Business agreement reviews typically focus on performance, but the real test of a contract occurs when a partner faces insolvency. The contracts you sign today determine your rights if a supplier, tenant, or business partner enters administration or liquidation tomorrow.
Administration vs liquidation is not a technical distinction. One process might keep a business alive. The other winds it up permanently. Knowing the difference matters because the clauses in your commercial contracts can either protect you or leave you exposed when things go wrong.
Administration vs Liquidation: Two Paths, Different Destinations
Administration is a pause button. When a company is insolvent or heading that way, its directors can appoint an administrator to take control and assess whether the business can be saved. The administrator reviews the company's position, reports to creditors, and works out whether there is a better outcome than simply shutting down. The first creditors' meeting must be held within eight business days of the appointment, and creditors then vote on the company's future.
Liquidation is the end of the road. A liquidator is appointed to sell the company's assets, pay creditors in order of priority, and close the company's affairs permanently. The company ceases to exist.
Think of it this way: administration asks "can this business survive in some form?" while liquidation asks "how do we wind this up as fairly as possible?"
A company in administration might emerge through a deed of company arrangement, where creditors agree to accept less than they are owed in exchange for a faster, more certain payment. It might return to its directors if the financial problems can be resolved. Or it might proceed into liquidation anyway, having exhausted other options.
Why Insolvency Risk Matters in a Commercial Contract Review
When you sign a supply agreement, lease, or partnership arrangement, you are making assumptions about the other party's ongoing ability to perform. A proper corporate contract review examines what happens when those assumptions prove wrong.
Most commercial contracts contain "ipso facto" clauses that purport to terminate the agreement or change its terms if the other party becomes insolvent. Since reforms to the Corporations Act 2001 (Cth), a statutory stay prevents the enforcement of these clauses where the trigger is the counterparty entering voluntary administration, a scheme of arrangement, or receivership over substantially all of its assets. The stay applies to contracts entered into on or after 1 July 2018. It does not apply to liquidation, and it does not affect older contracts. For most agreements signed in recent years, you cannot simply walk away just because the other party has appointed an administrator.
This creates practical problems. If you are a landlord with a tenant in administration, the moratorium under the Corporations Act prevents you from recovering the premises without the administrator's written consent or leave of the court. This applies to commercial and retail leases alike, including Victorian leases governed by the Retail Leases Act 2003. If you are a supplier, you may need to keep supplying goods under existing contracts even though you have doubts about getting paid.
Contract Clauses That Protect Your Position
A commercial contract review should identify several types of clauses that affect your exposure if the other party faces financial difficulty.
Retention of Title and PPSR Registration
If you supply goods on credit, a retention of title clause means ownership stays with you until you are paid. Without this clause, goods you supply become the property of the buyer immediately, and you become just another unsecured creditor if they cannot pay. With a properly drafted and registered retention clause, you can reclaim your goods from an administrator or liquidator.
The clause needs to be drafted carefully and registered on the Personal Property Securities Register (PPSR) to be effective. A retention of title arrangement is a purchase money security interest, and strict registration timeframes apply. An interest that is unregistered, or registered late, can vest in the company when an administrator or liquidator is appointed. Many suppliers discover too late that their retention clauses were never registered and are therefore worthless.
Security Interests and Personal Guarantees
Unsecured creditors typically receive cents in the dollar when a company is liquidated, after secured creditors and employee entitlements have been paid. The ATO generally ranks as an ordinary unsecured creditor for most tax debts, standing in line with other suppliers, although unpaid superannuation receives employee priority and the ATO has separate recovery powers against directors. If you are extending significant credit or entering a long-term arrangement, consider whether you need security over specific assets or a personal guarantee from the directors.
A personal guarantee means the directors are personally liable if the company cannot pay. This gives you someone to pursue even after the company has been wound up. But guarantees need careful drafting to be enforceable, and you should understand exactly what you are signing if you are asked to give one.
