When a company faces tough times and is in financial distress, it can become insolvent. There are a number of ways a company can handle insolvency, one of these is through Administration. A company will look to the advice and recommendations of an appointed administrator for the future of the company. It can be Voluntary or Involuntary. While similar, the processes and how they begin do differ. This article will explain what administration is and the differences between when it is Involuntary and Voluntary.
What is Administration?
Companies will enter administration when they are insolvent or facing insolvency. As a result, an independent person will take control of the company. This person is the administrator. Under their administration they will investigate the circumstances of the company. They will also make recommendations on how to proceed. There are two forms of administration a company can face. Voluntary administration and involuntary administration.
The administrator will provide recommendations on how the company should proceed. These recommendations include:
- Selling the company
- Winding up the company
- Restructuring the company
These recommendations will be based on outlook of the insolvent company’s future. No matter what, the administrator will be looking for a way to repay the creditors.
Insolvency is a period of financial distress for a company. It is the inability for it to pay debts when they fall due. More simply, the company owes more money than it makes. A company can be insolvent in two ways:
- Cash-flow Insolvency
- Balance-Sheet Insolvency
Cash-flow insolvency occurs when a company has the assets to pay what is owed, but is unable to pay in the appropriate form.
Balance-sheet Insolvency occurs when a person or company’s total debts or liabilities outweigh their total assets, even though it might still be able to its next debts when they are due.
Voluntary and Involuntary Administration are two of the many corporate insolvency procedures available. Insolvency is not necessarily the end of the company. Administration usually follows it, and if handled well, can pull the company out of tough times.
Voluntary administration occurs when the insolvent company makes the decision to appoint an administrator. Directors of the company will make the decision. The key fact here is that the company has made its own decision to begin administration. During Voluntary Administration, the administrator will analyse the financial records and assets of the company to determine its position and future. The company will use the advice on how to proceed based on the investigation. The administrator will recommend how the company can get itself out of debt, or whether it can’t. If the company can’t save itself, then it will be wound up. Directors can reclaim control of it through a Deed of Company Arrangement (DOCA). After the administrator has provided their advice, the company will decide on how they will proceed.
Involuntary Administration is similar, however, the company does not get to decide whether it enters administration. The companies creditors are the ones who begin administration. The secured creditors file an application to the relevant court, to have the insolvent company wound up. The creditors will need to be able to prove that the company has failed to comply with their requests for payments.
While the application is decided the court appoints an administrator. Often creditors choose their own administrator and apply to the court to have them appointed. A successful application will then see a liquidator placed in control of the company. During this, the directors duties are extremely limited. If the company is to be liquidated, a liquidator will be appointed. The liquidator will apply the company’s assets in the best way that can maximise repayment of the creditors. Once all assets are sold, the company is wound up.