External administration

Recycling capital to new businesses

A well-functioning external administration regime facilitates the efficient recycling of capital and so contributes to the efficiency with which funds are allocated in the economy. It also protects creditors’ rights, which promotes confidence in broader credit provision.

There are a number of processes available to businesses under Australia’s external administration regime (Table 3.1).

Table 3.1: Australia’s external administration regime60
Process Description
Voluntary administration When a voluntary administrator is appointed to control and investigate a company’s affairs and make a recommendation to creditors about the company’s future and what is in the best interests of creditors.
Liquidation The orderly wind-up of a company’s affairs, distribution of assets to creditors and dissolution under the control of a liquidator.
Controller (including receivership) Someone who enters into possession or control of the company’s property to enforce a security interest.
Schemes of arrangement An arrangement (approved by the court) between a company and its creditors and/or members to alter their respective rights and interests or to facilitate a reconstruction.
Informal work-outs Restructuring outside formal external administration.

External administration of an entity involves costs, but it is important that these costs are minimised, so the maximum amount of capital can either be retained in a business that is able to continue operating or reallocated to more productive activities.

Some submissions argue that the current regime is biased towards liquidation.61 They claim the prohibition on trading while insolvent, and its associated penalties, make directors more cautious in attempting to reorganise a business that could continue to be viable.

Stakeholders suggest that placing a company into voluntary administration can lead to the failure of a business that could survive with some restructuring, because voluntary administration processes can significantly devalue a company and involve significant costs.62

Others submissions suggest that current arrangements are too complex and costly for SMEs. For example, SME owners are often personally liable when the business is in financial distress, and there are costs associated with navigating the corporate external administration and bankruptcy regimes.

In some cases, liquidator misconduct in areas of improper gain, including excessive remuneration, and liquidator independence and competence affect the cost and effectiveness of liquidation for SMEs.63

Policy options for consultation

To prevent viable businesses from entering voluntary administration, some submissions suggest that Australia adopt the US Chapter 11 regime, or certain aspects of it.64 The Inquiry considers adopting such a regime would be costly and could leave control in the hands of those who are often the cause of a company’s financial distress.65 Capital would be maintained in a business that is likely to fail, which would restrict or defer the capital from being channelled to more viable and productive enterprises. Adopting such a regime would also create more uncertainty for creditors by limiting their rights. The Inquiry notes that Chapter 11 has rarely enabled businesses to continue as going concerns in the long term.66

There is little empirical evidence that Australia’s voluntary administration process is causing otherwise viable businesses to fail.67 The Inquiry would like stakeholders to provide any empirical evidence that supports that view.

The Australian Government released proposals in 2012 to improve liquidator competence, align corporate insolvency and bankruptcy, and promote market competition on price and quality.68 These proposals seek to mitigate administrative costs for SMEs and curtail the escalation of time-based fee entitlements.

The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

  • No change to current arrangements.
  • Implement the 2012 proposals to reduce the complexity and cost of external administration for SMEs.

The Inquiry seeks further information on the following area:

Is there evidence that Australia’s external administration regime causes otherwise viable businesses to fail and, if so, what could be done to address this?

60 Corporations Act 2001, Chapter 5.

61 This has also been suggested in Bickerdyke, I, Lattimore R and Madge, A 2000, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, AusInfo, Canberra, page 89.

62 Parbery, S 2010, ‘Assessing Voluntary Administration in Australia: Including Suitability for Workouts, Turnarounds and Pre-Packs’, paper presented at the Supreme Court Annual Corporate Law Conference, 24 August, Sydney, pages 98–99.

63 ASIC data on liquidator supervision reflects such complaints. Australian Securities and Investments Commission (ASIC) 2014, Report 389 — ASIC regulation of registered liquidators: January to December 2013, ASIC, Canberra.

64 Title 11, United States Code, Chapter 11.

65 These are some of the reasons several inquiries have rejected Chapter 11, including the Parliamentary Joint Committee on Corporations and Financial Services 2004, and Corporations and Markets Advisory Committee 2004.

66 The Productivity Commission notes that only around 6.5 per cent of businesses emerge from Chapter 11 as an ongoing entity. See Bickerdyke, I, Lattimore R and Madge, A 2000, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, AusInfo, Canberra, page 90.

67 Although ASIC data suggests that most companies that enter voluntary administration fail, data does not suggest that these companies would have remained viable with an informal work-out.

68 Commonwealth of Australia 2012, Exposure Draft: Insolvency Law Reform Bill 2013, Canberra.