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If a company does not have sufficient funds to continue trading it is likely to be insolvent or become insolvent and it may enter into administration.
An administrator is a solvency practitioner who is independent of the company in question. If required we can refer you to an appropriately qualified insolvency practitioner or you may wish to appoint one whom your accountant or other person may know.
During administration a company is protected from its creditors while the various alternatives are considered.
Administrators have the power to call a meeting of creditors to decide whether to put a company into liquidation, or to accept any proposal or offer of the directors or other persons (allowing the company to trade in particular, in its core business to generate cash flow to pay its debts). If there is a proposal put for the business to continue and creditors to be paid, the company and its directors execute a Deed of Company Arrangement. This is an alternative to liquidation. At the time of considering the proposal the creditors consider a report from the insolvency practitioner as to their recommendation. Eventually, the decision as to whether a proposal for a Deed of Company Arrangement is entered into is a decision for the creditors of the company. If a Deed of Company Arrangement is entered into then during this phase the administrator retains control of the deed fund in accordance with the Deed of Company Arrangement until the debts are paid. A Deed of Company Arrangement can be varied as to its terms and are in place in light of the various alternatives that may be available to a company. Some examples, external persons such as relatives fund the Deed of Company Arrangement and in others, the funding is from the continued trading and in some it is a combination of both.
During administration a company is protected from its creditors whilst consideration given to the restructuring plan. This technique can be very beneficial when a company has an aggressive or some aggressive creditors.
Further, if a director of the company receives a notice from the tax office in relation to tax due by a company then it may be that the director will become personally liable if it does not take urgent action for the appointment of an administrator or otherwise. Before entering into any arrangement with the tax office in relation to debts of the company a director should seek appropriate proper advice as to whether the director will become liable if the company does not pay the debt.
Also if a director receives a notice from the tax office urgent advice should be sought as inaction may result in the director becoming personally liable whereas action could save the director from such personal liability.
Where there is a company administration there are issues relating to secured creditors being those creditors who have specific charges over specific assets of the company.
Also, one must consider whether a director has given personal guarantees as usually a company being in administration and arrangement by the creditors of the company or director through a Deed of Company Arrangement, usually will not relieve a person from personal obligations under the guarantee.
Voluntary Administration can be described as a mechanism instigated by a company in financial distress to obtain a level of protection from its creditors for enough time as needed to save the business and avoid liquidation.
The procedure comes from Part 5.3 A of the Corporations Act 2001 (Cth). The purpose of this Act is to allow the company to avoid liquidation and to have the company administered in such a way that maximises the chances of the company and its business continuing; or if it can't continue, to allow a better return for the company's creditors and shareholders than would result from the liquidation of the company.
A meeting of directors starts the process off and, as with administration, an Administrator is appointed. The first meeting of creditors is held within 5 days and a second meeting to decide the company's future is held within a 28 day period.
Voluntary administration provides a statutory framework for an offer to be put to creditors in compromise of their claims. In doing so, it provides a company with a mechanism to carry out its duties in what might previously have been attempted by an informal arrangement, whilst also protecting the interests of creditors involved.
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