When a company finds themselves drowning in debt, business administration can be the lifeboat necessary to save the company. However, administration can be a long and complex process, so Business Kitz have put together this blog post to help you understand!
What are the key things to remember?
- Administration follows insolvency;
- It can be either involuntary or voluntary; and
- Administration commonly results in the company either winding up, being sold or undergoing a restructuring.
When does business administration occur?
Administration is often successive to insolvency. Insolvency refers to when a company can longer pay their owing debts, effectively owing more money than they are making. When it is believed a company is in serious financial trouble and there is a risk of permanent bankruptcy, the company will enter administration.
What is business administration?
Business administration is all about working out the future of an insolvent company. This process does not mean the company’s demise is inevitable, but instead warrants a thorough investigation into the company’s finances. This requires an external, independent person taking control of the company, and proposing possible recommendations for the company’s proceedings.
Most commonly, these recommendations include:
- Winding up the company (our sister company, Legal Kitz, has a blog post explaining this process);
- Selling the company; or
- Restructuring the company.
Whatever outcome is decided, the administrator has to devise a way to repay the company’s debts.
Who is involved in the process of administration?
The deliberative process involves both the company itself, and the creditors whom the company is indebted to. The independent person entrusted with the administrative process can be interchangeably referred to as either the ‘administrator’ or ‘insolvency practitioner’. Think of an administrator as a really good psychic (but one that is equipped with financial expertise and business knowledge); they are in charge of predicting alternate futures for the company.
This person can be nominated by the company’s board, the creditors or the court. The elected administrator is often contingent on who starts the administration process, thus it is important whether administration is involuntary or voluntary.
What is involuntary administration?
Involuntary administration refers to administration when it is initiated by the creditors of whom the company has failed to repay their debts to. The steps for involuntary administration are:
1. Creditors apply to wind up the company
Creditors must file an application to wind up the company, in which they must prove that the company is indebted to them and has failed to fulfil payment requests. This application must also include an affidavit, and ASIC must be notified of the company’s noncompliance.
2. Court-appointed administrator
Creditors apply to the court for permission to appoint a nominated administrator. The appointment of an administrator equips the individual with total control of the company, causing any legal proceedings against the company to halt.
3. Financial assessment
Once all of the company’s finances have been reviewed, assets are sold in order to repay the creditors. Such assets that are liquidated include equipment, property and vehicles. As a result, the company is wound up.
What is voluntary administration?
Alternatively, voluntary administration occurs when a company initiates administrative processes on their own behalf, as an effort to save a company when insolvency is realised. This process includes the following steps:
1. An administrator is appointed by the company
Board members or creditors nominate an administrator to lead the process.
2. Financial review
The nominated administrator will conduct a thorough investigation into the company’s records and assets to determine the financial position of the company. From this, a report is composed that advises board members and creditors as to how the company can proceed, including the process of debt repayment. If escaping insolvency is possible, the company can regain control via a Deed of Company Arrangement. However, if it is not possible for the company to get out of debt, it will be wound up.
3. Company decision
Following these proceedings, the company decides what the next step will be for the business. This is often deliberating whether restructuring the company, selling the company or winding up the company will be most viable.
As you can tell, administration is a complex process that requires deep investigation and critical decision making. If you require legal assistance in navigating this process, our sister company, Legal Kitz, is here to help. Book here now for a FREE 30-minute consultation with our highly experienced and qualified team.