The Comprehensive Guide to Voluntary Administration (Updated 2021)

What is voluntary administration?

Voluntary administration is an insolvency procedure involving the appointment of an external administrator, known as a voluntary administrator. It is usually initiated by the company’s directors or by a secured creditor. Voluntary administration is a process for a business in financial strife and helps determine the best course of option for the future of the business. It aims to help a business by addressing financial issues with respect to creditors.

The external administrator

The administrator is appointed by the director (or secured creditor) to oversee the administration process. By law, the administrator is required to be a registered liquidator with ASIC. Highly experienced administrators might also hold membership of professional entities such as Chartered Accountants Australia and New Zealand, along with the Australian Restructuring Insolvency and Turnaround Association.

The external administrator will:

• Investigate the company’s finances
• Review options
• Inform creditors of current situation
• Recommend a plan for bringing the business back to profitability

The voluntary administrator makes their recommendations once they have finished investigating the company’s affairs. They are required to report findings to the creditor(s) and provide recommended actions. This could involve entering into a deed of company arrangement (DOCA). If the creditors don’t vote for a return to operating under the existing directors or a DOCA, the company could go into liquidation. Lastly, it could be returned to the control of the company directors.

Hitting the pause button for businesses in trouble

The breathing space that voluntary administration provides for companies results in a few important consequences. These can help businesses in trouble. For example, when your business enters voluntary administration, it’s similar to hitting the pause button and unsecured creditors are temporarily prevented from enforcing their claims against your company, unless they have permission from a court or the administrator.

Owners and landlords can’t recover their property, and even secured creditors are generally prevented from enforcing their charge over the company’s property. The court can’t place your company into liquidation, and creditors who hold personal guarantees can’t act under their guarantee without court permission.

Taking prompt action is strongly advised. Directors need to be aware of legislation designed to help companies avoid administration and possible liquidation. This includes use of the safe harbour provisions which provide directors with the time required to develop a business restructure and turnaround plan.

Voluntary administration and duty to prevent insolvent trading

The role of voluntary administration can also be understood from the perspective of directors needing to avoid insolvent trading. There are legal ramifications for directors who fail to prevent insolvent trading. These may consist of significant fines, inability to act as a director in the future, and possible jail time. They may also be liable for personal action from creditors to recover debts incurred during insolvent trading.

Since the penalties against trading whilst insolvent are onerous, voluntary administration provides directors with a mechanism to pause trading while they get expert advice and decide on the company’s next steps.

Voluntary administration versus other types of administration

Voluntary administration by company directors or secured creditors is different to an administration entered into by a provisional liquidator or appointed by an order of a court. It usually begins with the directors deciding, in a formally convened meeting, to place the company into external administration. After investigation and creditors meeting to vote, the company can proceed to any of the three options outlined above.

Stages and process

Like any legal process for companies, voluntary administration has strict procedures and stages that need to be followed. Time limits apply when it comes to meetings and resolution of the administration process, and the meeting to decide the company’s future usually happens within 30 days of the administrator being appointed.

What is the difference between voluntary administration and liquidation?

There are distinct differences between voluntary administration and liquidation. In liquidation, you’re already in the wind-up stages. In voluntary administration, however, your business could be turned around (in rare cases), enter a deed of company arrangement, or entered into liquidation. Voluntary administration, therefore, is a potential step before liquidation, but entering voluntary administration by no means suggests a business will be liquidated.

Purpose

The purposes of liquidation and voluntary administration also differ. The sole purpose of liquidation is to wind up a company, recover proceeds from the assets, pay creditors in order of priority, and deregister the company so that is ceases to exist. There is no prospect of returning the company to trading. Once in liquidation, the company doesn’t get a chance to seek expert advice from parties such as administrators or get input from creditors.

In contrast, the voluntary administration process is designed to explore possible competing options for struggling companies. During the process, businesses seek expert input from administrators and the directors have a time-out period during which they’re protected from the risk of insolvent trading. The competing options do include liquidation, but the creditors could also vote for a deed of company arrangement (as recommended by the administrator) or a return to trading under the directors’ management.

Companies who act in the early stages of recognising financial difficulties may be afforded additional options. Employing business advisory experts can help put together a business restructure plan that will provide your company with the best prospects of avoiding insolvency.

Role of administrator/liquidator

The external administrator usually becomes the liquidator if and when liquidation is the recommended course of action. The liquidator will realise the company’s existing assets and pay creditors in priority order, all while acting in the best interests of the creditors'.

During voluntary administration, the administrator’s role is to oversee the process of assessing the company’s prospects, whether that’s returning to trading, DOCA, or liquidation. Like the liquidator, the administrator needs to contribute to an outcome that’s the most lucrative for creditors. However, he or she also has an obligation to explore the possibility of the company’s return to trading and its future profitability through a DOCA. Hence, his or her responsibility is broader than only considering the creditors’ interests.

