Decision time: the administrator's role in deciding to continue business operations

The make-or-break tough decisions that need to be made.

When a Voluntary Administrator is appointed, the common expectation is that the business will continue to operate during the administration process. However, there are crucial assessments that must be undertaken prior to this decision to ascertain whether continued trading is feasible, as well as the associated risks that an Administrator assumes. This article outlines the primary considerations that a Voluntary Administrator evaluates before deciding to continue business operations.

Funding considerations

First and foremost, the question of funding arises: who will finance the ongoing operations? It is important to note that Administrators are not a last-resort bank; they prefer not to use their own capital for trading purposes. Key funding sources typically include:

1. Internal cash flow and debtor collections: Often, trading is supported by the company’s existing cash flow and collections from debtors, leveraging the moratorium period to delay payments on pre-appointment debts.

2. Supplier and creditor support: Consideration must be given to the level of support that suppliers and pre-appointment creditors are willing to provide. Will they continue to offer credit, or will payment for pre-appointment debts be required to ensure ongoing supply critical to the business?

3. External funding: If internal cash flow is insufficient, external funding options may be explored. While this may come with additional costs, it can facilitate the company's objectives compared to the alternative of liquidation.

Managing secured creditors

Effective communication with secured creditors—who typically hold security over most of the company's assets—is vital. Understanding their position allows the Administrator to seek outcomes that satisfy both secured and unsecured creditors. The ultimate goal is to maximise stakeholder value while ensuring compliance with the administration process.

Strategic decision-making

The decision to continue trading must focus on providing solutions that yield the best possible outcomes for stakeholders. The administration process can offer a crucial period for cash flow relief, allowing the business to restructure and emerge stronger under a Deed of Company Arrangement. Alternatively, continued trading may serve different objectives, such as:

1. Completing existing projects: Trading may be limited to completing current projects or work in progress, maximising asset value before winding down operations.

2. Facilitating a sale: Continued operations may also be aimed at selling the business as a going concern, thus maximising asset value rather than merely liquidating tangible assets.

Risk assessment

Before proceeding with continued trading, Administrators must thoroughly assess the risks involved. The administration process can incur significant costs, and it is essential to evaluate whether the potential benefits justify these expenses for all stakeholders involved. Administrators must also be aware of the personal liability they assume when incurring debts during the administration period. This responsibility is not taken lightly; thus, at Worrells, we prioritise ensuring that the appointment serves the best interests of all parties, including creditors, employees, financial institutions, the ATO, and business owners.

Next steps

If you or your client are considering whether voluntary administration is a suitable option, we encourage you to:

1. Review our Worrells Guide to Corporate Insolvency.

2. Watch our informative YouTube videos on Voluntary Administration.

3. Contact your local Worrells Principal for a confidential, no-obligation consultation.

By understanding the complexities and responsibilities involved in the role of a Voluntary Administrator, stakeholders can make informed decisions that align with their objectives. Also, if Voluntary Administration is not the best option in your circumstances we can advise on the alternatives such as Small Business Restructuring (SBR).