Termination Rights After the Ipso Facto Reforms
While the ipso facto stay restricts termination for insolvency status alone, you can still include termination rights triggered by other events: non-payment, breach of contract, or failure to meet performance standards. These clauses let you exit the relationship based on conduct rather than status, and they remain enforceable during administration.
Your contract should also address what happens to partially completed work, deposits, and goods in transit if the agreement ends unexpectedly.
Warning Signs in Business Agreements
A thorough business agreement review should flag arrangements that leave you unusually exposed to counterparty insolvency risk.
Long payment terms combined with no security create obvious problems. If you are giving 90-day credit to a customer with no retention of title clause and no guarantee, you are effectively lending them money unsecured for three months at a time.
Exclusive arrangements can be particularly dangerous. If you are tied to a single supplier or customer and they fail, you may have no alternative lined up. Your contract should address what happens to exclusivity if the other party enters administration.
Large upfront deposits paid to contractors or suppliers represent money at risk. If the builder you paid a deposit to enters liquidation before completing your project, you become an unsecured creditor competing with everyone else they owed money to. In Victoria, understanding deposit limits under the Domestic Building Contracts Act 1995 and protection works requirements can reduce this exposure in building contracts.
What Happens to Your Contract in Administration
When an administrator is appointed, they must decide which contracts the company will continue to perform. They have a limited period, usually around 20 business days unless extended by the court, to assess the company's affairs before creditors vote on the company's future.
During this period, your rights under the contract are largely frozen. You cannot terminate simply because of the administration if your contract was entered into on or after 1 July 2018. The administrator may continue to trade the business, which means your obligations under the contract may continue too.
If the administrator keeps performing your contract, they become personally liable for goods and services supplied, and for property the company uses, from the point of their appointment. This gives you some protection: you have a claim against the administrator personally, not just against the insolvent company. One caveat applies to landlords. An administrator can avoid personal liability for leased premises by giving notice within five business days that the company will not exercise its rights over the property.
If the administrator elects not to perform your contract, you have a claim against the company for damages. A formal power to disclaim onerous contracts only arises later, if a liquidator is appointed. Either way, your damages claim ranks alongside other unsecured creditors, which usually means receiving a fraction of what you are owed.
Due Diligence Before Signing
The time to think about insolvency risk is before you sign, not after the administrator's letter arrives.
Check the PPSR before extending credit. If the other party's assets are already heavily encumbered by security interests, there will be little left for unsecured creditors if things go wrong.
Search ASIC's registers. Multiple director resignations, late lodgement of annual returns, or a history of related company failures can indicate problems.
Ask for financial statements. A company reluctant to share basic financial information may have something to hide.
Consider the industry. Some sectors have higher failure rates than others. Construction, hospitality, and retail businesses face particular pressures that affect insolvency risk.
Frequently Asked Questions
What is the difference between administration and liquidation?
Administration is a temporary process that assesses whether an insolvent company can be rescued, restructured, or sold as a going concern. Liquidation is a terminal process in which a liquidator sells the company's assets, distributes the proceeds to creditors, and deregisters the company.
Can I terminate a contract if the other party goes into administration?
Usually not on the basis of the administration alone. For contracts entered into on or after 1 July 2018, the ipso facto stay under the Corporations Act prevents you from enforcing a termination right triggered by the appointment of an administrator. You can still terminate for other grounds, such as non-payment or breach.
Do I need to register a retention of title clause?
Yes. A retention of title clause must be registered on the PPSR within the required timeframes to be effective against an administrator or liquidator. An unregistered clause generally gives you no better position than any other unsecured creditor.
Getting Your Business Agreements Right
Every commercial relationship carries some insolvency risk. The question is whether your contracts allocate that risk appropriately and give you practical options if problems emerge.
A proper review examines not just what the contract says about normal performance, but what happens when performance becomes impossible. It identifies gaps in protection, missing security arrangements, and clauses that may not work the way you expect. We offer fixed-fee contract reviews to provide cost certainty and ensure your commercial interests are protected.
This information is general in nature. Contact us for advice specific to your situation.
