What is administration?

Administration is typically used when a company is insolvent, or likely to become insolvent, and its directors or a secured creditor want time and protection to explore a rescue or an orderly sale. The usual trigger is cashflow insolvency, meaning the company cannot pay its debts as they fall due.

The Corporations Act sets two objects: to maximise the chance of the company, or as much of its business as possible, continuing in existence; or, if that is not possible, to produce a better return for creditors and members than an immediate winding up would. Administration is one form of external administration, the umbrella term that also covers liquidation, receivership and deeds of company arrangement. It differs from receivership, where a receiver appointed by a secured creditor focuses on recovering that creditor's money alone.

The company's directors, a liquidator or a secured creditor holding a security interest over the whole, or substantially the whole, of the company's property can appoint the administrator under Part 5.3A of the Corporations Act. The administrator must consent and lodge the required forms with ASIC. From that moment a statutory moratorium applies, so creditors generally cannot start or continue proceedings or enforcement without the court's leave.

The administrator takes control of the company's assets and operations, can keep trading to preserve value, and investigates the company's affairs, including voidable transactions such as unfair preferences. Within a short, set timeframe the administrator convenes creditors' meetings and reports on the options: rescue, sale, a DOCA or liquidation. Extensions are available through the court if the investigation needs more time.

Creditors vote on the outcome at a creditors' meeting. The main options are a deed of company arrangement, which binds creditors to a plan for payment, restructure or continued trading; returning control to the directors if the company turns out to be solvent and operable; selling the business or its assets as a going concern; or placing the company into liquidation if rescue is impossible.

Secured creditors generally keep their security rights, and priority claimants keep certain enforcement rights, but the moratorium can affect timing and value. Unsecured creditors need to lodge proof of their debt and, if they want to influence the result, attend the meetings.

If a customer goes into administration, confirm the appointment through ASIC's records, keep evidence of what you are owed, check the deadline for lodging a proof of debt and reassess your credit risk on the account. Suppliers with goods on site need to check whether they hold retention of title or other security.

The administrator can adopt, vary or end contracts, so keep records of deliveries and outstanding invoices. Businesses that hold the company's data, such as finance intermediaries, need to verify the appointment before disclosing anything and keep records of what was requested and released.