When your business is struggling, it’s best to seek financial advice to understand the options available. One option is to go into administration to assess the company’s viability, and possibly turn its fortunes around.

By definition, if your company liabilities total more than the value of its assets, the debts cannot be paid and it’s considered insolvent. If your company is insolvent, it can no longer pay its debts when they are due. The most common procedures are voluntary administration, liquidation and receivership.

What is administration?

Going into voluntary administration essentially means taking a step back and allowing an external administrator to take a look at your company’s financials with the view of possibly bringing the company back to life. It is designed to quickly resolve a company’s financial problems and determine its future with minimal impact. If this is not possible, the aim is for voluntary administrators to find the best solution possible for creditors, ensuring a better return than had the company gone directly into liquidation.

There are three possible outcomes when a company is put into voluntary administration:

What going into administration means for your company

The effect of going into voluntary administration is to provide the company with a bit of breathing room to sort through its affairs. There are several elements that are impacted by this move.

The role of directors in voluntary administration

During a voluntary administration, directors of a business cannot use their powers. All directors are obligated to help the voluntary administrator. This includes providing the company’s financial books and records as well as a report on the business of the company, and the property, affairs and financial circumstances.

If the company moves into a deed of company arrangement, powers of directors are generally outlined in the deed’s terms.

The steps

  1. Directors of the company decide to place the company into voluntary administration. This must be done at a properly convened meeting, by resolution of the Board and in writing.
  2. A voluntary administrator is appointed. The administrator locates the company’s assets and protects them, and discussions are held with directors to see whether continued trading is feasible.
  3. At least five business days notice is required prior to the first meeting of creditors. During the meeting, creditors can vote to replace the administrator and create a committee of creditors to oversee.
  4. The administrator investigates the company’s affairs. A report is created for creditors. The report covers background information on the company and directors, results of the investigation and analysis of the financials.
  5. Within 25 or 30 business days of appointment, the administrator must call a meeting to decide the company’s future. Creditors decide to:
    • Return the company to the control of the directors,
    • Accept a deed of company arrangement, or
    • Put the company into liquidation.
  6. If a deed of company arrangement is decided, within 15 business days the company must sign the deed and deed administration begins.
    If the creditors decide to put the company into liquidation, this happens immediately and the administrator becomes the liquidator.

A secured creditor or the company’s shareholders can also initiate the process.

The role of the administrator

The role of the voluntary administrator is to investigate a report on the business, property, affairs and financial circumstances of a company to its creditors.

When it comes to deciding which avenue to pursue regarding the company’s future, the administrator must report on all three options as stated above, and then recommend which option would be the best for the creditors.

The administrator has the power of the company and its directors, including the ability to sell and close down the business or sell individual assets of the business.

Also, the administrator must report to ASIC on any possible offences that may have been committed by people involved with the company.

The meetings

It’s important to really understand what happens during the two meetings that are held with creditors.

First creditors’ meeting

Second creditors’ meeting

The report

All creditors should read the voluntary administrator’s report prior to the second meeting. The report must include:

The outcomes

Company returned to directors

The directors will be responsible for ensuring that all debts are paid as they are due. This outcome is quite rare.

Deed of company arrangement

Liquidation

The voluntary administrator becomes the liquidator, unless creditors at the second creditors’ meeting appoint a different liquidator. Payments of dividends to creditors are made in the order set out in the Corporations Act 2001.

Consequences of voluntary administration

Perhaps the largest consequence of going into administration concerns tax. As with all stages of a business cycle, the financial woes of a business are also subject to tax issues. It’s important to understand how tax can affect the administration.

While going into voluntary administration is looked upon unfavourably, it’s important to remember that the purpose of the exercise is to find the best solution possible for everyone involved, directors and creditors included.

More information? To find out more, give us a call on 1300 023 782 or email team@cdrta.au.

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