The process of voluntary administration in Australia
Voluntary administration is a formal process in Australia which aims to resolve a business’ financial situation, offering an alternative to liquidation. This process provides businesses with the means to restructure and, avoid winding up. We’ll explore the many stages of voluntary administration, its purpose and benefits, and the roles of the key parties involved.
Understanding voluntary administration
Voluntary administration in Australia is initiated when a company is deemed insolvent or likely to become insolvent. The company’s directors appoint an external administrator, known as a voluntary administrator, to take control of the company. The primary objective of voluntary administrators are to keep the company running. If that’s not possible, administrators aim to achieve a fairer outcome for creditors than immediate liquidation.
Initiating the process
The process begins with the appointment of a voluntary administrator, usually an insolvency practitioner. This appointment can be made by the company’s directors, a liquidator, or a secured creditor with an enforceable security interest over the majority of the company’s assets.
Once appointed, the administrator takes control of the company’s operations, replacing the directors’ powers. The administrator’s responsibilities include investigating the company’s affairs, business, and financial circumstances, and determining the best course of action.
The administration process
Within eight business days of the administrator’s appointment, the first meeting of creditors is held. Creditors can appoint a council of creditors to assist the administrator or decide whether to replace the current administrator. This meeting provides creditors with an opportunity to engage with the process early on.
The administrator conducts a thorough investigation of the company, including its financial position and potential for recovery. From the investigation, the administrator prepares a detailed report for creditors. The report outlines the company’s situation and proposes the most appropriate course of action. The options typically considered are:
- Returning the company to the directors’ control if the company is solvent.
- Executing a Deed of Company Arrangement (DOCA), which is an agreement between the company and its creditors to pay all or part of the company’s debts.
- Liquidating the company if it’s determined that this would provide the best return to creditors.
The second meeting must be held within 25 business days of the administrator’s appointment (or 30 business days if the appointment is made in December). During this meeting, creditors decide on the future of the company based on the administrator’s report. The options are to:
- End the administration and return the company to its directors.
- Accept a DOCA.
- Put the company into liquidation.
Deed of company arrangement (DOCA)
A legally binding arrangement between a company and their creditors, a DOCA governs how a company’s situation will be dealt with to repay creditors and keep the business afloat.
Conditions of a DOCA vary but generally include the extent of debt repayment, the timeframe for repayment, and any moratorium on debt collections. Once the DOCA is agreed upon, the administrator oversees its implementation, ensuring the company complies with the terms set out.
Benefits of voluntary administration
- Rescue opportunity: Voluntary administration gives companies a chance to restructure and avoid liquidation.
- Creditor involvement: Creditors have significant input in deciding the company’s future.
- Moratorium on debts: An automatic stay on creditor claims and legal actions provides the company with relief from its immediate financial pressures.
Drawbacks of voluntary administration
- Cost: The process can be expensive, potentially reducing returns to creditors.
- Uncertain outcome: There’s no guarantee of a positive outcome, and the company may still end up in liquidation.
Employees in voluntary administration
When a company enters voluntary administration, its employees are directly affected. The appointment of an administrator does not automatically terminate employment contracts, but the their employment depends on the outcome of the administration process. During the administration period, the administrator may decide to continue operations, which means employees will keep working and will be paid as usual.
However, if the company is liquidated, employees may lose their jobs. In such cases, employees are considered priority creditors and are entitled to claim outstanding wages, superannuation, and other entitlements. Administrators seek to balance interests of employees with those of creditors, aiming to either restructure the company through asset sales and settlements.
What are the roles and responsibilities involved in voluntary administration?
- Administrator: Manages the company’s operations during administration, investigates the company’s affairs, and proposes the best course of action for creditors.
- Creditors: Participate in meetings and vote on the company’s future. They can form a committee to assist the administrator and provide oversight.
- Directors: Lose control of the company during the administration but remain responsible for assisting the administrator and providing necessary information.
Final thoughts on voluntary administration in Australia
Voluntary administration offers Australian businesses a lifeline in times of financial turmoil. It balances the interests of the company, its creditors, and other stakeholders, aiming to achieve the best possible outcome. While the process is not without challenges, it presents a favourable alternative to liquidation, potentially saving businesses and preserving value for creditors.