3 Types of External Administration That Can Apply to Businesses Facing Insolvency
As a company director, you may have heard the terms Receivership, Voluntary Administration (Administration) and Liquidation. But do you know exactly what they mean and how they differ?
These terms refer to the process generally called external administration. This involves an external professional being placed in control of a company in financial trouble and facing insolvency.
Each concept is a legal process where an external party is appointed to take control of your company and either find ways for it to get back on its feet (such as agreeing to a Deed of Company Arrangement ((DOCA) in Administration), or wind up your company quickly and distribute the funds to creditors.
If your company is facing insolvency and you’re worried you may need to initiate a formal insolvency appointment, or that one may be appointed by a creditor, it’s important you understand the substantial differences between each type of appointment.
All of the roles must be conducted by a qualified professional, known as a Registered Liquidator, who is registered with the Australian Securities & Investments Commission (ASIC).
It's important to also note that in addition to these three traditional forms of external administration, there's now an alternative called the Small Business Restructuring Process (SBRP) which can be a better option for a company, if it meets the criteria.
Receivership
Receivership involves the appointed professional, acting as a Receiver. A Receiver’s role is to sell a company’s business and/or assets.
If there is a prospect of the business being sold as a going concern (ie. as a trading business), the Receiver may operate the business for a period in order to market it for sale and conduct a sale process.
The fundamental difference between Receivership, Voluntary Administration and Liquidation is that the Receiver is appointed by a secured creditor, such as a bank, to recover their debt only.
In contrast, an Administrator of Liquidator is usually appointed by an internal party such as the directors (Administration) or shareholders (Liquidation), to deal with all of a company’s creditors.
A secured creditor will appoint a Receiver to a company where a debt is owing and not being paid on time. The Receiver’s primary duty is therefore to the secured creditor who appointed them. The Receiver acts only for the benefit of the secured creditor and has an obligation to give the money from the realisation of your business’ assets to the secured creditor before other claims, although employees are paid first from certain assets.
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Voluntary Administration
While it’s not uncommon for an Administrator or Liquidator to be appointed while your company Is in Receivership, it doesn’t necessarily mean your company will be wound up. Voluntary Administration is an option aimed at giving your business the opportunity to survive and avoid Liquidation.
Voluntary Administration is for companies which are either insolvent or on the verge of insolvency. While an Administrator can be appointed by a secured creditor, they are generally appointed by the company directors to deal with all of a company’s creditors and affairs.
The Administrator takes full control of your company and is obligated to work out how to try and save it or its business. To have a successful Administration, a Deed of Company Arrangement (DOCA) must be approved by creditors, or the business sold by the Administrator.
If this is not achieved, a Liquidator is then appointed to wind up the company.
The main difference between Receivership and Administration is instead of acting for the sole benefit of a secured creditor, the Administrator must act fairly and impartially for the benefit of all parties involved. The Administrator tries to work out the best solution for your company’s problems, assess any DOCA proposals that may be put forward for your company’s future and compare the possible outcomes of the DOCA proposals to the likely outcome which might occur in a Liquidation.
As the name suggests, Voluntary Administration is usually initiated voluntarily by the director/s of a company. It’s different for Receivership because the receiver is appointed by an outside entity. As discussed below, Liquidation can be voluntary or compulsory.
Company Liquidation
Company Liquidation differs from Receivership and Voluntary Administration because once your company is placed in Company Liquidation, either voluntarily by the director/s or by order of the court, it generally means your company will be wound down and cease to exist.
With Receivership and Administration, on the other hand, there is a chance it can survive and return to normal trading.
Company Liquidation occurs when your company is insolvent — that is, unable to pay all of its debts when they fall due and its business cannot be saved.
Similar to Administration, it can be initiated voluntarily by a shareholders’ vote, or involuntarily by a court order on application by a creditor. Once the Liquidator has sold your company’s assets, investigated its affairs and pursued any legal recovery claims, the funds are then distributed in order of priority under the Corporations Act. Once the Liquidation is finalised, ASIC will deregister the company.
Speak to an Insolvency Professional Today
If you believe your company is facing external administration, you need to contact an insolvency professional as soon as possible to give your company its best chance of survival. You might have been experiencing financial difficulties in your business for a while, but getting advice quickly is vital for exploring your options—including the new Small Business Restructuring Process (SBRP)—and understanding your obligations as a director.
Complete our Instant Online Assessment to learn about your options. Alternatively, get in touch with our team of financial professionals on 1800 861 247 or via our contact form.
