Key points

• Part 5.3A and Schedule 2 of the Corporations Act 2001 (Cth) aims to allow an insolvent company to continue in existence.
• Administration provides an alternative to the drastic and often final step of placing a company into liquidation.

Alert content

The object of Part 5.3A and Schedule 2 of the Corporations Act 2001 (Cth) (Act): “is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”

The impact / what the reader needs to know or do

Recent examples about the nature and effect of the object of Part 5.3A and the administration of companies can be found and are illustrated, at least based on the media commentary, about the collapses of construction companies in Australia.

Considering the objective of Part 5.3A in those scenarios, that often involve homeowners and have involved government contributing money, the added value of “maximising the chances of a company, or its business continuing in existence" because it highlights the far reaching disruption that company or business destruction by winding up companies can have. That disruption extends in many cases beyond the interests of the immediate creditors of the company regardless of the industry in which the company was a part.

The recent administration of various builders, including the two recently reported in the media, Zorzi and Inspired, provide a timely example of the benefit of placing a company into administration in preference to a time of winding up.

In each of those instances, administrators are able to explore entering into a Deed of Company Arrangement that, if successful, will allow the entities to continue in existence minimising any negative effect on their creditors, homeowners, and their families (customers) suppliers and insurers.

In a liquidation there would be no option but to commence the orderly closure of the entities and no possibility of customer contracts continuing.

Next steps

Dentons is available to consider and advise directors and companies about the best course of action for a company facing financial difficulty, including allowing a company’s affairs to be administered in a way that maximises the chances of the company continuing to operate in the best interest of their creditors.