by Rod Bristow
Voluntary administration. It’s a term that seems to be popping up more and more in the media. We’re told that businesses who enter voluntary administration are finished and it’s the end of the road for them, when in fact, it can actually be a way to try to keep the business operating and viable.
A recent high-profile case is that of Network Ten – Australia’s third largest television broadcaster. With a string of hit shows and the backing of billionaires Lachlan Murdoch, James Packer and Gina Rinehart, it’s hard to believe that the broadcaster would need to enter administration. In Ten’s case, reduced advertising revenue and high budgets on its primetime shows mean it’s likely it will be unable to repay the outstanding balance on a $200 million overdraft due to the Commonwealth Bank in December. With Ten’s high-profile backers refusing to guarantee a new loan past this date (for reasons known only to them but to become clear soon I suspect), the company entered voluntary administration in a bid to restructure and look at the best way to remain viable in 2018.
Other recent high-profile brands and businesses entering administration include Topshop, Careers Australia and SumoSalad. However, in the 2015-16 financial year, nearly 14,000 companies were declared insolvent, of which only 703 were liquidated – that’s only 5%, proving that administration isn’t the death knell the media makes it out to be.
Let’s look at the stages of insolvency and what it means for businesses, their staff and customers.
At its most basic level, insolvency is what a business can’t pay its debts as and when they fall due. A company may be ‘cash-flow’ insolvent, meaning they don’t have the cash on hand to pay wages and debts, but have assets which could be liquidated to free up cash. A company may also ‘balance sheet’ insolvent, meaning there is no cash or assets available to pay debtors. In either case, a company may be required under the law to be placed into administration, receivership or liquidation.
When a company enters voluntary administration, the directors of that company appoint a third-party administrator to investigate its affairs while determining its viability moving forward. The administrator takes on all the power of the company and its directors, providing some breathing space to determine the future of the company.
Usually businesses will trade as normal during voluntary administration. The administrator will meet with creditors, review financial statements and provide a report back to the creditors on the best solution for all parties.
There are three outcomes to voluntary administration – the company is returned to the directors and no further action is required; a deed of company arrangement is imposed, requiring the company to pay creditors; or the company is placed into liquidation.
Similar to administration, a company goes into receivership when a secured creditor (generally a bank of other lender) calls in a receiver to recoup what they are owed. A receiver takes control of some or all of the company’s assets, giving priority to the secured creditor over unsecured creditors.
Otherwise known as ‘winding up’, liquidation involves the sale of a company’s assets in order to repay creditors.
There are a number of ways to enter liquidation. The first is voluntarily – directors or shareholders can elect to appoint a liquidator to divide assets among creditors. The second is by court order – where a creditor, company or board applies to the court for a compulsory liquidation.
In all of these cases, the role of the liquidator is to assess, collect and distribute assets (or proceeds of the sale of assets) and handle any claims for compensation. Once this process has taken place, the company is dissolved.
Directors of insolvent companies may be hesitant to declare their status.
As we can see, Channel Ten entering voluntary administration early could actually protect the company and its directors from action by ASIC, and gives the company a chance to restructure and look for ways to continue past December 2017. Hopefully this means some good news for retail and small shareholders. I suspect it also gives the Government a nudge to change the highly contentious media ownership laws, or risk losing a major broadcaster and employer.