What happens to your invoice when a customer goes into administration
Voluntary administration, liquidation and restructuring are different events with different consequences for money you are owed. Here is what each one means.
If you deal with enough businesses, sooner or later one of them will turn up on ASIC’s notices with words like “administrator appointed” or “liquidator appointed” next to its name, and you’ll have an unpaid invoice sitting in your ledger.
What happens next depends on which process the company has actually entered. They are not the same thing, they don’t lead to the same outcome, and they don’t move at the same pace.
This is a plain explanation of the three processes you’re most likely to see: voluntary administration, liquidation, and small business restructuring.
It is general information about what each one is, not advice about what to do with a specific debt. For that, talk to your accountant, a lawyer, or the administrator or liquidator handling the matter.
Voluntary administration
Voluntary administration is governed by Part 5.3A of the Corporations Act. A company’s directors, a secured creditor, or a liquidator can put the company into administration when it’s insolvent or likely to become insolvent.
The moment that happens, an independent administrator is appointed and takes over control of the company from its directors. The point of the process is to work out, in a short and defined window, what should happen to the company: keep trading and recover, be sold as a going concern, be restructured under a deed of company arrangement, or be wound up if none of that is achievable.
For an unsecured trade creditor, the main practical effect is a moratorium. While the company is in administration, creditors generally can’t start or continue legal proceedings against it, and can’t enforce most security or repossess goods, without the administrator’s consent or the court’s leave.
You’ll usually be asked to lodge a proof of debt, and you get a vote at creditors’ meetings on what happens next. Whether you recover anything, and how much, depends entirely on what’s proposed and what assets and cash are actually available. There’s no general outcome that applies to every administration.
Liquidation
Liquidation is the winding up of a company. It can follow on from a failed administration, be proposed directly by creditors or the company itself (a creditors’ voluntary liquidation), or be ordered by a court on a creditor’s application (a court, or compulsory, liquidation).
A liquidator is appointed, takes control of the company’s assets, and their job is to realise those assets and distribute the proceeds. The company is later deregistered.
Distribution follows a statutory order of priority under the Corporations Act, not first-come-first-served. Secured creditors with a valid security interest are generally paid from the assets covering that security first.
From what’s left, the costs of the liquidation itself are paid, then certain employee entitlements such as unpaid wages, superannuation and leave. Unsecured trade creditors rank behind all of that and are paid, pro rata, only out of whatever remains. Lodging a proof of debt with the liquidator is how you register your claim; it doesn’t itself guarantee any payment.
Small business restructuring
Small business restructuring (SBR), under Part 5.3B of the Corporations Act, is a newer process aimed specifically at small companies. It’s only available to a company whose total liabilities are $1 million or less.
The key difference from administration is who stays in charge: under SBR, the directors keep running the business day to day, while an independent restructuring practitioner works with them to put together a restructuring plan for creditors.
Creditors, including unsecured trade creditors, vote on whether to accept that plan. If it’s accepted, the company continues trading and pays creditors according to the terms of the plan rather than through a winding up.
If it fails or isn’t accepted, the company may end up in liquidation after all. Because the business keeps operating and directors keep dealing with suppliers throughout, this is often the process where staying in contact with the company, rather than just waiting for a distribution, matters most.
Why the first few days matter
Whichever of these processes a customer enters, the earliest notices are where you find out which one it is, who the administrator or liquidator is, and what the moratorium or restructuring means for anything you’re mid-transaction on, like goods in transit, work in progress, or a personal guarantee.
Finding out weeks later, after you’ve kept extending credit on the assumption nothing had changed, is the outcome worth avoiding. It won’t change the legal process the company is going through, but it changes how much you find out while there’s still something to act on.
If you’d rather not check ASIC’s notices yourself for every company you deal with, Insolvency Alerts watches them for you and alerts you when one of your customers appears.