What is
VOLUNTARY
ADMINISTRATION?

Why consider a Voluntary Administration?

A company that should consider a Voluntary Administration is one that:

• Is insolvent so needs a deal with creditors;
• Had a one-off loss or a bad trading period which caused the problems;
• Has a viable business but needs a freeze on creditors to allow time to cut debts by reducing costs and staff, and to rebuild sales and profit margins.

How can a Voluntary Administration help a company facing financial problems?

A Voluntary Administration:

• Is inexpensive to initiate;
• Creates the opportunity to maintain a business;
• Provides creditors with an independent review of the company and its business; and
• Provides a mechanism to negotiate a compromise between a company and its creditors.

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.

How often are Voluntary Administrations successful?

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.

The process of a Voluntary Administration

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 (Decision 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.

How is a Voluntary Administration started?

A Voluntary Administration is easy to initiate, it is just a Resolution by a majority of directors. The Voluntary Administration process 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.

What happens on the appointment of an Administrator?

Upon the appointment of an Administrator, the directors’ powers are effectively suspended, and control of the company passes to the Administrator.  The Administrator then chooses a course of action they consider most likely to maximise the return to creditors and shareholders.  The Administrator has many options and may choose to trade the company’s business, trade part of the company’s business, sell the company’s business or perhaps cease trading.  The Administrator will quickly “tell the world” of the appointment by way of a Notice of Appointment on the Insolvency Notices website and an Initial Report to Creditors will be despatched.

What are the possible outcomes of a Voluntary Administration?

The Voluntary Administrator takes control of the company and the restructuring process.

The usual aim of a Voluntary Administration is to save the business or to at least achieve the best possible outcome for stakeholders.  The Corporations Law specifies three broad possible outcomes at the end of the process:

• Return the company to the directors’ control for it to resuming trading (this option is rarely chosen);
• Execute a Deed of Company Arrangement (DOCA) which is the document that specifies “the deal” done with creditors; or
• Place the company into liquidation.

When do creditors get included in the Voluntary Administration process?

Creditors play a crucial role in a Voluntary Administration by voting at Creditors Meetings.  The Administrator calls at least two meetings which allows the Administrator and creditors to get together to determine the best outcome of the Administration.  The two meetings have slightly different purposes:

• First Creditors Meeting – is held within eight business days of the start of the Administration. Its main purpose is for creditors to decide whether they want to form a ‘committee of inspection’ and whether creditors want the existing Administrator to be continue or to be replaced.
• Second Creditors Meeting – is held around five weeks after the Voluntary Administration starts. This meeting is also referred to as the Decision Meeting.  Its purpose is to allow creditors to vote on the outcome of the Voluntary Administration.

Prior to each of those Meetings, the Voluntary Administrator will send detailed reports to all creditors. These reports provide creditors with enough information to allow them to make informed decisions at the meetings. The Second Creditors Meeting takes place after the Administrator has conducted their investigations into the company and reported on their findings.

Creditor Voting at Creditors Meetings

The two Creditors Meetings are required to follow particular agendas.  At the right time, creditors will be able to vote on a number of proposals.  To make it easier for creditors to take part in the process, creditors can attend either personally, by teleconference, or sometimes via video link.  At the right time, each proposal that creditors must consider is put to a vote. That vote is decided by a majority in number (so more than half of the number of creditors) and value (so more than half of the dollar value of creditors) who vote. There can be complications around the voting and there a number of rules the Voluntary Administrator may need to apply.

Ending a VA

A Voluntary Administration ends when the decision is made to proceed with one of the three possible outcomes being to give control back to the company directors, execute a DOCA or place the company into liquidation. But Voluntary Administration can also end if a Court orders, for example that a liquidator be appointed.

What happens to creditors in a Voluntary Administration?

On the appointment of a Voluntary Administrator, there is a moratorium on creditors’ claims. The moratorium operates so that:

• All creditor payments are suspended to give the company breathing space;
• Owners and lessors of property are prevented from taking action thus allowing the company to continue to use those assets, even if the company is behind on payments;
• Bank and other secured creditors can’t enforce a charge on property of the company.

Can a Voluntary Administration stop creditor legal actions?

Yes. Voluntary Administration triggers a moratorium on any legal recovery actions by creditors. That means that creditors can’t continue or start court proceedings against the company.  Also, a Voluntary Administration stops the enforcement of guarantees against directors, but only for the period of the Voluntary Administration. That is, when the Voluntary Administration ends, creditors who have a personal guarantee from a director can commence or re-start actions against the directors personally.

What happens to employee entitlements in a Voluntary Administration?

