A Guide to Administration
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:
- The company is returned to the control of the directors – If the company is believed to be viable and formal administration is unnecessary, the company can revert to its former state.
- A Deed of Company Arrangement (DOCA) – the Deed must be prepared by a solicitor and executed within 15 business days of the meeting. A DOCA can take the form of a trade out, paying creditors in full or part, continued trading while seeking funding, a buyout, realisation of assets, or a combination of these options.
- The company is put into liquidation.
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.
- Unsecured creditors cannot enforce their claims against the company without the administrator or court’s permission.
- Property cannot be recovered by owners or landlords.
- Secured creditors cannot enforce their charge over company property, except in certain circumstances.
- The company cannot be put into liquidation by the court.
- Any creditor holding a personal guarantee cannot act under the personal guarantee unless the court consents.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
It’s important to really understand what happens during the two meetings that are held with creditors.
First creditors’ meeting
- The meeting must be called within eight business days of the start of voluntary administration.
- Advertisement must appear in a newspaper in the states or territories in which the company has its registered office or carries on its business.
- Notice of meeting must be sent to the creditors at least five business days prior. To allow creditors to consider the administrator and understand the administrator’s independence, it must include:
- Notice of the meeting
- Declarations of any relationships they may have
- Indemnities they may have been given.
- At the meeting, creditors must decide whether they want to retain the current administrator and whether they want to form a committee of creditors, as well as who will be on it.
- The committee of creditors consult with the voluntary administrator about all matters relevant to the administration, and receive reports.
- If a creditor wishes to nominate an alternative administrator, they must approach a registered liquidator prior to the meeting and obtain written consent that they would be prepared to act as administrator.
- To be eligible to vote at the meeting, details of a creditor’s debt must be lodged with the administrator.
Second creditors’ meeting
- Creditors are given the opportunity to decide the company’s future.
- Creditors are given reports by the administrator on all possible options for the company, including the administrator’s recommendation.
- The voluntary administrator must send creditors notice at least five business days prior to the meeting. It must include:
- Notice of the meeting
- Voluntary administrator’s report
- A statement about any proposals for a deed of company arrangement.
- A claim form (usually a proof of debt form)
- A proxy voting form.
- The meeting must be advertised as per the initial meeting.
All creditors should read the voluntary administrator’s report prior to the second meeting. The report must include:
- Sufficient information to explain the business, property and affairs.
- Reasons for the current financial situation.
- Analysis of any proposal for the future of the company. This must include all possible outcomes and an estimate of what would be available to creditors should the company go into liquidation.
- The opinion of the administrator on all outcomes, and which outcome would be best for creditors.
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
- The company must sign the deed within 15 business days of the creditors’ meeting.
- Binds all unsecured creditors, owners of the property, those who lease property to the company and secured creditors.
- Does not prevent any creditor who has a personal guarantee from the company’s director from taking action under the guarantee to have their debt repaid.
The deed must include:
- The name of the deed administrator
- The property that will be used to pay creditors
- Debts covered by the deed and the extent to which the debts will be released
- The order in which the debts will be paid
- The nature and duration of any suspension of rights against the company
- Any conditions for the deed to come into operation
- Any conditions for the deed to continue in operation
- The circumstances in which the deed terminates.
- The voluntary administrator must ensure the company follows through with the commitments of the deed.
- If any creditor is concerned that the company is not meeting the obligations set out by the deed, it should be taken up with the deed administrator.
- A deed can be varied or terminated at any time. The deed administrator must call a creditors’ meeting.
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.
- Assets are sold to pay debts – Proceeds are still subject to tax as per normal (ordinary income or capital gains).
- Business has to sell trading stock or other assets at below market value – In some instances, tax law may treat the sale as having been made at market price.
- Sole trader or shareowner in a business and assets are sold to a white knight – This is still subject to tax on the sales. In certain situations, you may be entitled to tax exemptions and concessions under the small business CGT concession rules.
- Creditor or lender forgives part or full debt – This amount falls under the ‘commercial debt forgiveness rules’. This means the business may have to reduce the value of tax losses, capital losses and assets by the amount forgiven.
- Shareholder of a company being liquidated – Any distribution should be tax-free because it is a return of your original investment amount. Anything above the original investment is likely to be taxed as a dividend.
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.
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