Understanding Voluntary Administration

Written by Nathan Watt

A Voluntary Administration is designed to help avoid court involvement during times of financial hardship when companies are facing creditors.

It takes a little over a month to start a Voluntary Administration and, to the surprise of many professionals, it's quite a simple process. Of course, if you're wondering about a Voluntary Administration, you probably want more info about what exactly it is, how it works, and how it could benefit you.

When Is A Voluntary Administration Beneficial? 

You should consider a Voluntary Administration if any of the following apply:

  • Your company is insolvent and needs to make a deal with creditors;
  • Your company had a bad trading period or one-off loss that caused issues;
  • Your company is a viable business ut needs to freeze creditors to make time for cutting costs, debts, and/or staff while rebuilding sales and profit margins.

How Can a Voluntary Administration Help a Company? 

Here’s what a Voluntary Administration aims to do for a company facing financial problems:

Be inexpensive and quick to implement;

  • Create the opportunity to continue operating;
  • Provide creditors with an independent review of the company;
  • Provide a mechanism to negotiate with creditors.

In some cases, the company owner may be able to retain control or part share of the company. In other cases, the business may be sold and employees able to keep their jobs.

What’s The Difference Between Voluntary Administration and Liquidation?

The whole objective of a Voluntary Administration is to save a company from its debts so that it can payoff creditors and continue operating. On the other hand, the objective of liquidating is to finalize all affairs.

How Is a Voluntary Administration Established? 

It's easy to start a Voluntary Administration, you just need the majority of a company's directors to agree on such a Resolution. The entire process typically takes 4-6 weeks to complete. During this time, there will be a moratorium for any recovery action creditors may try to take against the company. The moratorium will also prevent personal guarantees being enforced against directors.


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How Often Are Voluntary Administration Successful? 

Unfortunately, Voluntary Administrations are not always so successful. In fact, only about 26% of companies that enter Voluntary Administration are saved. This statistic helps to show that expert advice is necessary before entering into Voluntary Administration as they’re often misused when they aren’t the right solution.

Will A Voluntary Administration Protect Directors? 

It’s possible for a company’s director to end up holding personal liability for their company’s debts for severe insolvent trading under the Corporations Act and the Director Penalty Notices (DPNs) that the Australian Taxation Office issues.

DPNs, specifically, require a company to pay various tax liabilities within a strict period of just three weeks (21 days) or the directors will become personally liable for those debts. However, the personal liability can be avoided if the company enters Voluntary Administration or liquidation.

What Is The Purpose of a Voluntary Administrator? 

When a Voluntary Administration is started a director or sometimes a Secured Creditor or liquidator will appoint a Voluntary Administrator. This is the person responsible for taking control of the company and guiding its restructuring process. Do note that the Voluntary Administrator must be a Registered Liquidator. ASIC is the official body that supervises all of these administrators and liquidators carefully.

The most reputable administrators will also be members of some professional accounting organization, like the Chartered Accountants Australia & New Zealand or the Australian Restructuring Insolvency and Turnaround Association (ARITA). Their job will include working with directors to assess the potential for a successful Voluntary Administration while calling meetings with creditors, preparing proposals or the Deed of Company Arrangement (DOCA), investigating the company's affairs, providing opinions on the company to creditors, and assisting with the implementing of the DOCA.

What Does a Voluntary Administrator Do? 

The purpose of a Voluntary Administrator is to conduct investigations into the company’s affairs and they must report any offenses they find to the ASIC. The investigations of a Voluntary Administrator will include:

  • When the company first became insolvent;
  • Whether the company continued trading while insolvent;
  • Where the directors are to be held responsible for offences;
  • Where payments to particular creditors may be recoverable or preferential;
  • Whether there are hidden assets that need to be recovered;
  • Other legal action that may be considered.

A Voluntary Administrator does these things so that they can fully inform creditors who are considering a DOCA. Typically, if a DOCA is accepted, creditors forgo their rights for recoveries or other legal actions.

What is a Deed of Company Arrangement (DOCA)?

A DOCA is basically the "deal" that a company and its creditors agree upon with the help of the Voluntary Administrator. The purpose of the DOCA is to maximize the company's chance to continue operating or to give creditors a better return in the long run than they would get immediately liquidating the company.

