What happens when a company goes into administration?
Are you a small or medium sized business?
Have you been experiencing financial troubles?
Have you considered voluntary administration?
Going into administration
If a company becomes insolvent, it will need to go into administration. Voluntary administration occurs when the directors of a company decide to appoint an administrator to take control of the company. A qualified insolvency practitioner will be appointed to ‘take over’ the company in an effort to investigate it and potentially save it. The Corporations Act 2001 (Cth) defines solvency as being “able to pay all debts, as and when they become due and payable”. The Act then stipulates that ‘insolvent’ is the opposite of ‘solvent’; thereby essentially saying that if a company is unable to pay their debts on time, they are insolvent.
It has been well established by common law that the following factors can be indicators of insolvency:
- continuing losses;
- overdue taxes;
- poor relationship with bank such that there is an inability to borrow funds; and
- inability to produce timely and accurate financial information to demonstrate performance.
(Note: this is not an exhaustive list and other factors can indicate insolvency.)
When we think of creditors, we often imagine people that have provided services or goods that have not been paid for, however in the case of a company, employees can also be creditors if the business owes them pay.
A timely example: Cooper and Oxley
Construction firm Cooper and Oxley went into voluntary administration in early 2018 when they became unable to pay their sub-contractors. Upon going into administration, the directors appointed an insolvency firm to take over the company’s day-to-day operations. As part of their role, the insolvency firm met with sub-contractors, assessed the financial position of Cooper and Oxley and prepared an initial notice to all creditors.
The process of voluntary administration
If a company becomes insolvent the directors can decide to go into voluntary administration. The process of administration is as follows:
- Appointment of administrator
The appointment of an administrator is the first step of administration. Once this has occurred, voluntary administration has begun.
- Creditors meeting
The administrator needs to hold a meeting with the company’s creditors. This needs to be done within 8 days of the administrator being appointed, and the creditors need to be given at least 5 days’ notice. These are the general time limits, however a Court can grant an extension. At this meeting, the creditors are able to vote as to whether they would like to keep the appointed administrator or create a committee of inspection to investigate the company.
- Administrator’s report
The next step in the process is the administrator’s report. The administrator must investigate the company’s financial position and report to the company’s creditors outlining their options.
- Creditors meeting
Within 20 days of being appointed, or 30 days if appointment occurs around Christmas or Easter, the administrator must hold a second meeting with the company’s creditors. Again, the creditors need to be given at least 5 days’ notice of the meeting and the Court may grant an extension if they see fit. The agenda of this meeting is to decide between the following options:
- end the administration and return the company to the directors’ control; or
- approve a deed, known as a Deed of Company Arrangement, through which the company will pay all or part of its debts and then be free of those debts; or
- wind up the company and appoint a liquidator.
Safe harbour reforms
In 2017, a lot of changes were made in relation to insolvency laws in Australia. Prior to these changes, directors did not have much protection from the insolvent trading provisions in the Corporations Act and neither did they have very much incentive to try to save their company if it started struggling financially.
The safe harbour provisions came into action on 19 September 2017, and they provide protection for directors who act responsibly and in good faith when faced with insolvency. Section 588G of the Corporations Act stipulates that if a director suspects, or reasonably ought to suspect, that their company is insolvent they should cease trading immediately and not incur any further debts.
The new safe harbour provisions in section 588GA of the Act provide that if, when a director suspects or ought to suspect their company is insolvent, they develop one or more courses of action that are reasonably likely to lead to a better outcome for the company, but in doing so they incur further debt, they are protected under the Act. The factors to be considered when determining whether the director’s actions would be reasonably expected to result in a better outcome for the company include whether they:
- properly informed themselves of the company’s financial position;
- took appropriate steps to prevent misconduct by officers or employees of the company that could result in further debts;
- ensured that the company is keeping appropriate financial records;
- obtained advice from qualified advisors; and
- developed and/or implemented a plan for restructuring the company.
As soon as the director begins the course of action that they are taking, the protection in section 588GA applies. Any debts incurred whilst the director is acting within the scope of the safe harbor provisions do not count as insolvent trading, whether or not the company was in fact insolvent.
Furthermore, the provisions mean that a company does not have to resort to appointing an administrator the second they become insolvent, thus allowing them the chance to restore their company to solvency. If the expected solvency does not end up being reached, the default position will be that there was no insolvent trading so long as the director was acting within the safe harbour provision. In these cases, the burden will lie on the liquidator to prove that the director was not compliant with the provision.
If you are the director of a company and you think you may be about to become insolvent, you may need to consider going into voluntary administration or seeking safe harbor protection. If you find yourself in this position please do not hesitate to contact Lynn & Brown Lawyers for expert advice.
About the authors:
This article has been co-authored by Chelsea McNeill and Steven Brown at Lynn & Brown Lawyers. Chelsea is in her third year of studying Law at Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.