Voluntary administration rates for listed companies look set to soar as directors of growing numbers of small and medium companies in financial dire straits, opt for administration as a potential lifeline for the business, rather than face personal exposure for insolvent trading.
Recent research from CPA Australia* has shown that nearly a third of all ASX-listed companies were close to insolvent in 2013, including more than half of the smallest 500 and 28 per cent of medium companies. And of the more than 700 small and medium companies in serious financial distress, those in the energy and mining, consumer staples, industrials, health care and utilities sectors were at greatest risk of collapse.
Specifically, it is small and medium companies that are facing a perfect storm of financial woes. The capital markets have been brutal, making it especially challenging for small caps to fund working capital. Coupled with low levels of consumer confidence, falling commodity export prices and stagnating household incomes, it's no wonder many listed entities are struggling.
Directors who have exhausted conventional funding options are more likely to turn to voluntary administration, causing an uptick in voluntary administrations in the months ahead. ASIC statistics for July and August 2014, recorded an 8 per cent rise in voluntary administrations over the previous two months. This upward trend should continue as more directors opt for administration as a final resort attempt to salvage the business when the realisation dawns that the company no longer has the means to continue trading.
While voluntary administration is sometimes regarded as a precursor to liquidation, perceptions are changing and more companies are proactively using this as a positive tool to save the business.
If initiated early enough and the directors have a considered plan for restructuring the business, an administration can in fact be a valuable lifeline, giving distressed companies the maximum chance of survival. There are many brands and businesses which have emerged successfully from the process including Darrell Lea, St Hilliers Group, Spring Gully Foods and many more.
Administrators can implement many options that are not readily available to the directors, including capitalising debt using a deed of company arrangement or restructuring for the purposes of a backdoor listing.
And for directors, administration can be a viable strategy to save the company because of the various benefits available to the company and directors.
The company gains a freeze on its creditors, giving it vital breathing space to restructure and preserve the value of company assets, including trading businesses, for the benefit of all stakeholders. And where assets sales are part of the solution, the administrator will in most cases be able to achieve a better result than the directors because of their strong commercial reputation and ability to inject competitive tension into any bidding process. Additionally, shareholder and director approval are not required to carry out the sale which can save significant time and money.
Another of the major advantages of a voluntary administration is that directors are protected from exposure to claims of insolvent trading which can leave them vulnerable to significant personal liabilities.
The law requires directors to protect the interests of creditors. They can be held personally liable if they incur debts once a company becomes insolvent. But by placing the company in administration, directors are protected from further liability and the company can then efficiently carry out a reconstruction.
The chances of rehabilitating a company can be significantly improved if companies act at the earlier stages of financial distress. Putting a company into administration is a finely balanced decision but at the end of the day, erring on the side of being proactive can allow the directors to preserve a measure of control over the company’s destiny and enhance their chances of saving it through a reconstruction that can mean the difference between liquidation and a new lease on life.
*Source: CPA Australia: Audit Reports in Australia 2005 – 2013: Preliminary findings (September 2014)
ABOUT THE AUTHORS Antony Resnick is a Principal of BRI Ferrier and is a Registered and Official Liquidator with 22 years’ experience attained internationally in a variety of industries
Gavin Robertson is a Principal of M+K Lawyers with particular expertise in mergers and acquisitions, corporate finance and governance