News / What Happens When a Company Goes into Administration?

What Happens When a Company Goes into Administration?

What Happens When A Company Goes Into Administration

The whole purpose of operating a company is to make money. However, with so many moving parts and money coming and going at different rates, it can be very easy to end up with an unmanageable amount of debt.

A business that has reached a point where it is experiencing significant financial trouble may have to go into administration. This happens to companies of all sizes every year, often because there are loans that can’t be paid off, suppliers who are owed money or because there is outstanding tax debt. The situation can be due to financial mismanagement or because something unexpected has happened to affect sales (which happened to many businesses during the pandemic).

If you put your business into administration voluntarily, it doesn’t necessarily mean the end of the road, just that someone independent has been brought in to investigate the financial situation in detail and make recommendations about the best way to move forward.

Take a look at the different types of administration and what happens when a company goes into administration.

Voluntary Administration

A company director or the board of a company can instigate the administration process themselves. This usually happens when debts are out of control and it is recognised that support is needed to identify the next best steps.

With voluntary administration, the Director or board will decide to appoint an administrator. The administrator will be brought in to:

  • Meet with creditors (e.g. banks and lenders, suppliers, employees, contractors or the ATO)
  • Analyse financial statements
  • Review existing assets
  • Go through relevant records and documents
  • Prepare a report detailing the options to move forward

From there, the Director/s and board, if there is one, will make a decision to either sell the business, restructure, or liquidate and stop trading.

Involuntary administration

If a company owes a great deal of money to a number of secured creditors, these creditors can file an application in court that proves they are owed money and that the company is not paying its bills.

As part of this, ASIC (the Australian Securities and Investments Commission) must be notified.

After reviewing the case, the court will appoint an administrator. This moves the company’s directors ‘to the side’. They will no longer be able to make decisions relating to the financial matters of the company.

A liquidator will be appointed to itemise the company’s assets and determine their value before they are sold. Assets may include cars, vans, trucks, equipment and machinery, and property.

The resulting cash is used to repay the creditors. Following this, the company will no longer trade.

How to avoid involuntary administration

If your business is ‘solvent’, you are able to pay your bills on time and steadily reduce your debts.

The term ‘insolvent’ describes the opposite.

It makes sense for an insolvent business to go into administration voluntarily because this gives you more flexibility to make plans and recover. If a solution can’t be found to pay outstanding debts, liquidation may be the best answer. However, at least you will know you explored every option with the help of an administrator.

The benefits of going into administration voluntarily are:

  • Directors are protected from legal action
  • You can ‘buy time’ to figure out how to pay your creditors
  • An administrator may be able to identify ways to recover
  • You will be able to negotiate with creditors
  • Your company can continue to trade

One of the first things to do if you are concerned your business is facing insolvency is to reach out to a lawyer who specialises in this area. If you’re on the Gold Coast, get in touch with our team today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice.

 

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