When a company is in financial difficulty and can’t pay its debts, it may be forced into liquidation.
But what happens if the company doesn’t want to go down that route? There is another option called voluntary administration. This article will explain what voluntary administration is and what it means for the business.
Voluntary administration can provide a way for a troubled business to restructure and emerge stronger on the other side. The voluntary administration process should not be taken lightly. It’s crucial to have an understanding of what it is before making any decisions, which is why our insolvency lawyers on the Gold Coast have written this article.
What is voluntary administration?
Voluntary administration is a process undertaken when a company is insolvent, or likely to become insolvent. The aim of the voluntary administration process is to give the company breathing space when it is facing financial difficulty. The company will then have a chance to restructure its affairs and may avoid liquidation.
Why does a company go into voluntary administration?
There are many reasons why a company may choose to go into voluntary administration. Some of the most common reasons include:
- The company is insolvent (unable to pay its debts).
- The company faces financial difficulty.
- The directors disagree about the company’s future.
- Pressure from creditors to settle outstanding company debts.
- Legal action that could affect the company’s ability to continue operations.
- To protect company directors from the personal risk of insolvent trading.
- Prevent the company from going into liquidation.
What happens when a company is placed into voluntary administration?
When a company is placed into voluntary administration, a voluntary administrator is appointed to manage the company’s affairs, business and property. The voluntary administrator is appointed by the company’s directors or by a secured creditor.
The primary purpose of the voluntary administration process is to allow an objective third party to investigate the company’s financial affairs. They will then decide on the best way forward.
The administrator is required to hold the first creditors’ meeting within eight business days of their appointment. This meeting is an opportunity for creditors to decide whether they want to replace the current voluntary administrator with one of their own. They can also appoint a committee of inspection to advise the voluntary administrator.
The administrator will then prepare a report which outlines their findings and recommendations. The voluntary administrator’s report will be presented to creditors at the second creditors’ meeting. This second meeting must be held within 25 business days of the administrator’s appointment.
At the second meeting, the voluntary administrator will recommend one of three courses of action to creditors.
- That the company execute a deed of company arrangement (DOCA);
- That the company be wound up; or
- That no further action be taken, and the company be returned to the control of its directors.
Then creditors vote on the voluntary administrator’s recommendation. If they accept the recommendation, it is binding on all creditors. If they do not accept the recommendation, the company is wound up.
Voluntary administration is an alternative to appointing a liquidator to wind up a company. It is designed to give the company a “breathing space” to allow it to continue operating or be sold as a going concern.
Deed of company arrangement (DOCA)
A deed of company arrangement (DOCA) is a legal agreement between a company and its creditors. This agreement is used to restructure the company’s debt.
The DOCA may be negotiated by the company’s directors or the voluntary administrator. It must be approved by creditors during the creditors’ meetings. Once approved, the DOCA binds secured creditors who voted in favour of the deed. The DOCA also binds all unsecured creditors, including those who did not vote in favour of it. The deed will then be executed by a deed administrator or registered liquidator.
The purpose of a DOCA is to help the company pay its debts over time, while continuing to operate its business. This may involve selling some of the company’s assets, changing its business operations or making other changes to its financial affairs.
What is the role of a voluntary administrator?
A voluntary administrator is an insolvency practitioner appointed to manage a company’s affairs, business and property during the voluntary administration process.
The purpose of voluntary administration is to maximise the chances of the company continuing as a going concern. Or if that is not possible, to achieve a better result for creditors than if the company were immediately wound up.
The voluntary administrator investigates the company’s affairs and reports their findings to creditors. From there, the voluntary administrator will make recommendations for the company’s future. Creditors then decide whether to accept or reject the voluntary administrator’s proposals.
What are the benefits of voluntary administration?
Voluntary administration can be a good option for companies that are insolvent or at risk of becoming insolvent because:
It provides protection from creditors
If a company is insolvent, its directors may be personally liable for any debts incurred while the company is insolvent. Voluntary administration can help company directors mitigate their insolvent trading liability by temporarily relieving them of their duties during the period of the administrator’s appointment.
It helps company directors avoid insolvent trading
If a voluntary administrator is appointed before a company becomes insolvent, a director may avoid an insolvent trading claim made against them. The process then provides the director with a more certain outcome than if the company is simply left to trade whilst insolvent. The voluntary administrator will assess the company’s financial situation and recommend the best way forward to creditors.
It provides greater certainty for employees, creditors and other stakeholders
Voluntary administration provides a more certain outcome than if the company is left to trade whilst insolvent. This is because the voluntary administrator will assess the company’s financial situation and make recommendations to creditors about the best way forward.
It gives the company time to restructure
The voluntary administrator will have control of the company for a period of time. During that time, they will work with the directors to try and find a way to make the company viable again. This can involve negotiating with creditors, selling off assets, or coming up with a new business plan.
