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Voluntary Administration

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Introduction

 

Voluntary administration is a process designed to help financially troubled companies avoid insolvency and liquidation by allowing them to restructure and negotiate with their creditors. Introduced by the Corporate Law Reform Act 1992, voluntary administration aims to maximise the chances of the company’s business continuing or, if this is not possible, to achieve a better return for creditors than immediate liquidation would offer.

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Key Features of Voluntary Administration

 

Appointment of an Administrator:

 

A voluntary administration begins when an administrator is appointed by the company’s directors, a secured creditor, or a liquidator. The administrator, typically a registered insolvency practitioner, takes control of the company and its operations. The primary role of the administrator is to investigate the company’s affairs and recommend to creditors whether the company should enter a deed of company arrangement (DOCA), be liquidated, or returned to the directors.

 

Moratorium on Legal Actions:

 

Upon the appointment of an administrator, an automatic moratorium is imposed, which temporarily halts most legal actions against the company. This moratorium provides the company with breathing space to restructure without the immediate threat of creditor action, such as winding up petitions or the enforcement of security interests.

Outcomes of Voluntary Administration

 

Deed of Company Arrangement (DOCA)

 

A DOCA is a binding agreement between a company and its creditors outlining how the company’s affairs will be dealt with. The terms of a DOCA can vary widely but generally include compromises and arrangements to restructure the company’s debts and business operations. If creditors approve a DOCA, the company continues trading under the terms of the agreement, with creditors receiving a percentage return on their debts and the administrator often becoming the deed administrator to oversee compliance with the DOCA.

 

Liquidation

 

If the creditors do not approve a DOCA, or if the administrator recommends liquidation, the company will go into liquidation. In this scenario, a liquidator is appointed to wind up the company’s affairs, sell its assets, and distribute the proceeds to creditors according to the priorities set out in the Corporations Act 2001. The Liquidator must report the results of his investigations to the Australia Securities & Investments Commission.

 

Return to Directors

 

In some cases, the administrator may recommend that the company be returned to the control of its directors if it is determined that the company is solvent or that continued trading is in the best interest of the creditors.

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Administrator’s Duties

 

The administrator is required to assess the company’s financial situation and report to creditors within a specific timeframe, usually within 20 business days. This report includes the administrator’s opinion on the best course of action for the company. During this period, the administrator has the power to manage the company’s affairs, business, and property.

 

Creditors' Meetings

 

There are typically two meetings of creditors during the voluntary administration process. The first meeting, held within eight business days of the administrator’s appointment, allows creditors to replace the administrator if they wish. The second meeting, held within 25 business days of the administrator’s appointment, is where creditors decide the company’s future based on the administrator’s report.

Advantages and Disadvantages

 

Advantages:

 

  • Provides a moratorium on legal actions, allowing time to restructure.

  • Potential to save the company and jobs.

  • Offers a flexible approach to debt restructuring.

  • Can result in better returns for creditors than liquidation.

 

Disadvantages:

 

  • Costs associated with administration can be high.

  • There is no guarantee of a successful outcome.

  • Can damage the company’s reputation and relationships with suppliers and customers.

Conclusion

 

Voluntary administration is a vital mechanism for companies facing financial distress, offering a structured process to assess the company’s viability and explore options for restructuring. It provides a balanced approach, aiming to protect the interests of creditors and allowing them to decide on the Company’s future, while giving companies a chance to survive and avoid being placed into liquidation.

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