In the event that a company cannot meet its financial obligations, it may be forced to declare bankruptcy. A business can file for either Voluntary Administration or Corporate Reorganization as a means of avoiding bankruptcy.
This article will explore what happens when a company files for bankruptcy in Australia and explain the differences between voluntary administration and corporate reorganization.
What is Voluntary Administration?
Voluntary administration is a type of external administration that is initiated by the company directors. It is a process where a licensed administrator is appointed to the company. The administrator will be able to take control of the business’ assets, negotiate with creditors, and attempt to restructure the company in order to prevent bankruptcy.
Also Read: What Makes A Good Credit Score – Beginning to Credit Score After Bankruptcy
The appointed administrator is able to make business-focused decisions to restructure the company and will be able to negotiate with both employees and creditors. The primary benefit of voluntary administration is that it allows the company to continue operating while the administrator attempts to restructure it.
What is Corporate Reorganization?
Corporate reorganization is a type of bankruptcy that is used by a company when it is not able to meet its financial obligations. The company will be officially declared bankrupt, meaning that all of its assets will be frozen. The company will then have a set amount of time to restructure its debt and repay as much as it can.
The primary advantage of corporate reorganization is that it allows the company to restructure its debts and avoid liquidation. This means the business will be able to continue operating and there will be no negative consequences for the company directors.
There are also a few disadvantages to corporate reorganization. It is a time-consuming process, and the company will be forced to make repayments to creditors over a long period of time. If the debt cannot be fully repaid, the company will be forced to liquidate.
What happens when a company files for bankruptcy?
When a company files for bankruptcy, it is officially declared bankrupt. This means that the company’s assets are frozen and all businesses and individuals who are owed money by the company are able to make a claim on those assets.
The primary effect of bankruptcy on a company is that all creditors are given priority when it comes to receiving payments. This means that the creditors will receive payments before current employees and suppliers are paid.
Some creditors are given precedence over others. Creditors whose debts are governed by the National Credit Code include banks, suppliers, tax officers, and liquidators. The rest of the creditors are given priority according to the date that they were owed money by the company.
Will your business be able to continue operating during Bankruptcy?
Yes, but with a few limitations. When a company is declared bankrupt, all of the company’s assets are frozen. This includes the inventory and equipment that are used to operate the business. If the company is able to restructure its debts and avoid liquidation, it will be able to regain control of its assets. If the company ends up liquidating due to its inability to restructure its debts, it will not be able to continue operating.
Before you decide to file for bankruptcy, be sure to understand the implications that this will have on your business. Your ability to restructure your debts will be dependent on the type of bankruptcy you file for. If you file for voluntary administration, you will have more control over the assets of your company. If you file for corporate reorganization, you will have less control over the assets of your company.
Conclusion
When a company is forced to file for bankruptcy, it is able to liquidate its assets and repay its creditors. This means that all of the employees associated with the company will lose their jobs and will not be repaid for their work. When a company files for bankruptcy, it will also need to distribute all of its assets to the creditors.
A company may be able to avoid bankruptcy by filing for either voluntary administration or corporate reorganization. These are the two types of administrative processes that are available to a company when it is struggling financially. When in doubt, it’s often best to consult with a restructuring firm, to explore your financial options before declaring bankruptcy in Australia.