What happens to employee entitlements in a Voluntary Administration is largely dependent on what happens in the Voluntary Administration. Employee entitlements that arose before the Voluntary Administration started are not usually paid during the Voluntary Administration.  If the Voluntary Administrator continues to trade the business, the Administrator must continue to pay employees for services.  If the company successfully agrees a Deed of Company Arrangement, then that DOCA will detail how employees will be paid.  If the company ends up in liquidation, then employee entitlements are dealt with under the liquidation laws.  That’s a complicated area.  As a general guide, employees are treated well in the Voluntary Administration process and will usually, but not always get paid either as part of the DOCA or if the company ends up in liquidation, under the FEG employees’ scheme.

Can employees get FEG in a Voluntary Administration?

FEG (Fair Entitlements Guarantee) is a government scheme designed to pay employees who have lost their job because their employer entered liquidation. So FEG is not designed to assist employees in a Voluntary Administration.  Remembering that the main aim of a Voluntary Administration is to save a company’s business, some employees will be paid because the business is saved.  If the Voluntary Administration fails and the company ends up in liquidation, then the FEG scheme will swing into operation and, in many cases, ensure employees are paid.

Are secured creditors treated differently in a Voluntary Administration?

Yes.  There are exceptions to the moratorium on creditors actions. Creditors who hold a registered secured charge over “the whole, or substantially the whole, of the property of a company” have special rights.  If they choose, they can take possession of the assets they have a charge over as long as they do so within 13 business days of the start of the Voluntary Administration.

What does a Voluntary Administrator do?

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 has a wide range of responsibilities to the various stakeholders.

Are Voluntary Administrators Registered?

There is no actual official registration known as a “Voluntary Administrator”.  Rather, an Administrator must be a Registered Liquidator.  The more reputable Administrators are also members of a Professional Accounting body, such as Chartered Accountants Australia & New Zealand, and some are members of the Association of Independent Insolvency Practitioners (AIIP) and/or the Australian Restructuring Insolvency and Turnaround Association (ARITA). Restructuring Works has members in-house.

What is the role of a Voluntary Administrator?

The Voluntary Administrator takes control of the company and the restructuring process. The Administrator will:

• Work with directors to quickly assess the possibility of a successful Voluntary Administration;
• Call meetings of creditors;
• Help directors prepare a proposal or Deed of Company Arrangement (“DOCA”);
• Investigate the company’s affairs and provide opinions to creditors;
• Assisting the implementation of the DOCA (usually).

Powers and Duties of an Administrator

The Voluntary Administrator plays an important role in the Voluntary Administration process. The Administrator is appointed to take control of the company and safeguard the interest of a wide range of stakeholders.  The key to the Administrator’s role is that they are independent of the company, directors, and creditors.  The Administrator is usually appointed by the company itself but as a failsafe, creditors get to Vote at the First Creditors Meeting as to whether the Administrator continues in that role or is replaced by someone else of the creditors choosing.  The Administrator acts impartially and investigates a variety of matters and reports to creditors. The Administrator also advises the company and creditors on commercial issues with the ultimate goal of recommending what should happen to the company and its business.

What investigations does the Voluntary Administrator do?

A Voluntary Administrator must conduct investigations into the company’s affairs and must report any offences. The investigations will cover:

• When the company became insolvent;
• Whether the company traded while insolvent;
• Whether the directors committed any offences;
• Whether there are any payments to particular creditors that are preferential and may be recoverable;
• Whether there are any hidden assets to be recovered or other legal actions to consider.

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 against the company.

The Administrator’s personal liability

A Voluntary Administrator is personally liable for debts they incur.  The idea behind this is so that when a Voluntary Administrator trades a business, creditors who are dealing with the Administrator will have some confidence that they will be paid for goods or services they provide.  Creditors may need that confidence because they will often be owed money by the company.  For the Voluntary Administrator, they are indemnified out of the company assets for debts they incur whilst trading the business.

What are the alternatives to Voluntary Administration?

Voluntary Administration can be an excellent solution for a company in financial difficulty. The main problem with Voluntary Administration is that it is a highly regulated process and so inevitably the cost of getting through the Voluntary Administration process is high.  There are a range of other possible solutions for a company that cannot pay its debts including several ways to restructure a company using informal and more cost-effective methods.  And whilst it does not sit well with many directors, when a business is simply unviable, liquidation is often the best option.

What are the new Laws for Small Business Restructuring?

On 1 January 2021, a new process was introduced called Small Business Restructuring.  The Small Business Restructuring Process is designed to be shorter and less regulated than a Voluntary Administration. This is intended to keep the costs lower. The company remains in the control of its directors during the Small Business Restructuring Process, whereas it transfers to the control of the Administrator in a Voluntary Administration. The process can be used by small businesses, which means companies with creditors of less than $1 million. You will find a lot more information on Small Business Restructuring here.

Voluntary Administration vs. Informal Restructuring

Informal Restructuring is where a company works with some, or all, of its creditors to come to a negotiated solution to return the company to financial health.  An informal restructuring is usually the “least drastic” solution available to a company in financial distress. They are very flexible and are achieved behind-the-scenes. They can be achieved in a short space of time or can take years to complete. Many restructurings can be dealt with by a company and its advisors without the need to resort to a Voluntary Administration.  At times it is not even necessary to involve external parties, such as the company’s bankers or trade creditors. Commonly though, a company will need to approach its key creditors and agree some sort of forbearance by those creditors whilst the company deals with its problems. You will find a lot more information on Informal Restructuring here.

