Understanding the role and impact of Voluntary Administration
Authored by: Darrel Causbrook
Authored by: Darrel Causbrook
What is the purpose of the voluntary administration?
When a company is in financial trouble or is likely to become insolvent, an independent administrator, often known as the voluntary administrator, steps in and takes control of the company. This gives the company's directors or any external party some time to seek solutions to rescue the company or its business.
If the directors or any external party can't develop a solution, the voluntary administrator steps in with the aim to handle the company's affairs in a way that provides a better outcome (in terms of repayment) for the creditors than if the company was instantly wound up or shut down. One primary tool for achieving this is the Deed of Company Arrangement (DOCA).
A DOCA is a formal agreement between the company and its creditors on how the company's issues will be resolved. This arrangement comes into play after the company enters voluntary administration. Typically, the DOCA proposal comes from the directors or any external party, often working closely with the voluntary administrator. The entire process is then overseen by a deed administrator, usually the same person who served as the voluntary administrator.
In most cases, the company's director(s) bring in the voluntary administrator when they recognise that the company is financially unstable or on the brink of insolvency. However, in some instances, a liquidator or secured creditor might be the one to appoint a voluntary administrator.
What is the role of a voluntary administrator?
After stepping in, the voluntary administrator looks into and informs the creditors about the company's situation, including its business, properties, and financial circumstances. They also relate three main choices to the creditors, which can include employees or contractors:
Stop the voluntary administration and give control of the company back to its directors.
Agree to a Deed of Company Arrangement (DOCA), which lets the company settle some or all its debts and then move on without those debts.
Close or wind up the company and get a person to handle the company's assets and debts.
The voluntary administrator has to share their thoughts on each choice and suggest which one is best for the creditors.
In their role, the voluntary administrator aims to:
Find solutions for the company's challenges
Look at plans given for the company's future
Think about the results of these plans compared to what would happen if the company were closed
Approximately five weeks after the company starts the voluntary administration process, a meeting of creditors takes place to determine the company's future direction. If things are complicated, this meeting might occur later.
The voluntary administrator can make big decisions for the company, such as selling its business or parts of it before the creditors choose the company's future. The voluntary administrator must also report any wrongdoings related to the company. When their job ends, the voluntary administrator needs to give a detailed list of their activities and payments.
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Effects of appointment of a voluntary administrator
When a voluntary administrator is chosen, the company gets a chance to pause and figure out its next steps. During this break:
Regular creditors can't take action or continue actions against the company unless the administrator says it's okay or a court allows it.
People who own things the company uses (except for items that can spoil) or those who rent such items to the company can't take their things back.
In most situations, creditors who have a claim on the company's things can't take those things.
Creditors or some other qualified groups can't start a court process to close the company.
If a creditor has a promise from the company's leader or someone else saying they'll pay the company's debts, they can't act on that promise without permission from the court.
Liabilities of a voluntary administrator
When a voluntary administrator takes control, they might need to make purchases or use services for the company. These expenses are considered part of the voluntary administration process and are typically paid from the company's available assets. However, if there aren't enough funds from selling the company's assets, the voluntary administrator is personally responsible for covering these costs.
If you're providing goods or services to a company under voluntary administration, make sure you get a purchase order that the administrator has authorised in the way they've specified. The voluntary administrator also has to decide whether to keep using or occupying property that belongs to someone else but was being used by the company when the administrator stepped in.
Within five business days of their appointment, the voluntary administrator must inform the property owner about their decision to continue or stop using the property. If they choose to continue, they become personally responsible for any rent or payments due after those initial five business days.
Voluntary administration process
Voluntary administrations are designed to be a swift and straightforward process with the aim of finishing in just over a month. By the end, the company will either be put into liquidation or will have reached an agreement known as a Deed of Company Arrangement (DOCA) with its creditors.
In more complex situations, the Administrator might postpone the Second Meeting of Creditors (also called the Decision Meeting), and this can happen with the approval of either the courts or the creditors.
The key principle behind these timeframes is to ensure that issues are resolved quickly, while also giving stakeholders enough time to receive and review the necessary information.
Step 1 - appoint a voluntary administrator
A voluntary administrator can be chosen by:
The company's directors, through a formal written resolution.
