A dramatic spike in voluntary administration rates is being forecast for listed companies, with small and medium sized businesses across a range of key sectors thought to be most at risk.
According to research examined by business advisory firm BRI Ferrier, directors of small to medium sized companies are more frequently choosing administration as a way to try and salvage and restructure the business.
VAs have a number of benefits and can hand protection to company directors from claims of insolvent trading. Company directors can be held personally liable for any debt that is incurred once a company becomes insolvent, with the VA process preventing exposure to this liability especially if action is taken early on.
A number of businesses have previously emerged successfully from the voluntary administration processes, including confectionary business Darrell Lea, food manufacturer Spring Gully Foods and construction company St Hilliers Group.
Audit report statistics from 2005 to 2013 show than nearly one third of all ASX-listed companies were close to insolvent in 2013. This includes more than half of the smallest 500 companies.
BRI Ferrier found that, of the 700 plus small to medium sized companies in serious financial trouble, those in the energy and mining, consumer staples, industrials, health care and utilities sectors were at greatest risk of collapsing.
Principal of BRI Ferrier, Antony Resnick, said that small and medium sized companies were now facing a “perfect storm” of financial woes.
“The capital markets have been brutal, making it especially challenging for small caps to fund working capital. Couples with low levels of consumer confidence, falling commodity export prices and stagnating household incomes, it’s no wonder many listed entities are struggling,” he said.
“Many directors will not be in a position to vouch that their businesses is a going concern when statutory accounts and solvency declarations fall due on 30 September.”
He suggested that directors who had exhausted normal funding options would turn to voluntary administration, leading to spike in cases in coming months.
“Administrators can implement many options that are not readily available to the directors, including capitalising debt using a deed of company arrangement or restructuring for the purposes of a backdoor listing.”
He said ASIC statistics recorded a 28 per cent rise over the previous quarter in voluntary administrations in the three months to June 30, 2014 and expected the trend to continue.
Principal of commercial law group at M+K Lawyers, Gavin Robertson, said directors were viewing voluntary administrations more favourably because of the advantages it afforded.
“The company gains a freeze on its creditors, giving it vital breathing space to restructure and preserve the value of company assets, including trading businesses, for the benefit of all stakeholders.
“And where assets sales are part of the solution the administrator will in most cases be able to achieve a better result than the directors because of their strong commercial reputation and ability to inject competitive tension into any bidding process.”