External administration

External administration includes administration, receivership and liquidation. These processes are used to close down the affairs of an insolvent company.

What is external administration?

Typically, whenever a company enters into a form of external administration, creditors will be involved.

A creditor is someone who is owed money by the company, because they have provided goods or services or made loans to the company. Other creditors may be employees who could be owed money for unpaid wages and other entitlements and statutory agencies like the Australian Tax Office.

There are generally two types of creditors – secured and unsecured:

  • A secured creditor - someone who has a 'charge', such as a mortgage, over some or all of the company's assets, to secure a debt owed by the company. (For example, a bank who loans money to a company.)
  • An unsecured creditor - someone who does not have a charge over the company's assets. (For example, a small business that has provided good and services to a company.)

If there is money available to repay creditors, the law sets out the order of priority in which people get paid in an external administration. Usually, secured creditors are paid before unsecured creditors. Employees fall into a special class of unsecured creditors, so their outstanding entitlements are usually paid before the claims of other unsecured creditors.

When a business goes into administration

When a company is experiencing financial problems, it may be placed into administration, either voluntarily, by its directors, or involuntarily, by creditors that are owed money for goods or services provided to the company.

Voluntary administration and the role of an administrator

The aim of voluntary administration is to resolve a company’s future direction quickly. An independent and suitably qualified person called an administrator takes full control of the company to try to work out a way to save either the company or its business.

The administrator investigates and reports to creditors on the company’s business, property, affairs and financial circumstances, and on the three options available to creditors:

  1. End the voluntary administration and return the company to the directors’ control
  2. Approve 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
  3. Wind up the company and appoint a liquidator

Another responsibility of the administrator is to report to ASIC about possible offences by people involved with the company.

Although the administrator may be appointed by the directors, they must act fairly and impartially.

Find out more about voluntary administration:

When a company goes into receivership

When a company experiences financial difficulty, a secured creditor (such as a bank) or the court may put the company into receivership.

The role of a receiver

An independent and suitably qualified person called a receiver is appointed by a secured creditor, or in special circumstances by a court, to take control of some or all of the company’s assets.

The receiver’s role is to:

  • collect and sell enough of the company's assets to repay the debt owed to a secured creditor (this may include selling assets or the company’s business)
  • pay out the money collected in the order of priority required by law, and
  • report to ASIC any possible offences or other irregular matters they come across.

The receiver has no obligation to report to unsecured creditors about the receivership. However, the receiver will usually write to all of the company’s suppliers to inform them of their appointment. Unsecured creditors are not entitled to see the receiver’s reports sent to the secured creditor.

If a receiver has the power to manage the company's affairs, under the terms of appointment, they are known as a receiver and manager.

It is possible for a company in receivership to also have an administrator or a liquidator appointed.

Read these guides to find out more about receivership:

When a company goes into liquidation

When a company experiences financial difficulty, creditors or a court may put the company into liquidation.

The role of a liquidator

Liquidation of an insolvent company enables an independent and suitably qualified person called a liquidator to take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.

When a company is being liquidated because it is insolvent, the role of liquidators is to act for all creditors (secured and unsecured).

The liquidator’s role is to:

  • collect, protect and convert the company’s assets into cash
  • investigate and report to creditors about the company’s affairs
  • inquire into the failure of the company and possible offences by people involved with the company and report to ASIC
  • after payment of the costs of the liquidation, and subject to the rights of any secured creditor, distribute the proceeds of the sale of company assets – first to priority creditors, including employees, and then to unsecured creditors, and
  • apply for deregistration of the company on completion of the liquidation.
Last updated: 01/05/2019 06:21