A secured creditor who has a security interest in most or all of the company's property.
A liquidator or a provisional liquidator.
Once selected, the voluntary administration process begins.
Step 2 - set the first meeting of creditors
The voluntary administrator must organise the first meeting with the company's creditors within eight business days after they take control of the company as part of the voluntary administration process.
A minimum of five working days prior to the meeting, the voluntary administrator should inform the majority of creditors in written form (by dispatching a meeting notice) and also publicise the gathering. This notice should be posted on the ASIC's Notices Publication site.
Additionally, the voluntary administrator needs to provide declarations to the creditors regarding any relationships they might have or any indemnities they've received. This information allows creditors to assess the independence of the voluntary administrator and decide whether they want to replace them with a different voluntary administrator chosen by the creditors.
The primary purpose of this first meeting is for creditors to decide whether they want to:
Form a committee of inspection, and if so, who will be on this committee
Remove the existing voluntary administrator and appoint a voluntary administrator of their choice
A committee of inspection is established to assist and advise the voluntary administrator. This committee also monitors how the voluntary administration is carried out, approves certain actions within the process, and may provide directions to the voluntary administrator. While the voluntary administrator should consider these directions, they are not always obliged to follow them.
Should a creditor desire to suggest a different voluntary administrator at the initial meeting, they need to contact a certified liquidator ahead of the meeting and get a written agreement from that liquidator confirming their readiness to act as a voluntary administrator. The potential replacement administrator must share information about any connections or guarantees they might have with meeting attendees. The present voluntary administrator can be changed only if the creditors approve a decision to that effect during the gathering.
For a creditor to have voting rights at this assembly, they need to present specifics of their outstanding amount or assertion to the voluntary administrator. The meeting can be chaired by either the voluntary administrator or another person nominated in writing by the administrator.
Step 3 - prepare the voluntary administrator’s investigation and report
After the first meeting, the voluntary administrator examines the company's affairs and shares their findings with the creditors. The goal of this examination is to determine if the company can pay its current debts. The report will also suggest what should happen next for the company. For instance, it might recommend that the company keeps operating as usual or be closed down and wound up.
Second meeting of creditors – meeting to decide company’s future
After looking into the company's affairs and forming an opinion on the available choices for creditors, the voluntary administrator must express which option they believe is best for the creditors. Following this, they must arrange a second meeting for the creditors. During this meeting, creditors have the opportunity to make a decision regarding the company's future.
Typically, this meeting occurs approximately five weeks after the company enters voluntary administration (though it might be six weeks if it falls around Christmas or Easter). In more complex cases, the administrator might need more time to report to creditors. In such situations, the court or the creditors themselves can approve an extension of the meeting time.
The voluntary administrator is responsible for leading this meeting. At least five business days before the meeting, the administrator must send creditors various documents, including a meeting notice, their report, and their statement. These documents will also include forms for creditors to submit their claims and for proxy voting.
The meeting is also advertised on ASIC's Published Notices website. The first and second creditors' meetings can be held via telephone, video conferencing, or web-based meeting tools if necessary.
Prepare voluntary administrator’s report
The voluntary administrator needs to create a report that provides all the essential details about the company's business, property, financial situation, and overall affairs. This report should give you enough information to make an informed decision regarding the company's future.
Additionally, the report should include an analysis of any proposals for the company's future, explaining the potential outcomes. It should also offer a comparison to help you understand what would be available for creditors in case the company goes into liquidation.
Before attending the Second Meeting of Creditors or deciding to appoint someone else to represent you at that meeting, it's crucial to carefully review the voluntary administrator's report.
Prepare voluntary administrator’s statement
The statement from the voluntary administrator has to include their thoughts and reasons about the available choices for creditors. It should also have their opinion about which choice is best for the creditors. Here are the options:
End the voluntary administration and give control of the company back to the directors.
Approve a Deed of Company Arrangement (DOCA) if one is proposed.
Close down the company and appoint a liquidator.
The statement should also provide any other information the voluntary administrator knows that helps you understand these options better.
