External Administration Under The Corporations Act

Contractors, subcontractors and suppliers may at some stage be engaged by a company that ends up experiencing financial difficulty, in some instances this will lead to insolvency. This, in turn may require the subsequent appointment of external administrators which may in turn result in the non-payment of outstanding debts. This article provides a brief explanation of the main types of external administrators which may be appointed to insolvent companies under the Corporations Act.

Firstly, what is insolvency? In short a company is insolvent when it can no longer pay its debt as and when they are due. If a client is paying only a portion of amounts assessed as due and payable it may be worth considering whether the company is able to pay the full amount as this could be an early sign of cash flow problems and subsequent insolvency.

The external administration methods under the Corporations Act include receivership, voluntary administration, deed of company arrangement, liquidation (also known as winding up), and scheme of arrangement.

Voluntary administration involves the appointment of a registered, independent insolvency practitioner (called an ‘administrator’) who takes complete control of an insolvent company usually for a relatively short period of time. An administrator is usually appointed by the company directors, a liquidator or a creditor who has a charge over the whole or substantially the whole of the company’s property. The primary aim of voluntary administration provisions of the Corporations Act are to maximise the chances of the company or its businesses remaining in existence by allowing the insolvent company to ‘trade out of trouble’ under the direct supervision or management of the administrator. If the administrator determines that it is not possible for the company to trade out of trouble over a period of time he or she will then set about liquidating the company. The secondary goal here is to achieve a better return to creditors than that which would have resulted from an immediate liquidation.

Receivership involves the appointment of an independent, registered insolvency practitioner called a ‘receiver’. A receiver is generally appointed by a secured creditor or a court. The role of a receiver is to take possession of the secured property, sell or liquidate the assets, and out of the proceeds repay the secured debt owed by the company.

Liquidation will ultimately result in the company being deregistered and ceasing to exist as a legal entity. Liquidation is an orderly process under which the company’s affairs are would up, its property sold, debts owed to its creditors repaid and the surplus (if any) distributed among its shareholders.

Scheme of arrangement enables the rights and liabilities of shareholders and creditors to be recognised under court supervision. The aim of a scheme of arrangement is to obtain binding agreement that modifies, reorganises or alters the legal rights of creditors and shareholders.

A contractor, subcontractor or supplier engaged by a company will generally be an ‘unsecured creditor’ and as such will be in a vulnerable position in the event that any of the above external administration methods are implemented as they will fall behind ‘secured creditors’ in order of entitlement. A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of its contracting party which is usually limited to banks and financiers.

Risk mitigation strategies which should be undertaken by a contractor include:

  • Awareness – be aware of the potential for the above to occur;
  • Monitor the contracting party’s performance on other projects in order to form a view on its financial stability;
  • Develop a commercial strategy to deal with risk throughout the project, do not wait until it’s too late;
  • Claim payment in accordance with the contract and in a timely manner, each day counts;
  • Claim for other entitlements in accordance with the contract;
  • Recover payment in a timely manner by applying contractual pressure and use of the relevant security of payment legislation;
  • Adopt a ‘do it now’ rather than a ‘do it later’ approach to commercial tasks; and
  • In Queensland the Subcontractors’ Charges Act may be a useful tool in assisting a subcontractor however this requires action prior to any of the above external administration methods being implemented. A claim under the Subcontractors’ Charges Act may not guarantee payment however it may increase a contractor’s chances of recovering amounts owed as. As with most claims, time is of the essence and advice should be sought immediately if a contracting party seems to be financially stressed.

Contract Solutions International (CSI) regularly work with contractors, subcontractors, suppliers and owners in providing contract and commercial advice in relation to administering and managing contracts.