Voluntary Administration Process
There are many reasons why a company can fall into financial hardship. These can include incurring a bad debt, losing a major customer, getting behind on tax or super, or a director’s personal circumstances hindering their ability to properly run their company. Any of these can lead to a company being unable to pay its debts as they fall due. In this case, the company may be insolvent. Voluntary Administration is a process available for Australian companies in difficulty to help directors save their business and avoid insolvent trading.
What is Voluntary Administration?
Where a company is insolvent, or likely to become insolvent, it can enter Voluntary Administration by appointing a Voluntary Administrator to take control. Voluntary Administration is a formal insolvency procedure under the Corporations Act to resolve a company’s future within five to six weeks.
Voluntary Administration is intended to help a company and its business survive. It enables this by:
- Preventing unsecured creditors from taking legal action,
- Allowing the Voluntary Administrator to continue trading the company’s business, and
- Providing the opportunity for the directors to propose an agreement to company creditors which, if accepted, allows the company to continue in the future with debts reduced to a manageable level, and control of the company returned to the directors.
Sometimes a business cannot be saved. In this case, Voluntary Administration aims to provide a better return to a company’s creditors than immediately entering liquidation. It also allows the company to avoid liquidation should its directors wish to propose an agreement to creditors to settle their debts.
The agreement which the directors (or anyone who wishes) can propose to creditors is known as a Deed of Company Arrangement (DOCA). If no DOCA is proposed, or creditors do not accept the proposed DOCA, the company will, in most cases, enter liquidation.
What is the Process for Appointing a Voluntary Administrator?
A voluntary administrator can be appointed by:
- The company’s directors,
- A liquidator already appointed to the company, or
- A creditor who holds security over all of the company’s property.
Voluntary Administration is most commonly commenced by the company’s directors passing a resolution that the company is, or is about to become, insolvent. They then sign a notice of appointment appointing the voluntary administrator.
What is the Role of the Voluntary Administrator?
Once appointed, the Voluntary Administrator will:
- Take control of the company’s business and continue trading it where appropriate,
- Report to creditors and provide information about the process and their rights, deal with their queries and calculate the amount of their claims against the company,
- Help the directors assess the options available to the company, including any DOCA proposal the directors wish to submit,
- Conduct detailed investigations into the company’s affairs and the likely outcome for creditors in liquidation from the realisation of company assets and recovery of legal claims,
- Provide a detailed report to creditors on the administrator’s investigations, the likely outcomes for creditors in liquidation and under any DOCA proposal, and which option the administrator recommends creditors to accept. This report is required to be issued within 20 business days of the Administrator’s appointment,
- Hold a meeting of creditors in order for creditors to vote on whether to accept the DOCA proposal or place the company in liquidation. This meeting is required to be held within 25 business days of the Administrator’s appointment, and
- Depending on which option creditors vote for, the administrator will then become the DOCA administrator or the liquidator.
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How Does Voluntary Administration End?
Administration is a temporary phase for the company, lasting just five to six weeks. The Administrator is required to call and hold a meeting within 25 business days where creditors decide the company’s future. Voluntary Administration generally ends either at, or shortly after, this meeting.
The Voluntary Administrator’s report will provide information to help creditors decide which of the following options for the company they will vote for at the meeting of creditors. Only one of the options will be successful.
These options include:
- Accept the DOCA proposal: The company will then execute a formal DOCA on the proposed terms. The DOCA will be prepared by solicitors and signed shortly after the meeting, or at the most within 15 business days of the meeting.
- End the Voluntary Administration: The company will be returned to the Directors’ control.
- Wind up the Company and Appoint a Liquidator: The company will enter liquidation at the meeting and the Administrator will generally become the liquidator.
How Voting Works at the Meeting of Creditors to Decide the Company’s Future
The company’s future is dependent on which option the creditors attending the meeting in person or by proxy vote on. Voting is on the voices, however a poll is often called. Where a poll is called, the company’s proposal for a DOCA will only be accepted if a majority in number and majority in dollar value vote in favour. If the requisite votes are not received, the company will enter liquidation unless the Administrator exercises his casting vote to accept the DOCA proposal.
The Administrator may exercise their casting vote if voting is split. For example, where the majority in number vote in favour of the DOCA proposal, but the majority in value vote against. The Administrator needs to carefully consider their decision and use their vote in the interests of the company and creditors as a whole.
Can Voluntary Administration Help Your Company?
There are a number of benefits to using the Voluntary Administration process for your company. These include:
- Prevents further legal action by unsecured creditors such as the ATO, to allow your company to consider its options,
- Gives your company the opportunity to reduce expenses to a manageable level so its business can survive,
- Provides a way to negotiate a compromise between your company and its unsecured creditors by way of a DOCA which, if successful, binds all creditors to the agreement,
- Reduces stress and pressure on the directors while the Voluntary Administrator trades the business and helps them make decisions about the company’s future,
- Avoids liquidation and the risk of legal action against directors and other parties that comes with it, and
- Allows an independent professional to review the company’s business and financial position and give creditors a detailed report on the company so they can make decisions about whether to continue supporting the company.
