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Voluntary Administration – What is it and how does the process work?

Voluntary Administration – What is it and how does the process work?

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Voluntary Administration (VA) is an insolvency process that can allow an otherwise likely insolvent company and its director(s) the opportunity to freeze all creditor recovery actions, and put forward a formal offer to creditors to compromise or settle their debts. This process can be quick, typically lasting between 25 and 30 business days, and must be undertaken through the appointment of an independent Voluntary Administrator.

A company is defined as insolvent when it is unable to pay its debts as when due and payable.[1]

The VA allows the Administrator to compromise or disclaim unprofitable contracts, negotiate with suppliers, collect assets, adjudicate on creditor debts and administer/investigate the company’s affairs. It may also provide time for a company director or a third party a final chance to save the company or its business and get things back on track. This is usually achieved by selling the business or putting forward an offer to creditors to compromise or settle their debts via a deed of company arrangement (DOCA). The alternatives being to have creditors vote to have the company placed in liquidation or for the VA to end.]

The Meaning of a Voluntary Administration

The Corporations Act 2001 (Cth) (the Act) provides for companies in financial difficulty in that:

    • If a company experiences financial problems, the directors may appoint an administrator to take over the operations of the company. The administrator will work with creditors to try find a solution to the company’s problems.
    • If the company’s creditors and the company cannot agree, the company may be wound up
    • If a registered liquidator is appointed as a voluntary administrator over a company, it is the voluntary administrator whom will review and consider any proposed DOCA. The administrator must make a recommendation as to whether it’s in creditors’ interest to accept the DOCA.
    • It is often the case that a DOCA is not put forward (likely resulting in the Liquidation). A recommendation is made in circumstances whereby creditors are likely to receive a higher return (by way of dividend) if the DOCA is accepted than if the company were to be placed in liquidation.
    • Creditors are given the power to determine the future of the company. It is rare that a company is returned to its directors. In the event that creditors cannot agree or where a DOCA leaves creditors worse off than in a liquidation scenario, the company may be wound up at the second meeting of creditors.

 

What causes a Voluntary Administration?

There are many factors which may contribute to a company being placed into Administration! Here are just a few:

    • the directors of a company suspect that the company is insolvent or likely to become insolvent
    • a secured creditor who is entitled to enforce a security interest over the company’s property
    • pressures from creditors demanding payments for debts overdue
    • to avoid insolvent trading (a personal financial risk of directors)
    • pressures from banks or secured creditors demanding payment
    • disputes between creditors, directors or shareholders
    • any legal actions or events that may unfairly prejudice the company
    • protect directors from a director penalty notice
    • to prevent liquidation

 

The Voluntary Administration Timeline

TimingEventBackground
Immediately


Voluntary administration begins on the appointment of the voluntary administrator
Suspicion of insolvency

Appointment of voluntary administrator

Speak confidentially to an SV Partners expert and arrange meeting


A voluntary administrator can be appointed by:
• the directors (by resolution of shareholders (often the Director) and in writing)
• a secured creditor (with a security interest in all or substantially all of the company’s property)
• a liquidator (or provisional liquidator)
Within eight business days of being appointed

(unless the court allows an extension of time)
First meeting of creditorsThe voluntary administrator must hold the first meeting of creditors.

At least five business days’ notice of the meeting must be given to creditors.

Creditors can vote at the meeting to:
• replace the administrator, and/or
• form a committee of inspection.
OngoingVoluntary administrator’s investigation and reportThe voluntary administrator must investigate the company’s affairs, potential claims and recoveries available to a Liquidator (see Voidable Transactions) and report to creditors on the alternative options available to the company
Within 25 business days of being appointed

(or 30 business days if the appointment is around Christmas or Easter unless the court allows an extension of time)
Second meeting of creditors – meeting to decide company’s futureThe voluntary administrator must hold the meeting to decide the company’s future.

At least five business days’ notice of the meeting must be given to creditors.

Creditors can decide at this meeting to:
• return the company to the directors’ control; or
• accept a DOCA (must be signed by the company within 15 business days following the meeting, unless the court allows an extension of time); or
• put the company into liquidation (this happens immediately, and the administrator usually becomes the liquidator).

Employees and a Voluntary Administration

The order in which creditor claims are paid depends on the terms of the DOCA. Sometimes the DOCA proposal is for creditor claims to be paid in the same order as in a liquidation. Other times, a different order is proposed.

Employees are a special category or class of unsecured creditors. Their outstanding entitlements (known as priority creditors) are usually paid before the claims of other unsecured creditors.

The DOCA must ensure employee entitlements are paid before (in priority to) other unsecured creditors unless eligible employees agreed to vary that order.

 

Voluntary Administration vs Receivership vs Liquidation           

The VA process is just one of many stepping stones that a company may find itself in when in financial distress.

In a receivership appointment, a receiver, or receiver and manager, may be appointed by order of a Court or by a secured creditor to take over some or all of the assets of a company.

Generally this would occur if the company is in financial difficulty, but not necessarily insolvent. A receiver may be appointed, for example, by a secured creditor because an amount owed to that secured creditor is overdue. A company in VA may also be in receivership at the same time. For further information please visit:  Receiverships.

In contrast, in a winding up (liquidation) appointment, a company may be wound up by order of a Court (usually following a judgement debt), or voluntarily if the shareholders of the company pass a special resolution to do so (creditors voluntary liquidation).  This process is the final stepping stone in the insolvency process, after which the company is deregistered. A company in VA may also be in liquidation. See company involved in VA and liquidation. For further information please visit:  Creditors Voluntary Liquidation and Court Liquidation.

 

What are the Outcomes and Benefits of a Voluntary Administration?

There are many benefits, such as:

    • the company is saved from liquidation and/or deregistration
    • giving the company time to deal with creditors in an orderly manner and prepare a proposal to give the best return to creditors
    • an independent practitioner is able to review the company’s affairs and deal with the pressures of creditors
    • reduces the possibility of secured creditors proceeding against the assets of the company
    • eliminate possible insolvent trading claims

There are also different outcomes, such as:

    • At the end of the administration, the company usually enters into a DOCA with its creditors or it is placed into liquidation.
    • If the DOCA suggests that the company will continue to trade (also known as a ‘trade-on’), the control of the company usually returns back to the company directors

For more information on voluntary administrations, visit our FAQ section or alternatively to speak confidentially to an expert that can assess your situation.

Article written by Andrew Allemand – Senior Accountant, Brisbane

[1] ASIC v Plymin [2003] VSC 123 provides for 14 indicators of insolvency, with no single indicator being determinative of a finding of insolvency (click here for a link to our indicator checklist).

Source: ARITA and ASIC notes on Voluntary Administrations, Receivership and Liquidations.

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