Small business-what is external administration

External administration includes administration, receivership and liquidation.
Typically, whenever a company enters into a form of external administration, creditors will be involved.
There are generally two types of creditor – secured and unsecured:
  • A secured creditor is 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. Lenders – for example, banks – will often require a charge over company assets when they provide a loan to the company.

  • An unsecured creditor is someone who does not have a charge over the company's assets.

Employees fall into a special class of unsecured creditors, so their outstanding entitlements are usually paid before the claims of other unsecured creditors.

If you would like more information about the different types of external administration and creditor rights, please see the ASIC information sheets referred to below.

For a brief explanation of some of the terms you may come across regarding external adminstration see ASIC Information Sheet 41 Insolvency: a glossary of terms

Administration

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

A creditor is someone who is owed money by the company, often because they have provided goods or services or made loans to the company. Employees owed money for unpaid wages and other entitlements are also creditors.

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:

  • end the voluntary administration and return the company to the directors’ control

  • 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

  • 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.

More about voluntary administration

Voluntary administration: a guide for creditors - INFO 74

Voluntary administration: a guide for employees - INFO 75

Independence of external administrators: a guide for creditors - INFO 84

Approving fees: a guide for creditors - INFO 85

Receivership

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

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 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.

More about receivership

Receivership: a guide for creditors - INFO 54

Receivership: a guide for employees - INFO 55

Liquidation

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

A creditor is someone who is owed money by the company, often because they have provided goods or services or made loans to the company. Employees owed money for unpaid wages and other entitlements are also creditors.

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.

More information on this topic

ASIC initiated deregistration of company

Cancelling a business name

Four ways to close a company

What happens when a company is deregistered?

More about small business

Small business home

Starting a small business

Compliance for small business

Closing a small business

Resources

More about liquidation

A guide for creditors - INFO 45 Liquidation

A guide for employees - INFO 46

For more information about insolvency generally see Insolvency: a guide for directors - INFO 42

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Last updated: 04/11/2013 12:00