It’s often incredibly stressful to find yourself dealing with financial struggles as a company director. The good news is that help is available in the form of voluntary administration. As one of Australia’s insolvency processes, voluntary administration gives you access to financial experts who can help assess your position and develop a solution for moving forwards. Rather than moving straight to liquidation, voluntary administration gives you breathing room from creditors and improves the chances that the company will survive.
The voluntary administration process is relatively straightforward. In this article we’ll be exploring it in more detail to find out how it benefits struggling Australian businesses.
The Voluntary Administration Process
Voluntary Administration is a process that’s designed to support businesses that are experiencing financial difficulties. If a business is unable to pay its debts (or if the owners suspect that it will become unable to pay its debts in the near future) it’s considered insolvent. While this can be a stressful position to find yourself in, voluntary administration can help you resolve the situation.
A Voluntary Administrator is a financial expert that will work with your business to assess its situation and develop a strategy for moving forwards. The process begins when the Administrator is appointed. The Administrator effectively takes responsibility for running the company temporarily, and uses their appointment to investigate the company’s affairs and financial position. At the end of administration, the Administrator will hold a meeting with the company’s creditors to report their findings and make recommendations.
This process is an important part of Australia’s Corporations Act. It allows company directors to find temporary relief from their creditors, improves outcomes for creditors and increases chances of the company’s survival.
Who Can Appoint a Voluntary Administrator?
The voluntary administration process is designed to be a flexible arrangement that benefits everyone involved with an insolvent company. Because it’s intended to help both internal and external stakeholders, a Voluntary Administrator can be appointed by three parties:
- Directors. Most cases of voluntary administration are initiated by the directors of a company. If the company’s directors think that the business is insolvent, or that it may become insolvent in the future, they can vote to appoint an Administrator. Directors are required to act in the best interests of the company, and insolvent trading can attract criminal charges, so voluntary administration allows you to meet your obligations.
- Liquidators. A Registered Liquidator may decide that a company’s creditors would be better served by administration and the possibility of trading on. In those situations, the Liquidator or the Provisional Liquidator can apply to the court to appoint an Administrator.
- Creditors. Secured creditors who hold major interests in a company may be entitled to appoint an Administrator with consent from the court. To be able to appoint an Administrator, a secured creditor must hold a security over the whole, or substantially the whole, of a company’s property.
What Happens at the End of Voluntary Administration?
Voluntary administration lasts for approximately 30 business days, although it may be extended with permission from the court. During that time the Administrator will assess the company’s financial position and report their findings back to creditors. Along with their findings, the Administrator will make a recommendation for one of three resolutions to the situation:
- Control of the company is returned to its directors and the business continues to trade.
- The company is immediately wound up and a Liquidator is appointed (the Administrator often becomes the Liquidator).
- Creditors agree to a binding Deed of Company Arrangement for partial or full repayment of the debts they are owed.
Following the Administrator’s recommendations the creditors will hold a vote on how to proceed. The majority of creditors (in number and in value) will decide which outcome to pursue.
Deeds of Company Arrangement
In some cases, voluntary administration will result in a Deed of Company Arrangement (DOCA). A DOCA is developed by the Administrator as a binding agreement between a company and its creditors. Rather than immediately winding up the company to repay creditors, a DOCA forms an agreement that provides creditors with better returns than liquidation.
A DOCA only becomes binding if it’s agreed to by the majority of creditors (in number and in value). Many DOCAs require the business to continue trading while entering into a repayment agreement. Under a DOCA, many creditors will accept partial payment of their debts, with the remainder of the debt being forgiven once the DOCA is complete.