What is Voluntary Administration?
Voluntary Administration is an insolvency process available to assist a company which is in financial distress.
It generally involves the director(s) of the company appointing an independent insolvency practitioner (the Administrator) to take immediate control of the company, conduct a full investigation of its financial affairs, determine if the company is solvent and if so, whether it is possible to save the company.[1]
Why should I appoint a Voluntary Administrator?
Voluntary Administration may be effective if a company’s business is otherwise viable, but has encountered financial difficulties due to:
- poor trading periods
- significant losses due to isolated events; or
- requires momentary breathing space from creditors to either restructure, implement new processes, reduce staff and costs and resume trading profitably.
This is different to another common term heard in the news called “liquidation”, which essentially sees a liquidator appointed for the purpose of finalising a company’s affairs, selling any assets to meet claims of creditors and then closing it down.[2]
The goal of voluntary administration is to first explore the options available to save the company and allow it to continue trading, with liquidation as a last resort.[3]
How do you appoint a Voluntary Administrator?
The process is straightforward – the director, or a majority of directors of a company pass a resolution appointing a voluntary administrator.[4]
This takes effect immediately once the documentation is lodged with ASIC.
Protections given by Voluntary Administration
Voluntary administration has the benefit of bringing about an immediate temporary freeze on any creditor recovery actions against the company and any recovery action under any director’s personal guarantees.
Any such legal proceedings already on foot are temporarily put on hold, and creditors are unable to start new legal proceedings for recovery against the company or pursuant to a director’s guarantee during the administration period without leave of the court. [5]
What happens next?
A first meeting of creditors is called within 8 business days of the commencement, which is largely a matter of procedure, to ratify the appointment. At the meeting the creditors can vote to remove the nominated administrator and appoint someone else. The creditors may also determine to form a committee.[6]
The administrator then works with the director(s), investigates the books and records of the company and provides an independent report to creditors. [7]
This report includes details of:
- the company’s business;
- the company’s assets and liabilities;
- the company’s net financial position; as well as
- the administrator’s recommendation as to which of the options available for the company and creditors going forward are preferable.
The administrator’s report includes an estimate of the likely dollar value return to creditors in each scenario.
Therefore, in summary, the avenues available for a company may involve that:
- the company continues trading, if for instance it is determined to be solvent and/or all creditor claims can be settled; or
- the director(s) put forward a proposed Deed of Company Arrangement (DOCA); or
- the company cannot be saved, in which case the company may go into liquidation.
When is Voluntary Administration not appropriate?
Whilst Voluntary Administration can be an invaluable tool in saving a company in financial distress, it is not always appropriate.
For example, in a situation where:
- the company is hopelessly insolvent; or
- there is no prospect of the director(s) proposing a DOCA which presents a better return than a liquidation; or
- there is no intention to save the company (e.g. it is no longer trading)
In these cases, it is worthwhile to consider whether a liquidation may be the more appropriate course of action for the company.
How can DSA Law help?
If you have a bankruptcy or insolvency issue, please Contact Us or
one of our Commercial Lawyers at DSA Law on (03) 8595 9580 so we can
assist you with the same.
[1] Corporations Act 2001 (Cth) s 438A.