Bankruptcy & Insolvency FAQ

Administration is the process to determine whether a company has, or will have sufficient funds to pay its creditors and continue trading viably or whether it should be ‘wound up’ and liquidated due to insolvency.

An administrator is a solvency practitioner who is independent of the company in question.

During administration, a company is protected from its creditors whilst the various alternatives are considered.

If there is a proposal put forth for the business to continue and creditors to be paid, the company and its directors execute a Deed of Company Arrangement. At the time of considering the proposal, the creditors consider a report from the insolvency practitioner as to their recommendations. Eventually, the decision as to whether a Deed of Company Arrangement is entered into is made by the creditors of the company.

Yes. If a director of a company receives a notice from the tax office in relation to tax due by a company, then it may be that the director will become personally liable if he/she does not take urgent action for the appointment of an administrator.

Part 5.3 A of the Corporations Act 2001 (Cth) - http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

Voluntary Administration can be described as a mechanism instigated by a company in financial distress to obtain a level of protection from its creditors for enough time as needed to save the business and avoid liquidation.

The Corporations Act 2001 (Cth) provides the legal framework for a company that is insolvent, or likely to become insolvent, to obtain some “breathing space” to enable the directors to formulate a plan to reorganise the financial affairs of the company and thereby avoid liquidation.

The legislation requires the appointment of a voluntary administrator. Full control of the company is passed to the administrator whilst he/she tries to determine a way to either save the company and pay its creditors, or enter liquidation. In this instance, the aim is to manage the company’s affairs in such a way as to ensure a better return to creditors than they would have received if the company had been placed into liquidation.

A voluntary administrator is usually appointed by a company's directors after they decide the company is, or is likely to become insolvent. However, in some instances a voluntary administrator can be appointed by a secured creditor or a liquidator.

It normally lasts 35 days. However, this can be extended by the Court if the voluntary administrator requires additional time to report on the company’s financial affairs.

• Creditors with personal guarantees from a director cannot act on their guarantee without approval from the Court.
• Creditors cannot continue to enforce claims against the company without approval from either the administrator or the Court.
• A Court application to wind up the company cannot be commenced.
• Owners of property used, or occupied by the company, cannot recover their property until administration has concluded.

To take control of a company's assets, then investigate and report on the company's business, property, affairs and financial circumstances to the creditors of the company. The voluntary administrator then provides the creditors with his/her opinion on each of the options available, and the best option for the creditors to pursue.

At the conclusion of the administration process, three options are available to creditors:

1. End the administration and return control of the company to directors;
2. Approve a Deed of Company Arrangement, which outlines the company’s plans to pay all, or part of its debts back to its creditors; or
3. Liquidate the company.

The administrator has the power to sell assets or close down the company's business in the lead up to the creditors meeting. The role of the administrator also includes reporting possible offences and breaches of the Corporations Act 2001 (Cth) to the Australian Securities and Investment Commission (ASIC).

There are at least two meetings required in the voluntary administration process:

1. The first meeting of creditors must be convened and held within 8 business days after the voluntary administration process begins, and decides whether a committee of creditors is to be formed, and whether the existing voluntary administrator is to be replaced. The administrator must convene the meeting by giving written notice of the meeting to as many of the company's creditors as possible, and publish notice of the meeting in a national newspaper, or in each State or Territory in which the company has its registered office or carries out its business (in a daily newspaper that circulates generally in that State or Territory).
2. The second meeting of creditors is usually held 35 days after the company enters voluntary administration. At this meeting, it is decided whether the administration is to end and the control of the company is to be returned to the directors; whether to approve a Deed of Company Arrangement, or whether to place the company into liquidation.

Resolutions at creditors meetings are passed firstly on the voice of the participants. However, if a poll is demanded then a resolution will pass if more than 50% of creditors (in number) and 50% in value (of credit) attending the meeting vote in favour of the resolution. If there is a deadlock, the appointed chairman has a casting vote and usually exercises this vote in accordance with the recommendations as outlined in the report to creditors by the voluntary administrator.