When a well-known business collapses, the headlines say it’s ‘entered administration’. Here’s what that actually means, what happens next, and who gets paid back.
A company is insolvent when it can’t pay its debts when they’re due. Directors who let a company keep trading while insolvent can be held personally liable.
When a company is in trouble, there are several formal processes it can go through.
Voluntary administration
Voluntary administration is designed to give a struggling company breathing space. It’s usually started by the directors.
An independent administrator, a registered insolvency practitioner, takes control of the company. Most creditors can’t take action to recover their debts while the company is in administration.
The administrator investigates the company’s finances and decides what’s best for creditors. They often keep the business running while looking for a buyer or a rescue deal.
Creditors meet, usually within weeks, and vote on the company’s future. The options are generally to return the company to its directors, accept a deed of company arrangement, a deal to repay creditors in part, or put the company into liquidation.
Many well-known businesses have gone through administration and survived under new owners, including Virgin Australia in 2020.
Receivership
Receivership is usually started by a secured creditor, such as a bank that has lent money against the company’s assets.
A receiver is appointed to recover that lender’s money, often by selling assets. Their main duty is to the secured creditor, not to other creditors.
Liquidation
Liquidation is the end of the road. A liquidator is appointed to wind up the company, sell its assets, investigate what went wrong, and distribute the proceeds to creditors.
The company is then deregistered and ceases to exist.
Who gets paid
Creditors are paid in a set order. Secured creditors, the insolvency practitioners’ fees and employees’ entitlements generally rank ahead of ordinary unsecured creditors, such as suppliers.
Shareholders are last in line, and usually get nothing.
Employees who lose their jobs can claim unpaid wages, leave and redundancy pay through the Federal Government’s Fair Entitlements Guarantee, if the company can’t pay.
Customers with gift cards, deposits or orders may lose their money, or administrators may choose to honour them to keep the business attractive to buyers.
Small business restructuring
Since 2021, small businesses with debts under $1 million can use a simpler restructuring process, where the owners stay in control while a restructuring practitioner helps them develop a plan to repay creditors.
Rising insolvencies
Company insolvencies in Australia rose sharply after pandemic support ended, with the construction and hospitality industries among the hardest hit, as businesses faced higher interest rates, costs and tax debts.