What Does a DOCA Include? 

There is no specific guidance written in the law books about what a DOCA must say or do. That's because a DOCA works best when specifically designed for a company's unique situation. Most often, the promise of a DOCA will say something like "10 cents on the dollar to all creditors" or a director may personally promise some amount of money, like $100,000, to be divided amongst creditors.

The point of a DOCA is that it's flexible and can be adjusted to offer whatever is appropriate. The Voluntary Administrator will help decide what the company and creditors deem agreeable.

How Is a DOCA Voted Upon? 

The voting regarding a DOCA is handled at the Second Meeting of Creditors where creditors will get to vote on the DOCA and what it entails. However, in order for a DOCA to be approved, the meeting must pass a resolution. This means that creditors who are voting must approve the DOCA by 50% in value and 50% in numbers.

As you can imagine, voting can bring quite a few complications with it, including an individual creditor’s right to vote and the amounts different creditors are claiming stake to. So, in the event that all creditors can’t agree on the DOCA, whatever agreement the majority passes will bind all creditors, even those who voted against it.

The DOCA that gets passed will also bind all property owners, even those who lease property to the company and all secured creditors involved with the company, so long as they voted in favor of the DOCA.

Additionally, if a creditor holds a personal guarantee, the Voluntary Administration means that they are not allowed to pursue that guarantee. With that said, once a DOCA is put in place, that DOCA does not prevent a creditor who holds a guarantee from the director from taking action pursuant to that guarantee. 

What Happens After a DOCA is Approved? 

Once creditors vote for a DOCA, the company is required to sign the deed within 15 business days of the meeting, unless a court allows them to take longer. If they do not sign the deed, the company will automatically enter the liquidation process where the Voluntary Administrator acts as the liquidator.


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How Do Creditors Get Paid With a DOCA? 

When it comes to paying dividends to creditors under a DOCA, the process mirrors that of paying dividends during a liquidation. This means that the Deed Administrator is first going to request a Proof of Debt from each creditor.

The Administrator will then go through and admit and reject the claims creditors submit, then pay a dividend accordingly. The Corporations Law will determine the timing and processes to be followed for this procedure. Claims will be processed and paid depending on the terms set forth by the DOCA.

Typically, a DOCA will propose for claims to be paid in the same order as liquidation would. Other times, a different priority may be set. However, the DOCA must ensure that employee entitlements are given priority alongside other unsecured creditors, unless eligible employees agree to a different priority.

Who Makes Sure a DOCA is Implemented? 

Once a DOCA is in place, the Deed Administrator is the one responsible for ensuring the company sticks to the commitments it made when signing the DOCA. The extent of the Deed Administrator’s on-going position and responsibilities will be defined in the DOCA itself.

What Is a Creditors’ Trust? 

If you’re running a Voluntary Administration, you may also have to deal with a Creditors’ Trust, which is an entirely separate legal arrangement. A Creditors’ Trust helps to accelerate a company from ending the Voluntary Administration.

Generally, creditors’ claims will be transferred to a Creditors’ Trust and any return will be received by the trust’s trustee rather than the Administrator. The DOCA will typically terminate once the creditors’ claims are moved to the trust.

What’s The Timeline for a Voluntary Administration? 

The whole idea of a Voluntary Administration is that it’s easy to get going and complete the process. The objective is to complete the entire process in a little more than a month and, at the end of that time period, the company will either enter liquidation or agree on a DOCA.

In more complex cases, it’s possible for the Voluntary Administrator to delay the Second Meeting of Creditors, or the “decisions meeting” with approval from the creditors or courts. There is no set timeline for Voluntary Administration, but the overriding principle is to make things speedy.

Conclusion

Voluntary Adminstrations are widely used in Australia to help struggling businesses.  Unfortunately most end up in liquidation, but the ability to clean up the mess and allow the directors, shareholders and creditors to move on in a quick and professional manner is one of the greatest benefits.  If your business is struggling don't put your head in the sand. It's not magically going to turn itself around and the longer you put this off, the worse it will be for everyone.  

So if you think your business is struggling, contact us today and let us help point you in the right direction.


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