Company’s status

Another point of difference between liquidation and administration is the company’s status. Once a company enters liquidation, the company’s end is near and the legal entity will soon cease to exist. With administration, the company might continue to exist depending on the recommendation of the administration and the decision of the creditors.

Implications for creditors

Implications can also be completely different for creditors in liquidation and voluntary administration. After a company enters voluntary administration, the implications for creditors will depend on the DOCA and what happens after the company returns to trading, or if it enters liquidation.

If the company enters liquidation, priority creditors tend to be paid first before any remaining funds are dispersed. If it returns to trading and is profitable, creditors might have a good chance of recovering their money. If the DOCA is successful, the creditors might also have a good chance of recovering their money.

What are the advantages of voluntary administration?

Voluntary administration offers a number of advantages for businesses in trouble. It can facilitate turnaround, help business explore options, and protect directors from legal risks.

Inexpensive

Voluntary administration could be relatively inexpensive to initiate when considered in the context of liquidation and losing your business. Businesses need to appoint an external administrator and hold creditor meetings, and the costs might be relatively insignificant for a large company.

Help directors avoid insolvent trading

One of the major advantages of voluntary administration is it allows directors to avoid insolvent trading. Company directors, as mentioned above, have a duty to prevent their company from trading while insolvent. By pausing operations and temporarily relieving directors of their duties, the process protects directors from further risks while the company gets help and explores its options.

Once you enter voluntary administration, the company’s directors are protected from the risk of penalties under insolvent trading provisions and personal liability for debt accumulated during insolvent trading.

Could help with return to profitability

Whether it’s through a DOCA or by returning to trading with insights from the voluntary administration process, going into administration can end up helping a company return to profitability. For example, the DOCA could outline a way for the company to return to operation with a reduced or deferred debt burden – with the agreement of the creditors concerned. Instead of closing down due to mounting debt or creditor’s demands, the company is given a chance to continue trading and operate. In this way, the voluntary administration process gives companies a second chance.

Moratorium on company debts and court proceedings

Once your business enters voluntary administration, there’s a moratorium on claims on company debts from creditors and it can reduce the risk of creditors initiating legal action against your company. For companies in financial strife with mounting debts, this can give much-needed breathing space, allowing time to develop a viable plan for the future while being relieved from the pressure of constant demands for repayment from creditors.

Improve financial position

The voluntary administration process could let your business improve its financial position. The administrator reviews the business’s finances and makes recommendations. With the help of qualified experts such as the external administrator, you might be in a better position to proceed trading or operating under a DOCA.

Companies entering voluntary administration are typically those in financial trouble, and the administration process can give them much needed breathing space and a useful time out to get expert advice and consider the future course of action. Rather than reacting to market conditions and constantly dealing with creditor demands, the company can concentrate on evaluating the next best step to take.

Assist creditors with independent review

The voluntary administration process gives creditors a chance to find out what’s happening in the business and get an independent expert to review the finances of the company. The administrator can offer a much-needed independent opinion to help the business take the next step, whether it’s liquidation, DOCA, or return to trading as normal.

Opportunity for compromise and negotiation

The voluntary administration process can also be understood as a chance to compromise and negotiate with creditors. Rather than constantly responding to creditor demands for payment, businesses have a chance to work with creditors to find a mutually rewarding outcome under a DOCA. The business can end up retaining control and returning to profitability with a clear plan for debt relief under a DOCA, and the creditors can look forward to being repaid.

The advantages can be seen through a simple administration case study.

What are the disadvantages of voluntary administration?

Companies considering voluntary administration will need to consider potential limitations of this type of insolvency action. Possible disadvantages of voluntary administration include costs, loss of control for directors, and loss of control to the administrator, who is obligated to act in the creditors’ best interests.

Costly for smaller businesses

For smaller businesses and businesses in financial trouble, the estimated tens of thousand of dollars in voluntary administration costs can be a significant outlay. Larger businesses will likely be less hesitant to pay up for a chance to return to profitability and the opportunity to negotiate with creditors. However, for smaller businesses, tens of thousands of dollars can be a major dent in their revenue and cash flow. The cost could be significant enough to make the smaller businesses rethink pursuing this course of action and opt for another alternative.

These issues have been addressed in legislative changes relating specifically to small businesses. They are now able to access a small business restructure process and simplified liquidation where applicable.

Control

During voluntary administration, the company’s directors give up control to the appointed administrator. While this is beneficial for reducing the risk associated with insolvent trading, it also means company directors are unable to guide the administration process and wield control over the proceedings. The voluntary administration stage proceeds under the direction of the administrator, who has the discretion to guide it as he or she deems appropriate.

