Financial troubles are always stressful for business owners, but knowing your options can help you decide on the best course of action for your business. Voluntary administration and liquidation are both insolvency processes, but they serve different purposes and create different outcomes for your business.
Getting professional advice from insolvency accountants like us is essential, but it helps to come with an understanding of your options. We’ll break down both processes and their effects to help you pick the right path for your situation.
Understanding the Two Options
Australian business owners facing financial challenges need to understand the differences between voluntary administration and liquidation.
What is Voluntary Administration?
Voluntary administration helps companies in financial distress get some breathing room from creditors. Its main goal is to help businesses restructure and continue trading. Companies can use this option instead of immediate shutdown, especially when financial restructuring might save the business.
Directors can start this process by appointing an independent administrator without needing approval from creditors or shareholders. The administrator then breaks down the company’s financial situation and suggests the best way forward.
A typical voluntary administration takes 25-30 business days. During this time, the administrator runs the company, and creditors can’t make claims, giving the company time to look at all the options.
What is Liquidation?
Liquidation winds up a company’s affairs when it becomes insolvent. The process sells company assets, pays creditors, and ends up dissolving the business entity.
Australia has two main types of liquidation:
- Court Liquidation: A court order starts this process, usually after creditors ask for it due to unpaid debts.
- Creditors Voluntary Liquidation (CVL): Company directors or shareholders start this process when they have insolvency concerns.
The company stops trading once liquidation begins. A liquidator takes control to sell assets, examine company affairs, and distribute money to creditors based on legal priorities.
Liquidation is the final chapter for a company. It leads to permanent closure and ASIC deregistration.
Difference Between Voluntary Administration and Liquidation
The biggest difference is in what they want to achieve. Voluntary administration is best for a business that still has the potential to turn around, since it tries to save or restructure a business, while liquidation closes down and dissolves the company.
Here are the key differences:
Voluntary Administration | Liquidation | |
Main Goal | Evaluate if the company can survive and look at recovery options | Close down company operations and end the business |
Duration | Takes about 25-30 business days | Can last several months to years based on complexity |
Business Operations | Business can keep running under administrator oversight | Operations usually stop right away |
Director Control | Leadership powers pause temporarily | Directors lose all control permanently |
Effect on Employees | Jobs continue if business keeps operating | Most employees lose their jobs immediately |
Employee Entitlements | Regular wages continue as administration costs | Payments prioritised through liquidation with FEG support |
Creditor Claims | Claims put on hold temporarily | Claims handled based on legal priority order |
Outcomes | – DOCA – Liquidation – Directors regain control | Business closes and gets removed from registry |
How They Work
Voluntary Administration Process
Voluntary administration moves quickly and starts when directors decide their company can’t pay its debts and appoint an administrator.
The administrator must stick to this timeline:
- Within 8 business days, creditors meet for the first time. They can vote to get a new administrator or set up a committee to oversee things.
- The administrator looks at the company’s situation and writes a detailed report with recommendations for the second creditors’ meeting.
- At the second meeting, creditors vote on three possible outcomes:
- Sign a Deed of Company Arrangement (DOCA)
- Put the company into liquidation
- Give control back to the directors
The company has 15 business days to sign the deed if creditors choose a DOCA, during which time creditors can’t make claims against the company.
Liquidation Process
A liquidator takes charge either through creditors voting them in, directors appointing them, or a court order. The liquidator then needs to:
- Let creditors know they’re in charge within 10 business days.
- Write a report within 3 months about the company’s assets, debts, and what creditors might get back.
- Sell what the company owns and gather available money.
- Look into how the company was run and check for any wrongdoing.
- Give money to creditors based on legal priorities.
- Send final paperwork to ASIC and start the deregistration process.
Depending on how complex the company’s situation is, the process can take months or even years if the company’s situation is complicated.
Administrator vs Liquidator
Both administrators and liquidators are qualified insolvency experts, but they do different jobs:
An administrator:
- Runs the company temporarily
- Checks the company’s financial health
- Creates rescue plans or suggests liquidation
- Tries to get better results than just shutting down right away
A liquidator:
- Takes full control of the company
- Sells assets and pays creditors in the right order
- Looks for any misconduct by directors
- Tells ASIC about possible wrongdoing
- Ends up closing the company down
Impacts on Stakeholders
A business’s choice between voluntary administration and liquidation sends ripples through everyone connected to it, so it’s important to know what it all means before making a decision.