It should also tell you if there are any transactions where money or property could be taken back by a liquidator, if one is chosen. These kinds of transactions include situations where certain creditors were paid ahead of others, unfair loans, trading while the company was insolvent, and actions meant to defeat creditors, like illegal phoenix activity.
If the company's director or other parties propose a DOCA, the voluntary administrator must give creditors a statement with enough details about each proposal so that creditors can make an informed decision. DOCAs can be quite flexible and might involve the company repaying some or all of its debts, possibly over time, and then being free of those debts. They might also allow the company to keep operating, but the terms can vary depending on the situation.
It's important to make sure you get as much information as possible about the terms of the proposed DOCA before the creditors' meeting. If you believe the voluntary administrator's report or statement lacks sufficient details for you to make decisions about the company's path forward, it's recommended to reach out to the voluntary administrator prior to the meeting.
Why would you enter voluntary administration?
Avoiding trading while insolvent
Directors must take steps to prevent their company from trading while insolvent, as there can be serious consequences if they don't. To avoid the risk of insolvent trading, troubled businesses often turn to voluntary administration. By initiating this process, the company and its directors can defend themselves by showing they took action to prevent insolvent trading. They did this by appointing an administrator and avoiding incurring additional debt. This allows them to buy some time to decide on the company's future and take necessary actions to address financial difficulties.
Resolving creditor issues
Voluntary administration isn't just about pausing creditor demands for struggling companies. It's an opportunity to bring in an independent expert known as the voluntary administrator. This external administrator looks into the company's operations and assets to figure out the best way to solve the problems, focusing on what's best for the creditors. This lets the company concentrate on solving issues, including those with creditors, instead of constantly reacting to creditor actions, market conditions, and other factors.
At the same time, creditors get a chance to stay informed about what's happening with the business through the administrator's reports. They can review the details and have a say in the administrator's recommendation, whether that's a Deed of Company Arrangement (DOCA), liquidation, or returning to business under the company's directors.
Entering into a Deed of Company Arrangement (DOCA)
Voluntary administration serves two primary purposes. First, it provides struggling, but potentially viable businesses with an opportunity to restructure and stay afloat. Second, it aims to manage the company's affairs in a way that benefits its creditors more than if the company had immediately gone into liquidation. During this process, there's a brief respite from creditor demands and debt collection actions, which allows the company to seek expert guidance from the voluntary administrator and potentially explore a Deed of Company Arrangement (DOCA).
The DOCA is one of the three key outcomes of voluntary administration. It's a highly adaptable agreement that essentially involves the company compromising its debts. Through a DOCA, the company commits to paying all or a portion of its debts, after which it becomes free of these obligations.
A DOCA can encompass various arrangements, such as lump-sum debt repayment, installment payments, asset sales with the proceeds used for payment, or even the company's return to regular operations and payment from its profits or a final sale. It could also involve relisting the company on a stock exchange.
Importantly, a DOCA binds all unsecured creditors, even those who voted against it. However, it doesn't prevent creditors with personal guarantees from the company's director or another person from taking action related to those guarantees to recover their debt.
Protecting directors from a director penalty notice
Companies facing financial problems, particularly those related to cash flow and insolvency, may fall behind on their obligations to the Australian Taxation Office (ATO). This can include unpaid PAYG (Pay As You Go) taxes and superannuation contributions. In such cases, the ATO has the authority to pursue the company directors personally for these unpaid amounts using what's known as Director Penalty Notices (DPN).
However, if the company chooses to enter voluntary administration, it can be beneficial if the DPN is related to amounts that were reported to the ATO but left unpaid within three months after the reporting period ended. In such cases, voluntary administration can potentially help reduce the director's personal liability.
On the other hand, if the amounts owed are both unreported and unpaid for over three months, voluntary administration will not offer the director the same level of protection from personal liability.
Even though liquidation is a possibility in voluntary administration, this process allows the company to explore other options before creditors vote on liquidation, based on the voluntary administrator's recommendation.
The primary aim of voluntary administration is to achieve the best outcome for creditors. So, if either agreeing to a Deed of Company Arrangement (DOCA) or returning the company to the directors' control is more beneficial than liquidation, the voluntary administration process provides the company with an opportunity to temporarily avoid liquidation. This way, it gives the company a chance to assess these alternative paths.
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Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.