FAQ

A Voluntary Administration is a legal appointment under the Corporations Act to give companies an opportunity to implement a restructuring plan with their creditors rather than going straight into liquidation. The appointment of an administrator (who must be a licenced insolvency practitioner) will create a moratorium for a period of between 25 or 30 business days, during which time the company’s directors can put a proposal to the company’s creditors to compromise the debts of the company. Within this moratorium period the administrator will assume control of the company and will make all decisions on the behalf of the company. The director’s powers will be suspended during the administration period. If the director’s proposal to settle the debts is accepted the company will transition into a Deed of Company Arrangement. If the director’s proposal is not accepted, the company will most likely be voted into liquidation by creditors.

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The principle purpose & objective of a Voluntary Administration is to provide an insolvent company (or a company that is likely to become insolvent) with an opportunity to:

• 1. To restructure its affairs so as to maximise its chances of surviving; or
• 2. If this is not possible to achieve a better outcome for creditors compared to if the company was wound up immediately. This may involve an orderly wind down of the business compared to an abrupt closure of the business under liquidation.

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The advantages of a Voluntary Administration include (but are not limited to):

• The directors passing control of an insolvent company to an independent insolvency practitioner who will assist the directors to find a solution for the company or the business to survive.
• The appointment can be made very quickly and without ASIC or court approval. The only thing you need to do is find a Voluntary Administrator who will accept the appointment.
• During the voluntary Administration period (which ranges from approximately 25 business days to 30 business days without court consent) the company will be protected whilst the directors formulate a proposal for a Deed of Company Arrangement.
• Without consent of the Court, a creditor cannot force the company to go into involuntary liquidation.
• Any proposal for a Deed of Company Arrangement does not need the prior approval of a Court or ASIC. The majority of creditors voting at a meeting called by the Voluntary Administrator can approve the proposal. As such as a Voluntary Administrations can be a very cost effective way to restructure the affairs and to compromise the debt of an insolvent company.
• If the DOCA is accepted, the company will avoid liquidation and will not be subject to liquidation repercussions, such as further investigations or “clawed back” transactions.

The disadvantages of a Voluntary Administration include:

• Suppliers may put a stop on the company. If this occurs, the Administrator will need to pay “cash on delivery” to ensure supply or provide an “administrator’s purchase order” which attracts personal liability.
• The law stipulates that an administrator will become personally liable for goods or services ordered during the Voluntary Administration period. Subsequently, the Administrator may need to be cautious not to incur debt during this time. A very thorough cash flow will need to be prepared prior to the appointment of an Administrator.
• The cost of a Voluntary Administration can be significant depending on the size and complexities of the business. The costs become more significant if the company is still trading.
• Given the relatively tight period of between 25 to 30 business days, the process can cause a significant amount of stress for the company staff and the Administrator.

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A Voluntary Administrator can be appointed by:

• The directors of the company; or
• A secured creditor who holds security over the whole or substantially the whole of the company’s assets

The appointment is effected by a simple appointment document which can be prepared quickly and executed immediately without any court or ASIC approval.

The only pre-condition to the appointment of a Voluntary Administrator is that the company must be insolvent or is likely to become insolvent. Directors who are concerned about the risk of trading whilst insolvent is the most common trigger for a Voluntary Administration appointment.

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Once you have selected the insolvency practitioner that you feel comfortable you will be able to work with, they will prepare the necessary paperwork for the appointment. The only document required to be signed to give effect to the appointment is a resolution passed by the board of directors.

The resolution will need to be passed by the majority of directors. So if you have 5 directors, at least 3 will need to pass the resolution. If you have 2 directors and both don’t agree on the appointment of an administrator, then one director will need to make an application to court for a provisional liquidator to be appointed. Once the provisional liquidator is appointed, it is then possible for the provisional liquidator to appoint an administrator. While this result may incur additional costs, if the company is in “deadlock” then this approach may be necessary.

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The short answer is not necessarily. A winding up application is filed in court by a creditor. It will be up to that Court to decide whether the application should be dismissed or adjourned. If the directors can demonstrate that the appointment of the Voluntary Administrator has genuine purpose and they intend to propose a Deed of Company Arrangement then the court will be more inclined to adjourn the winding up application until the second meeting of creditors has been held. If the creditors approve the Deed of Company Arrangement then the court would dismiss the application after the creditors have approved it. Before the courts will consider any adjournment of the winding up application they will want to see evidence of the director’s proposal for a Deed of Company Arrangement and that it will be in the best interests of creditors. In recent years, the courts have become more strict in this area of the law and have ordered the winding up of companies despite the appointment of an administrator.

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Once the directors appoint a Voluntary Administrator full control of the company will pass to the administrator. The directors will no longer be able to make any decisions on behalf of the company. Having said this, most administrators will still seek the assistance and cooperation from the directors. This will be critical for a successful Deed of Company Arrangement (DOCA) to be implemented. If the directors cannot work with the administrator it is unlikely there will be a successful outcome. The Administrator will also usually retain the company’s staff to carry out the day-to-day activities. The Administrator also has the power to close the business if the he or she forms the view that it is not commercial for it to continue to trade. If a DOCA is approved by creditors, then control of the company will usually be returned to the directors (subject to provisions of the DOCA as approved by creditors).

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During the Voluntary Administration period creditors who hold personal guarantees cannot take any steps to call up or enforce their guarantees. After the Deed of Company Arrangement has been approved or creditors have voted to place the company into liquidation, any guarantees can then be called up and enforced without restriction.

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A creditor can ignore the meeting process and will still be able to prove for a dividend in either the Deed of Company Arrangement (DOCA) or liquidation. A creditor can also appoint another person to vote on their behalf (ie appoint a proxy) if they don’t want to attend in person. Even if a creditor does not attend any meetings they will nevertheless be bound by a DOCA (assuming it was approved by other creditors who attended the meeting). Furthermore if a creditor voted against a DOCA but it was approved by the majority of other creditors, they will still receive dividends.

It is not a requirement under the law for directors to attend Voluntary Administration meetings, but is highly recommended, particularly if you wish to propose a Deed of Company Arrangement (DOCA). Creditors will no doubt want to hear the director’s explanation for the failure of the business and the purpose of the DOCA. If there is no proposal for a DOCA, then it is not uncommon for a director not to attend the meetings.

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Lease contracts come under the control of the Voluntary Administrator. The administrator will have to decide whether the business requires the leased asset or whether it should be surrender to the leasing company. The Voluntary Administrator has 7 days to make this decision. If a Deed of Company Arrangement (DOCA) is being proposed, the leased assets will usually be kept for the Administration period unless the assets are surplus to the company’s needs.

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The conduct of the business will fall under the total control of the Voluntary Administrator. The Administrator will usually keep directors and staff to undertake the day-to-day activities if trading is to continue, but the final say rests with the administrator. The administrator also has full power to end trading if it is considered that it is un-commercial to continue trading, if there is no chance of business returning to a profitable situation or it becomes evident that the business cannot be sold as a ‘going concern’. The administrator’s role is to try to maintain the ‘value’ of the company’s assets. Trading unprofitably may reduce that value. Furthermore, if the company has insufficient working capital to maintain trading, the administrator will most likely close the business.

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