Effect on Directors
Directors see immediate changes to their powers and duties when either process starts. Directors can’t use their management powers without the administrator’s approval during voluntary administration, though they often stay involved to help administrators get the best results for employees and creditors.
Liquidation strips directors of all powers forever, not just temporarily. They need to give a statement about the company’s affairs and help with misconduct investigations. Directors must support liquidators as needed by providing financial records and explaining their business decisions.
Impact on Employees
Employee job security is different between these processes. Voluntary administration doesn’t automatically end employment, and employees keep getting wages if the administrator continues trading. On the other hand, liquidation usually ends employment.
Both processes give employee entitlements priority over unsecured creditors in this order:
- Unpaid wages and superannuation
- Leave entitlements (annual and long service)
- Retrenchment payments
Each category needs full payment before moving to the next. The Fair Entitlements Guarantee (FEG) gives extra protection in liquidation cases, covering unpaid wages, annual leave, long service leave, payment instead of notice (up to 5 weeks), and redundancy pay (up to 4 weeks per year of service). FEG doesn’t cover unpaid superannuation entitlements.
Creditor Rights and Voting Powers
Creditors get a say and have substantial influence in both processes. Resolutions pass at creditor meetings when most voters agree in both number and value. Secured creditors can vote using their full debt amount without reducing their security value, which might give them major influence over outcomes.
Creditors can ask practitioners for information, check certain books, and even remove and replace practitioners. The second meeting in voluntary administration gives creditors the choice to accept a DOCA, liquidate the company, or give it back to directors.
Legal and Financial Considerations
There are some significant legal and financial factors that set voluntary administration apart from liquidation.
Safe Harbour Protections
The Corporations Act offers protections that shield directors from personal liability for insolvent trading. These provisions let directors run a financially distressed company while they develop recovery plans, but they have to ensure the company pays employee entitlements and meets tax reporting obligations to get protection. On top of that, they need to get advice from appropriately qualified professionals and keep proper financial records.
Keep in mind that safe harbour doesn’t automatically protect directors from all liabilities. The protections exclude unpaid PAYG withholding tax and superannuation guarantee charges that remain unreported for over three months. Directors must prove they were creating a plan that was reasonably likely to lead to a better outcome than immediate insolvency.
Voidable Transactions
Liquidators can break down and potentially void certain transactions made before their appointment when a company enters liquidation. These include unfair preferences where one creditor got paid over others and uncommercial transactions. This helps keep the process fair and ensures unsecured creditors don’t face disadvantages from actions taken before liquidation.
Tax and ASIC Obligations
Tax compliance is important for any business facing insolvency, and both processes require ongoing compliance with tax authorities and ASIC. The ATO usually supports proposed deeds that help recover more debt than liquidation and don’t have adverse features. Directors who don’t comply may face increased personal liability and legal issues. The ATO has guidelines to handle tax debts in insolvency cases and sometimes offers payment plans or pauses interest charges.
Making the Right Choice for Your Business
The choice between voluntary administration and liquidation depends on your business’s unique situation.
When to Consider Voluntary Administration
Your business might benefit from voluntary administration if it’s viable but faces temporary money problems. This path makes sense if you can cut costs by getting out of unprofitable contracts or shutting down locations that aren’t performing well. Voluntary administration gives you time to weigh up the options and create recovery plans.
When Liquidation is the Better Option
Liquidation becomes your best choice if your debts are substantially higher than assets with no real way to recover financially. Liquidation brings closure and clarity, giving proper attention to employee entitlements and creditor claims. Small businesses can use the simplified liquidation process as a faster, cheaper option.
Questions to Ask Before Deciding
Missed tax payments, supplier demands, and trouble meeting payroll are all signs your business needs assessment to see if major changes are needed. You should also consider the level of creditor support – will they agree to compromise through a Deed of Company Arrangement?
Get the Professional Advice You Need From SV Partners
Australian business owners facing financial distress have an important choice to make between voluntary administration and liquidation, but you don’t have to make it alone. Seeking professional advice can help you understand the options available to help you make the best decision.
As a specialist accounting and expert advisory firm, SV Partners is uniquely qualified to assess your business’ financial position and provide tailored solutions for any situation. To get advice from our team, organise a free consultation, or reach us through our confidential assist line by calling 1800 246 801.