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Coming back from business administration

Coming back from business administration

Business administration can be a scary term, but it's not necessarily the kiss of death it might seem. We define some key terms related to insolvency, and outline some ways to get your business back from the brink.


 

When is the business insolvent?

A business is insolvent if it is no longer able to pay its debts when they fall due. Its creditors – the businesses or people to whom money is owed – are classed as ‘secured’ if they have a ‘charge’, such as a mortgage, over company assets. As a rule, they will be paid before unsecured creditors if a recovery action is taken against the business.

Employees are unsecured creditors, but according to ASIC guidelines they can still be entitled to certain benefits, such as unpaid wages and sick leave, in priority to other creditors.

When does administration occur?

Usually, a company is only put into external administration when other ways to rescue it – such as refinancing or restructuring – are determined to be beyond the resources or capabilities of its owners. It can occur when the company has become insolvent or is likely to become so soon.

Administration can be entered into voluntarily by the company’s directors, or by a secured creditor who has appointed a receiver to take control of some or all of its assets. ASIC stresses that the business should not take on further debt during a period of insolvency.

Is administration the end of the business?

The main goal of administration is to decide the company’s fate and direction. In some cases, it may still be possible to save the business while also satisfying its creditors. If not, the administrator will try to wrap up its affairs in a way that provides creditors with more compensation than if the company had gone straight to liquidation.

What can you do to save the business?

Acting too late is one of most common causes of insolvency, so it’s important to seek accounting and legal advice as soon as possible. Signs of trouble can include increasing debt, suppliers wanting cash on delivery, and overdue taxes and superannuation liabilities.

There may still be time to restructure the company, or to secure a cash loan against equipment. If the business is buckling under bad debts, you may need to seek debtor financing, or factoring, to keep the cash flowing in.

Administration can be thought of as ‘intensive care’ for the business. With early intervention and the right advice and support, the patient has a better chance of making a full recovery.

When you’ve been through administration and come back from the brink, there are a number of accounting tactics you can employ to stay in the black. Find out more about how to remain cash-flow positive.

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