Voluntary Administration vs. Safe Harbour

Safe Harbour Legislation is designed to allow directors to address a company’s financial difficulties behind-the-scenes whist under the supervision of an “Appropriately Qualified Advisor”.   Safe Harbour legislation was introduced in 2017 as part of the Insolvency Reform Law Act. Under the Safe Harbour reforms, directors will not be personally liable for debts incurred after the date of insolvency (S588G Insolvent Trading) if they can show they were incurred in connection with a course of action reasonably likely to lead to a better outcome for the company and its creditors as a whole, rather than proceeding to immediate administration or liquidation. You will find a lot more information on Safe Harbour here.

Voluntary Administration vs. liquidation?

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 its affairs.  Sometimes a business is simply unviable.  If a business cannot pay its debts and if the directors cannot see a way forward that would return a business to profitability, then liquidation is the only sensible choice.

What is a Deed of Company Arrangement (DOCA)?

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.

What terms must be in a DOCA?

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.

Who votes on and approves a DOCA?

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.

What if all the creditors do not agree to the DOCA?

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.

Does a DOCA bind creditors who hold a personal guarantee?

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, it does not prevent a creditor who holds a personal guarantee from the company’s director taking action under the personal guarantee.

What happens after the vote for a DOCA?

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 does not happen, the company will automatically go into liquidation, with the Voluntary Administrator becoming the liquidator.

Who monitors the DOCA?

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.

How do creditors get paid in a DOCA

Payment of dividends to creditors under a DOCA mirror the procedures for payment of a dividend in a liquidation. The Deed Administrator will call for Proofs of Debt from creditors, admit and reject claims and then pay a dividend. The timing and processes for these events 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. The DOCA must ensure employee entitlements are paid in priority to other unsecured creditors unless eligible employees have agreed to vary their priority.

Does a Voluntary Administration affect a director’s credit rating?

Yes, a Voluntary Administration may have an effect on a director’s credit rating, but not a severe effect. Anyone who conducts a directorship search will be able to see that the director is a director of a company has entered Administration. Credit Reporting Agencies also 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.

Does a Voluntary Administration help protect a director?

Yes, there are some protections for directors while their company is going through Voluntary Administration. Directors’ guarantees on company debts are not enforceable while a company is in Voluntary Administration. That gives a director some breathing space so they can deal with restructuring the company.  You may also be aware that directors could have personal liability for company debts if the company traded while insolvent.  Usually, a key provision of any DOCA that is proposed is that directors are released from any insolvent trading claims.  That is, the DOCA will be designed to settle all issues.

Legal issues for Directors

Voluntary Administration is a process that is designed to be run outside of the Court system.  So, in most Voluntary Administrations, there will be no involvement of the Courts.  Despite that, directors should be aware that Voluntary Administration is a highly regulated process and there will be some legal issues to consider:

• Sometimes, creditors or other stakeholders may disagree with some aspect of the Voluntary Administration and may seek Court intervention.
• When an Administrator is appointed, the director loses control of the company because the Administrator takes control of the company’s operations.
• A director will have a number of responsibilities during the Voluntary Administration process, mainly to provide information and assistance to the Administrator.

Other Questions

What is the Court’s role in a Voluntary Administration?

In most Voluntary Administrations, the Courts will play no role.  Voluntary Administration is designed to operate without Court involvement.  In some cases, a creditor or other Stakeholder may be unhappy with some aspect of the Administration and so they may apply to the Courts to have the matter reviewed.  Typical matters where the Courts may get involved could be: disputes over the amount a creditor is owed; disagreement on who should be acting as the Voluntary Administrator; disagreement over voting on a proposed DOCA.

What is a Creditors Trust?

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.

Can you start a Voluntary Administration if you have received a Wind-Up Notice?

Yes. Even though a creditor may have lodged a wind-up petition at Court, it is still possible for a company to start a Voluntary Administration. There is some logic to that situation – if a Voluntary Administration can result in a better outcome than a Court Winding up then it is best that be allowed to happen.  However, once there is an application for winding-up submitted to Court then the Court will want to decide whether to let the Voluntary Administration proceed or place the company into liquidation.

Can a Voluntary Administrator be removed?

Yes.  It may be that a creditor, or several creditors are unhappy with the directors’ choice of Voluntary Administrator.  If so, it is part of the Voluntary Administration process that at the First Creditors Meeting creditors get the chance to propose a new Voluntary Administrator.  If there is a proposal for a replacement Administrator, then there will be a vote at that meeting.  Also, creditors or other stakeholders could also apply to a Court to have an Administrator removed or replaced.