Understanding Company Insolvency – Administration, Liquidation and Receivership

In the building and construction industry, it’s likely that at some point you’re going to have a contract on foot with a company that goes belly up.

Finding that out will be unpleasant.

But what you do next, and just how unpleasant it gets, will depend on exactly what’s happened and how you respond.

For today, there are three main forms of external administration that we’re going to discuss:

1. Administration;
2. Liquidation; and
3. Receivership

Because of the complexity of this area, we’re talking today in generalities, not absolutes.

The main takeaways are:

• Appreciate that there are different types of external administration; and
• Understand some of the key differences between them.

General Comments about Insolvency in Australia

Most often in Australia, insolvency practitioners are a specialist form of accountant.  They often have experience in running and managing business, and particular training in the laws of insolvency as well as accountancy.

These practitioners are appointed to one of the forms of insolvency, and in being appointed they take on certain responsibilities to:

• The creditors of the company;
• The shareholders of the company; and
• The legal framework around insolvency.

Insolvency practitioners charge fees for this service, often resembling those charged by lawyers or accountants generally. These fees usually rank first, or at least high, in the list of things that need to be paid out of a company’s assets.

Other than the most basic forms of compliance, practitioners aren’t expected to do things or take risks for which they are not paid. Sometimes they will take a calculated risk on a course of action despite having no funds, if they believe there is a likely return to creditors out of the decision.

Administration

Administration is generally commenced by a resolution of the company’s directors that the company “is, or is likely to become, insolvent”.

In theory, the policy behind administration is to allow an external party to assess the company’s status and report to its creditors about whether it has any hope of survival. It’s designed to be temporary, and short term.

The administration process usually involves 2 meetings of creditors being called. The first shortly after the appointment with a basic report about what happened and what will happen. The second is to “decide the future of the company”.

There are three options for the future of a company at the second meeting of creditors:

1. Hand control back to the directors and end the administration – this almost never happens;
2. Enter into a Deed of Company Arrangement – a formal document agreed to by the creditors which might allow the company to trade out of its difficulties or restructure in some way that is more beneficial to all involved than liquidation would be (often by comparing the estimated cents-per-dollar return to creditors in each case); or
3. Go into liquidation.

Decisions are made by the creditors of the company who are present at the meetings (by themselves or by proxy), and votes are calculated based on both number of creditors and the value of their debts. Voting at meetings of creditors is fairly complicated so we won’t go into any more detail for the purposes of this article.

Liquidation

As well as a possible outcome of Administration, liquidation can also be the first step of insolvency.  This might be called a creditor’s voluntary liquidation, a member’s voluntary liquidation, or a Court ordered liquidation.

All forms of liquidation are similar, but not identical.

The primary thing about a liquidation is that it pretty much means the end of the company once the liquidators’ job is done.

The liquidators’ main tasks are to:

1. Investigate the affairs of the company, and report on potential wrongdoing by the director;
2. Collect debts owed to the company;
3. Recover voidable transactions (more on this below) if advisable and commercial to do so;
4. Pay out any surplus to creditors, in an order of priorities that is set by legislation.

The biggest pain point for liquidations is often the concept of voidable transactions. For you, the most common type is going to be a preference payment.

Basically, if a company that owes you money pays it within 6 months of commencing liquidation, and it was insolvent when it did, or became insolvent by doing it, then you might get asked to pay it back. The policy here is that if you go more than other creditors did, that’s unfair and the money should be redistributed. In practice, nobody likes getting these letters.

Although we could write a whole text book about voidable transactions (and others have), if you think you’re at risk here or get a letter from a liquidator, the best thing is to get legal advice pretty quickly.

Receivership

Receivership is a different creature from the other two types of insolvency we’ve mentioned so far.

First, it’s normally not commenced by the directors. Most often it’s the decision of a lender who has a security over the company’s assets. Often the right to appoint receivers is found in the loan or security documentation and is exercised when there is a breach of the loan agreement, but it can also be found in various pieces of legislation.

Second, the job of a receiver is a bit different to the job of an administrator or liquidator.

Third, the outcomes of receivership might be quite different.

Receivers and managers are different things, but you will often find them appointed as “receivers and managers”. We’ll just say “receivers” for this article.

The job of a receiver appointed by a bank is usually to get the bank paid. They owe duties to other creditors as well, and to the company itself, but their primary mission is going to be doing what might be needed to get the bank paid. They do this by taking control of the company and directing its affairs for the duration of their appointment. The directors retain some residual powers and duties, but these are limited.

For example, if appointed to a developer in the middle of a project, the receivers might choose to finish the job in order to maximise the payout at the end. Or they might have to decide to sell the project, half completed, even though that doesn’t involve as much profit.

Once a receiver has done their job, then they generally resign promptly.

Receivers can be in their role at the same time as administrators or liquidators. The receivers will usually be from a different firm than the administrators/liquidators, and they will act independently from each other.

So you might have a company that’s BOTH in liquidation and receivership.

The important thing for you is to figure out who you’re dealing with and ensure they have the authority to enter agreements or pay bills (if you’re engaged to continue working for the company, for example).

What to Do?

If you’re dealing with a company in external administration of any kind, then there are some practical steps you should take:

1. Figure out exactly what form/s of external administration it is in;
2. From that, understand who has authority to deal on behalf of the company;
3. Protect yourself going forward – understand who is liable for your invoices as well as what happens to your existing debts;
4. Avoid assumptions – ask questions, get advice, and confirm everything in writing.

Insolvency is complicated, and many people have been burned by making poor assumptions about how to proceed. If in doubt – please give us a call and we’ll clarify the situation for you.