Our experts can talk you through your situation and provide detailed advice.
Get in touch for a free consultation today.
How Much Needs to be Paid Under a DOCA Proposal?
In order for a DOCA proposal to be successful, it generally needs to be recommended by the Voluntary Administrator and accepted by its creditors at the meeting to vote on the company’s future. It therefore needs to provide creditors with the best return the company can reasonably afford and should be better than the expected outcome for creditors in liquidation.
A DOCA proposal usually provides for a return to creditors that is less than the full amount of the debts. Depending what the company can afford, this is often less than 50 cent/$ and may be lower.
The Voluntary Administrator will report on the expected outcome for creditors (i.e. cents/$ return) under the DOCA proposal and in liquidation and provide an opinion as to which option is in creditors’ best interests.
When calculating the return to creditors, the Voluntary Administrator will need to factor in:
- Voluntary Administration costs including their remuneration, trading expenses and legal fees,
- Their costs to act as DOCA Administrator or Liquidator, depending on which option creditors vote for,
- Returns to priority creditors including employee superannuation and other entitlements, and
- Returns to unsecured creditors such as the ATO, suppliers, the landlord and any banks or financiers for any shortfalls.
Accordingly, in order for unsecured creditors to receive a return, your DOCA proposal needs to provide sufficient funds to cover the Administrator’s and DOCA Administrator’s costs and priority employee claims in full.
When Is the Right Time to Appoint a Voluntary Administrator?
There can be a lot of concern and delay about speaking to an Administrator. In our view, these concerns are unfounded, as speaking to an Administrator is confidential and obligation-free. Unfortunately, delays can mean that by the time company directors do seek professional insolvency advice, they’ve left it too late for Administration to save their company. In these cases, business closure and liquidation becomes inevitable.
We recommend you seek insolvency advice to investigate your options when you become concerned about your company’s future trading.
This may be evident from:
- Continuing trading losses,
- Dropping work in the pipeline,
- A legal battle turning sour,
- A finance application being refused,
- A bad debt or losing a major customer or project,
- Difficulty paying suppliers, tax or superannuation,
- ATO refusing a payment arrangement, conducting a superannuation audit or issuing a Garnishee Notice, Director Penalty Notice or creditor’s Statutory Demand, or
- A dispute between the directors or shareholders.
If a creditor, such as the ATO, has already filed a winding up application in court following an expired Statutory Demand, your options are limited. In this situation, you are unable to appoint a liquidator yourself. Your only option is to appoint a Voluntary Administrator to avoid being wound up by the court.
Step 1 – Appointment of a Voluntary Administrator
The first step in the voluntary administration process is to appoint an independent Voluntary Administrator. The Voluntary Administrator can exercise certain powers of the company and its directors while the company is in Voluntary Administration.
The Administrator will take control of the company’s business and affairs. If considered appropriate they will continue trading the company’s business, but will be cautious as they are personally liable to pay all expenses they incur.
Step 2 – First Meeting of Creditors
Following their appointment, the Voluntary Administrator must issue a report within five business days notifying creditors of their appointment and calling the first meeting of creditors. This meeting must be held by the Voluntary Administrator within eight business days of being appointed.
Creditors are then allowed to vote at the meeting to decide:
- Whether they want to form a committee of inspection, and if so, who will be on the committee, and
- Whether they want the existing voluntary administrator to be replaced.
The role of a committee of inspection is to:
- Assist and advise the voluntary administrator in their duties,
- Monitor the conduct of the voluntary administration,
- Approve certain steps in the administration process, and
- Give directions to the Voluntary Administrator.
The Voluntary Administrator will listen to the creditors on the committee of inspection, but does not need to comply with their suggestions and directions.
Step 3 – Voluntary Administrator’s Investigation and Report
The third step in the Voluntary Administration process is the investigation and written report. The Voluntary Administrator must investigate the company’s affairs and report to the company’s creditors on the expected outcomes in liquidation or under a DOCA proposal. The Voluntary Administrator only has 20 business days to investigate and issue their report. Details of the second meeting of creditors will also be provided in this report.
Step 4 – Second Meeting of Creditors to Decide the Company’s Future
The second meeting of creditors to decide the company’s future must be held within 25 days of the Voluntary Administrator’s appointment. The options available to creditors are discussed above and generally include the company executing a DOCA shortly after the meeting or entering liquidation at the meeting.
Find Out More About Voluntary Administration
If your company is struggling financially there are a number of paths you can take to turn things around. The experts at Revive Financial can help you decide if Voluntary Administration is the best option for your company. We specialise in giving professional advice to businesses and company directors in financial difficulty.