External Administration: A Way out Australian Businesses in Financial Distress?

On 21 April 2020, Virgin Australia, Australia’s second largest airline, went into ‘voluntary administration’ due to financial distress, marking the most prominent victim of the COVID-19 pandemic. In Virgin’s own words, the voluntary administration will recapitalise Virgin’s business and help it emerge in a stronger position after the pandemic.

What is voluntary administration? How does it work? Is it an effective way out for Australian businesses in financial distress? This article will briefly outline the answers to these questions.

What is administration?

Under the Australian Corporations Act 2001 (‘the Act’), what Virgin refers to as ‘voluntary administration’ is a procedure undertaken by a company when it is or likely to be insolvent. An administrator, who is external to and independent of the company, will be appointed to administer the company’s affairs to achieve specific outcomes. The process is also termed ‘external administration’ or simply ‘administration’ under the Act.

Under the Act, the purpose of administration is two-fold. It is either:

1. to maximise the chances for the company and its business to survive; or
2. if survival is impossible, to have the company wound up immediately for the benefit of its creditors and shareholders.

Procedure of administration

External administration of company usually consists of the following steps:

1. the company’s directors resolve that in their opinion, the company is insolvent or is likely to become insolvent in the near future, and an administration should be appointed
2. appointing an administrator
3. first directors’ meeting with the administrator
4. administrating the company affairs by administrator
5. meeting with the company’s creditors to decide the company’s future
6. outcome of administration – normally one of the following:                                                                             (1) the company executes a deed of company arrangement with the administrator;                             (2) the company creditors resolve that the administration should end;                                           (3) the company creditors resolve that the company should be wound up.

Who can be an administrator?

An administrator must be a registered liquidator free of connections to the company. The following types of persons or body corporates are excluded by the Act from being an administrator except with leave of the court:

1. a debtor to the company or its related companies indebted for more than $5,000;
2. a creditor of the company or its related companies for a debt more than $5,000;
3. directors, secretaries, senior managers, employees and auditors of the company and their partners, employers or employees etc; and
4. directors, secretaries, senior managers and employees of a secured party in relation to the company’s property.

How does the administrator work?

The administrator assumes control over the company with a broad range of powers in order to achieve the purpose of administration. Such powers include:

1. control of the company’s business, property and affairs;
2. access to the company’s books;
3. appointment and removal of directors;
4. execution of documents; and
5. bringing or defending legal proceeding in the company’s name.

The administrator has two fundamental tasks, namely:

1. investigate the company’s business, property, affairs and financial circumstances to determine which outcome of administration is suitable in the interest of the its creditors; and
2. report to the Australian Securities and Investments Commission (ASIC) about offences or misconducts of the company’s officers, employees or shareholders.

The company’s directors must assist the administrator by providing the administrator with:

1. access to and information of the company’s books;
2. information of the company’s position; and
3. information of the company reasonably required by the administrator.

Protection of the company during administration

In order to maintain the company’s property during administration, a range or actions against the company are either restricted or suspended, including:

1. winding up;
2. exercise of third party property rights such as charges;
3. proceedings against the company; and
4. enforcement processes.

Outcome of administration

Approaching the end of the administration, a meeting will be held with the company’s creditors to decide the company’s future where the creditors may resolve on the outcome of administration.

If the creditors resolve that a deed of company arrangement be executed, the executed deed will bind all the company’s creditors and deal with the company’s debts in accordance with its terms. The administrator will administrate the deed unless otherwise resolved by the creditors.

However, if a deed of company arrangement is impractical, the creditors may also resolve that the administration should end or the company be wound up.

Conclusion

To conclude, when the company is insolvent or likely to become insolvent, external administration could be a way of achieving a better outcome of the company. However, administration may also lead the company to winding up if the circumstances of the company are so grim that a company arrangement with its creditors is impracticable. Thus, external administration must be choice carefully made by the company in the light of its circumstances, such as its assets and debts, potential of restructuring and so on.

For more information relating to company insolvency, please refer to our article Risk and Avoidance of Insolvent Trading During COVID-19 Pandemic.

Please contact our firm for advice specific to your circumstances.

Disclaimer

This publication is general information only and does not purport to provide legal advice. We do not accept responsibility for any losses for reliance upon this publication.