and be deregistered as a business. For this reason, many companies hold off on liquidation until the creditors open a court case to force them into liquidation and to recover their debts. This is called involuntary liquidation.
However, it is also possible for a company to apply for liquidation itself. Why might they do this? If the executives in the company see no potential route to recovery, they might wish to avoid the additional stress, time, and expense of dealing with the courts. By applying for a voluntary liquidation the company is able to avoid dealing with the courts, though the end effect (sale of all assets and deregistration of the business) remains the same.
Once appointed, a liquidator will go through a seven step process:
- Firstly, the liquidator will find and protect the assets of the company, in order to maintain their value for a future sale.
- They will then realise the assets of the company.
- The next stage is to investigate, in full, the financial affairs of the company.
- The liquidator will also make appropriate reports to ASIC and creditors, including making note of any misdeeds to take further action on.
- The revenue realised from the assets of the company will then be distributed to the creditors.
- If there is a surplus of funds remaining after satisfying the creditors, these will then be distributed to shareholders.
- The final stage will be to deregister the company.
Administration
Wherever possible, the directors and owners of a company will (or, rather, should) prefer to enter a state of administration, rather than liquidation.
When in voluntary administration, a company is still either insolvent or likely to become insolvent. However, it also allows for the company directors and executives to restructure the organisation so that it can continue trading in the future. Under this strategy, the company will have an administrator appointed to it, who will be responsible for looking into the company’s affairs and business structure, reporting to its creditors, and assisting in determining the best course of action forward for the company so it can rectify its debts.
The administrator’s tasks can be summed up across six key focuses:
- The administrator will take control of the company’s assets.
- They will then investigate the affairs of the company, how it is managed, and its operations.
- If there are any offenses that have led to the company needing an administrator, then the administrator will also report them to ASIC, to take further action upon.
- From there the administrator will help the directors produce a Deed of Company Arrangement (DOCA) – a binding document setting out next steps for the company.
- Then the administrator will report to the creditors and provide guidance on the best course of action. It’s important to remember that the administrator will be operating in the best interests of the creditors, and recovering debts will be the key priority.
- The final state is to call together meetings of creditors in order to determine whether the creditors should allow the company to continue trading, or if they are more interested in simply liquidating it and winding the business up.
Assuming the company can be saved (and is not therefore liquidated), after the restructure and debts have been paid back – or put back into control, so that the creditors are not left in the lurch – the period of administration will last for five or so weeks, and at the end of that the company will be able to resume operations as normal.
Voluntary administrators can be appointed in three different ways:
- The directors of the company themselves can request to have an administrator appointed.
- A liquidator or provisional liquidator can appoint an administrator if a look into the company suggests that liquidation might not be necessary.
- A secured creditor can apply to have a voluntary administrator appointed to the company.