The harsh truth about going into administration

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If your company has become insolvent, administration is often imminent. However, this does not mean your company is obliged to shut down or close operations. If considered action is taken in the early stages, it is possible for companies to bounce back from administration. Although, regaining momentum and recovering from insolvency is a complicated process that is costly and lengthy. This Business Kitz blog will cover the basics of the administration process.

What is administration?

Administration refers to the process in which an independent, external person takes control of a company and investigates its financial position and assets, before making recommendations on how to proceed. Recommendations may include:

  • Closing company operations;
  • Selling the company; or
  • Restructuring the company.

When does a company enter administration?

A company enters administration when the director realises that the company is insolvent. Insolvency means that the company owes more money than it makes. In other words, its debts are higher than its profits. If the director continues to trade after realising the negative financial position the company is in, they may be held liable for these omissions.

Why does administration occur?

The purpose of administration is to consider the possible future of the company and whether or not the company can be saved from insolvency. No matter what direction is decided for the company’s next steps, the administrator must work out a way to repay the company’s debts.

Who is involved?

There are a number of parties involved in the process of administration.

Of course, the company itself is involved, as led by the directors of the company who are primarily concerned for the future of the company and its financial position. The parties that the company owes money to, known as creditors, are also closely consulted in the process, as receiving any overdue payments is a priority for them. Additionally, the administrator is responsible for assessing the business’ position and determining the best direction forward.

What are the types of administration?

Voluntary administration

Voluntary administration occurs when the company instigates the administration process on their own accord. The administrator is appointed by the board or by the secured creditors. Let us run you through the steps of voluntary administration:

1.  The company appoints an administrator

The board members and creditors of the company decide to appoint an administrator.

2.  The administrator investigates the company

Financial records, assets and any other finance documents are analysed to assess the severity of insolvency.

3.  The administrator advises the company

Once the administrator has determined the best way for the company to move forward, they prepare a report for board members and creditors to view.

4.  The company votes on how to proceed

The company decides on which recommendation they should accept to move forward, thus potentially continuing business operations if possible.

Involuntary administration

Involuntary administration occurs when the creditors force the company that is indebted to them to enter administration, as result of the company failing to repay its debts. Here are the steps involved in this process:

1.  Creditors apply for a winding up order

Creditors file an application to wind up the company in court. The creditors must prove that the company has failed to comply with requests for payment. The Australian Securities and Investments Commission must be informed that this process is underway.

2.  The court will appoint an administrator

The court appoints an administrator whilst the ‘winding-up’ application is pending.

3.  Company assets will be sold

The provisional liquidator will conduct a stock count of the company’s assets, which are then sold to repay debts.

4.  Debts are paid

Creditors are repaid from the proceedings of selling the company assets. The company is wound up, and ceases operations.

What are the key takeaways?

  • Administration only occurs as a result of insolvency;
  • Companies enter can enter administration either voluntary or involuntary;
  • Administration results in the company either being sold, wound up, or restructured; and
  • Companies can go on to be successful after administration

Legal advice

Insolvency is something your business should always try to avoid. If you are worried about your company’s financial status, we recommend that you seek either accounting or legal advice. Our sister company, Legal Kitz, are business law specialists that can assist with ensuring that your concerns are addressed by providing tailored advice. You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.