It allows for a fresh start
If the company is successfully restructured, it can emerge from voluntary administration with a clean slate and no debt. This can be a good option for companies that are otherwise viable but have become bogged down by debt.
What is the role of directors during a voluntary administration?
Once company directors decide to enter voluntary administration, they must ensure they fulfil their obligations throughout the process. This includes ceding control over the company, allowing the voluntary administrator access to whatever information they need and preparing for the final outcome of the administration. (More information here for directors of insolvent companies)
Ceding control of the company
When a company goes into voluntary administration, the directors’ powers are suspended. This includes their ability to make decisions about the company, its property and its assets. The voluntary administrator takes over these responsibilities. They assume the power to decide the company’s future.
Helping the voluntary administrator with access to information
Directors need to give the voluntary administrator all the information the administrator needs about the company. This includes financial records, details of any contracts or leases, and employee information. The voluntary administrator will use this information to help them understand the company’s financial situation and make decisions about the company’s future.
Helping with the decisions necessary during the voluntary administration
At the end of the voluntary administration, the company may enter a DOCA, liquidation or be returned to the control of the directors. Company directors need to be aware of the implications of each of these outcomes and prepare accordingly.
Attending creditors’ meetings and discussing the company’s options with the voluntary administrator can help directors make informed decisions about the best course of action for their company.
What happens to employees during voluntary administration?
If a voluntary administrator keeps the business running, the administrator must pay the employees out of the company’s funds. So, the appointment of a voluntary administrator doesn’t mean that all the employees lose their jobs.
However, some employee entitlements that were being paid before the voluntary administration might not get paid during the administration. What happens with those entitlements depends on the decisions passed at the creditors’ meetings.
What happens to shareholders during voluntary administration?
Once the company is in voluntary administration, shareholders’ rights are heavily restricted. They can only vote on resolutions proposed by the voluntary administrator if they are a creditor. They cannot take any legal action against the company or the voluntary administrator.
The voluntary administrator will assess the company’s financial position and decide whether it can be saved or if it needs to be wound up. If the voluntary administrator determines that the company should be wound up, shareholders might receive nothing from the sale of the company’s assets. It depends on whether anything is left after creditors are paid.
What’s the difference between voluntary administration and liquidation?
An external administrator will be appointed to manage the affairs of a company. The goal of voluntary administration is to allow the company to continue operating. Or if that’s not possible, to achieve a better outcome for creditors than if the company was immediately wound up.
Liquidation, on the other hand, is the process of winding up a company and selling off its assets. Liquidation can be either compulsory (ordered by the court) or voluntary (agreed to by the directors). Once a company is in liquidation, it ordinarily ceases to trade.
How long does a voluntary administration last?
Barring unforeseen circumstances, a voluntary administration usually lasts between 25 and 30 days.
A voluntary administrator must hold the first creditors’ meeting within eight business days of their appointment. They must have the second creditors’ meeting within 25 business days of their appointment.
During the creditors’ meetings, creditors may vote on the company’s future. They need to decide on whether to restore the directors’ control, grant a deed of commercial arrangement (DOCA) or call for the company to be liquidated.
The approval of one of these three steps will bring an end to the voluntary administration process. If creditors approve a DOCA, the company must finalise and sign the agreement within 15 business days of the second creditors’ meeting.
The court may allow the creditors’ meetings to be delayed under certain conditions. This may push back the voluntary administration process.
What happens at the end of a voluntary administration?
The voluntary administration ends with a second creditors’ meeting. At this second meeting, the voluntary administrator will report on the progress made during the administration. They will also propose one of three possible outcomes:
- Returning control of the company to its directors;
- Entering a deed of company arrangement; or
- Liquidating the company.
The creditors vote on the administrator’s proposal and decide whether to accept or reject it. Once a proposal has been accepted, the voluntary administrator will carry out the relevant actions and resign from their role.
It is also possible for the voluntary administration process to be ended with a court order.
Get the right team for your voluntary administration
If you are considering voluntary administration for your company, it is important to work with an experienced lawyer. An experienced lawyer can advise you on your options and help you to navigate the process, including finding and working with an administrator.
Our team has years of experience advising directors and shareholders through voluntary administration. If you’re considering voluntary administration for your company, get in touch with us today. We’ll help you understand the process and assess whether voluntary administration is the right solution for you. Call us for a confidential chat on 1300 286 578 or email us at info@tdllaw.com.au
Important note on this article
This article discusses the general state of affairs, which could change at any time because the law can change at any time. Also, your situation is unique, so an article like this one can’t give you all your options, and some of the options discussed here might not apply to you. For those reasons and others, you mustn’t treat what you’ve read here as legal advice for you. What you should do as soon as possible is get legal advice specific to you if you are affected by anything discussed above.
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