What Happens When a Company Goes Into Administration? (2020 Update)
Insolvency often results in a company going into administration. However, this doesn't always mean it's the end of your business.
If your company has become insolvent, it’s not necessarily the end of the road. Administration often follows on from insolvency and it doesn’t always mean that you’ll have to shut down your company. However, it’s a complicated process which can be costly and lengthy. In this article, we’ll cover the basic elements of administration and the process involved. By and large, companies can and do bounce back from administration – if it’s handled early on.
What is administration?
Administration is a process in which an independent person takes control of a company, investigates it and then makes recommendations on how to proceed. Some of the recommendations could include:
- Winding up the company
- Selling the company
- Restructuring the company
M&M Designs Pty Ltd has become insolvent. They have gone into administration and appointed an external administrator to advise them on whether they can salvage the business. The administrator will have to look at all their financials, and offer recommendations as to how they can continue.
Companies will enter administration when they are insolvent. Insolvency means that the company owes more money than it makes. It’s also important to note here that if a company continues to trade and incurs further debts, a director may be held liable for that debt. A company goes into administration when a director realises the company is in serious financial trouble. It doesn’t mean that the company is shutting down, but it does mean that the company is at risk of going bust.
Why does administration occur?
The purpose of administration is to work out an insolvent company’s future. This comes down to the question of whether or not it can be saved. Either way, the administrator has to figure out a way for the company’s debts to be repaid. This applies whether it can be saved or not.
Administration involves different parties, who have different interests. Firstly, there’s the company itself. The directors of the company may want to save the business and pay of their debts. Secondly, there’s creditors, who are owed money from the company. Creditors are primarily concerned with being repaid. Further, administrators are tasked with assessing the business and determining what the best way forward is.
An administrator is also called an ‘insolvency practitioner’. The terms ‘administrator’ and ‘insolvency practitioner’ are interchangeable and both carry out the same duties.
The administrator can be appointed by the company’s directors (also known as ‘the board’), the secured creditors or the Court. This is important because the type of the administration (and therefore its procedure) depends on who starts the administration process.
Voluntary administration occurs when the administrator is appointed by the board or by the secured creditors. It is described as ‘voluntary’ because the company is initiating the administration process on its own accord. A company may enter administration to find out where they stand financially and to take prompt action when they discover it’s insolvent and want it to be saved. This is how it happens:
1. The company appoints an administrator
The board members and creditors of the company hold a meeting. In this meeting, they decide to appoint an administrator.
2. The administrator investigates the company
The administrator analyses financial records, assets and other documents to determine what kind of position the company is in.
3. The administrator advises the company
After the administrator has determined how the company can move forward, they prepare a report for the board members and creditors to look over. The report will detail how the company can get itself out of debt. If it can’t, then it will be wound up. If it can, the director’s can reclaim control of the company through a Deed of Company Arrangement (DOCA).
4. The company votes on how to proceed
The company meets and decides on which recommendation they should accept. This can be restructuring the business, selling the company or winding it up.
A real life example
In 2017, Australian TV network Channel 10 went into administration. It soon became apparent that the only way it could be salvaged was to be bought out. Thankfully for Channel 10, US TV network CBS purchased it. Channel 10 was able to continue trading as usual and is now a subsidiary of CBS.
Involuntary administration occurs when it is not the company that decides to go into administration, but the creditors. This usually happens after a company has failed to repay its debts.
The process is as follows:
1. Creditors apply for a winding up order
Secured creditors file an application to wind up the company in the relevant Court. The creditors need to prove that the company has failed to comply with requests for payment. This is in itself a strict process, which requires the creditor to also file an affidavit. In addition, ASIC need to be informed.
2. The Court will appoint an administrator
While the ‘winding-up’ application is pending, the Court appoints an administrator. Often, creditors will choose an administrator and then apply to the Court for permission to appoint them. The appointment immediately freezes any legal proceedings against the company, and the provisional liquidator takes complete control of the company.
At this stage, the directors of the company are prohibited from acting in their capacity as directors.
3. Company assets will be sold
The provisional liquidator will ‘take stock’ of all the company’s assets. This can include equipment owned, property and vehicles. After that, these assets will be sold, meaning they have been converted into liquid form.
4. Debts are paid
Creditors are repaid from the proceeds of selling the assets. The company is wound up and therefore ceases to exist.
TechTell Pty Ltd is a small technology company. They owe their creditors more than $7,000,000 and cannot repay it. After ignoring a statutory demand, the creditors have applied for the company to be wound up. As a result, the administrator sold all assets and paid off the company’s debt.
In conclusion, the administration process is long and complicated. However, administration only occurs as a result of insolvency – which is something your business should try and avoid. Administration doesn’t always mean that your company will have to shut down, but it does mean that the way your company is organised will change.
Jackie is the Content Manager at Lawpath and manages the content team. She has a Law/Arts (Politics) degree from Macquarie University and is an admitted solicitor in the Supreme Court of NSW. She's interested in how technology can help shape the future legal landscape.