Voluntary Administration is a process where an insolvent company is placed in the hands of an independent person who can assess all the options available, and generate the best outcome for a business owner and for creditors.
A Voluntary Administration is easy to initiate – it’s just a Resolution by a majority of directors – and can usually be completed in a little over a month. During that time, there is a moratorium on any recovery action by creditors against the company and it stops the enforcement of personal guarantees against directors. A Voluntary Administration is designed to avoid the involvement of the Courts.
A company that should consider a Voluntary Administration is one that:
The objective of a Voluntary Administration is to save a company so it can continue its operations, whereas the objective of a liquidation is to finalise all of its affairs.
Not often! Of all companies that enter Voluntary Administration only 26% are saved. That statistic indicates that expert advice is needed prior to entering a Voluntary Administration as they are often mis-prescribed as the right solution.
A Voluntary Administration:
In some cases, the owner may be able to retain control or a part share in the business. In other cases the business can be sold as a going concern and employees may be able to retain their jobs.
A Voluntary Administrator is the person appointed by the director (or sometimes by a liquidator or Secured Creditor) to run the process of Voluntary Administration. The Administrator must be a Registered Liquidator. ASIC supervises all Liquidators/Administrators very closely. The more reputable Administrators are also members of a Professional Accounting body, such as Chartered Accountants Australia & New Zealand, and the Australian Restructuring Insolvency and Turnaround Association (ARITA).
The Voluntary Administrator takes control of the company and the restructuring process.
The Administrator will:
Yes. Directors can attract Personal liability for company debts from the severe insolvent trading provisions of the Corporations Act and the tough Director Penalty Notices (DPNs) issued by the Australian Taxation Office. DPNs require a company to pay various tax liabilities within 21 days or the directors will become personally liable for the debt, unless a Voluntary Administrator or liquidator is appointed. Therefore, one of the strengths of the voluntary administration process is that it limits director’s personal liability.
Yes. Voluntary Administration triggers a moratorium on any recovery action by creditors, and at the same time the directors’ powers cease. It stops the enforcement of guarantees against directors. The only exception is that a lender with a mortgage over all of the assets of the company may enforce its security within a 10 business day decision period.
Yes, a Voluntary Administration may have an effect on a director’s credit rating, but not a severe effect. Credit Reporting Agencies keep track of companies that enter Administration and the names of the directors of those companies. However, an Administration does not have the same stigma as a liquidation or bankruptcy.
Voluntary Administrations are designed to be easy to appoint and quick to complete. The objective is to complete the Voluntary Administration process in a little over a month and at the end of the process either put the company into liquidation or agree a Deed of Company Arrangement (a deal with creditors). In complicated cases, it is common for an Administrator to delay the Second Meeting of Creditors (decisions Meeting) with the approval of either the Courts or Creditors. The overriding principle of the timeframes is to require a speedy resolution of issues balanced against the need to provide stakeholders with time to receive relevant information.
A Voluntary Administrator must conduct investigations into the company’s affairs and must report any offences to ASIC. The investigations will cover:
The purpose of reporting on these matters is to fully inform creditors who are considering a Deed of Company Arrangement. Usually, if a DOCA is accepted by creditors then they forgo any rights they may have had for recoveries or legal actions.
A Deed of Company Arrangement, often called a DOCA, is essentially the “deal” that is proposed to a company’s creditors in a Voluntary Administration. The aim of a DOCA is to maximise the chances of a company continuing, or to provide a better return for creditors than an immediate winding up, or liquidation, of the company.
The Law provides no specific guidance or requirements on what a DOCA must say and do. That is so that DOCAs can be designed to suit the situation. Commonly, DOCAs will promise say: 10 cents in the dollar to all creditors, or a director will personally promise to contribute $100,000 and that is to be divided amongst the creditors. The point is that a DOCA is very flexible and so can propose whatever is appropriate.
At the Second Meeting of Creditors, creditors are asked to vote on the DOCA. In order for the DOCA to be approved, the meeting must pass a resolution – that means that, of those creditors voting, it must be approved by 50% in number and 50% in value. There can be quite a few complications surrounding the voting, such as particular creditor’s rights to vote and the amount of different creditor’s claims.
The DOCA binds all unsecured creditors, even a creditor that voted against the DOCA. It also binds owners of property, those who lease property to the company and secured creditors, if they voted in favour of the DOCA.
A creditor who holds a personal guarantee against a director is not allowed to pursue that guarantee whilst a company is under Voluntary Administration. However, once a DOCA is signed, the DOCA does not prevent a creditor who holds a personal guarantee from the company’s director taking action under the personal guarantee.
If creditors vote for a DOCA, the company must sign the deed within 15 business days of the creditors’ meeting, unless the court allows a longer time. If this doesn’t happen, the company will automatically go into liquidation, with the Voluntary Administrator becoming the liquidator.
A Creditors’ Trust is a separate legal arrangement used to accelerate a company’s exit from Voluntary Administration. Creditors’ claims are generally transferred to a newly created Creditors’ Trust and any return is received from the trustee of the trust, not the need Administrator. The DOCA generally terminates after the creditors’ claims against the company are moved to the trust.
Payment of dividends to creditors under a DOCA mirror the procedures for payment of a dividend in a liquidation. So, the Deed Administrator will call for Proofs of Debt from creditors, admit and reject claims and then pay a dividend. All of the timing and processes are set out in the Corporations Law. The order in which creditor claims are paid depends on the terms of the DOCA. Usually, the DOCA proposal is for creditor claims to be paid in the same priority as in a liquidation. Other times, a different priority is proposed. But, the DOCA must ensure employee entitlements are paid in priority to other unsecured creditors unless eligible employees have agreed to vary their priority.
It is the Deed Administrator who ensures that the company carries through the commitments made in the DOCA. The extent of the Deed Administrator’s ongoing role will be set out in the DOCA.