Creditor’s interests as priority

Another possible negative effect that companies should be aware of when considering voluntary administration is the fact the administrator is bound to act in the creditors’ best interests and not that of the company or directors. Where these two coincide, the company could benefit from this type of insolvency action. For example, if the administrator recommends and the creditors vote for a DOCA or return of control to the company directors, the company could have a good plan for returning to profitability. In this case, your business could recover quickly, meet creditor obligations, and eventually return to profitability.

However, if the administrator determines it’s in the creditors’ best interest to place the company into liquidation so the assets can be sold off to repay creditors, the company would face winding down action and cease to exist. If the directors and shareholders prefer to continue trading, this recommendation by the administrator can be seen as a negative one. Directors need to be aware that the administrator is obliged to report any wrongful behaviour to ASIC.

No guarantees

While entering voluntary administration can bring a much-needed reprieve from creditor’s demands, it doesn’t guarantee a certain outcome. Having an expert such as an external administrator look over your finances and operations doesn’t necessarily mean your company is guaranteed a return to profitability or will end up with a great plan to continue operations.

Activating the voluntary administration process can mean you end up in liquidation, since not all businesses can be saved. However, it does give your business relief from debt-recovery actions and a chance at a quick resolution.

Other implications

If your company enters administration, this news will be made public on ASIC’s website. If you do return to trading, the implications could be you’ll find it more challenging to get financing in the future, or suppliers will require cash upfront to supply. This is significant as many directors are fearful of their reputation being tarnished.

What are the challenges involved with taking a business through voluntary administration?

As with any insolvency proceeding, voluntary administration means you’ll be publicising your company’s having financial struggles to parties such as customers, suppliers, and lenders. The uncertainty associated with voluntary administration can also make it a challenging process. If you’re a company director, giving up power and control to an external administrator can be unsettling as you have no say in how the company proceeds.

Risk of uncertainty

While voluntary administration could offer troubled enterprises a second chance to return to profitability, this type of insolvent action also brings the risk of liquidation for the company. Depending on the findings of the review, the appointed administrator could recommend eligible voters to put the company into liquidation, and this could well be what the directors want to avoid.

However, the administrator could also recommend entering a DOCA, which could give the business a clear pathway back to profitability. The final option is recommending control be given back to the directors, in which case the company would return to trading as normal.

The risk of uncertainty might be a minor consideration if a company is in serious trouble – which is often the case when insolvency proceedings are being considered.

No benefit for costs

The company could end up being returned to the directors’ control for trading as normal. However, the company has incurred costs it likely can ill afford. The cost of administration could total tens of thousands of dollars. For a business already in financial strife, this bill can be significant while delivering no major solution to its problems. However, this might not be the case if the administrator’s review provides useful insights for guiding the business back to profitability.

Directors must give up control

One of the major ramifications for directors during voluntary administration is that they must give up control of the business. The business temporarily ceases operation, and control is given to the administrator. Furthermore, the administrator’s obligations are towards the creditors, not the business.

Hence a voluntary administration proceeding not only forces directors to relinquish control; it means an external expert is brought in to investigate the business and make decisions according to the creditors’ – not the business’s – best interests. The loss of control is coupled with the possibility the outcome will favour only the creditors rather than both the creditors and the business.

Legal compliance

The voluntary administration proceeding must follow strict legal and regulatory requirements, so companies and their directors need to ensure they follow the administrator’s recommendations and seek legal help where possible. Time limits and formalities – such as convening a formal directors’ meeting to decide on voluntary administration – are all important. This can be a challenge for directors who are new to insolvency proceedings.

Reputation implications

Businesses usually will not consider insolvency proceedings unless they’re in serious trouble. Insolvency proceedings such as external administration are made public – such as through the ASIC website – so your suppliers and customers will know about it. The reputational implications can be more significant if you’re a high-profile company and get media coverage.

What is the role of the directors during a voluntary administration?

Directors might be the ones to decide to put the company into voluntary administration, but they’ll also need to make sure they fulfil their responsibilities during the voluntary administration process. This can mean relinquishing control, helping the voluntary administrator as much as they can with access to information, and preparing for possible outcomes.

Relinquishing control

During the voluntary administration process, the role of the company directors is to relinquish control and let the administrator do their job. Since the company has temporarily ceased trading, the directors should not be carrying on with business as usual. They’ll step down from their role and daily responsibilities and open the business, its books and records, and physical premises to the administrator and support the administrator with any information or help that he or she needs to complete the administration process.

Assisting the voluntary administrator

Company directors are required to assist the voluntary administrator with the voluntary administration process. Assisting could entail providing access to financial records, useful information about the business, reports, and other documents. They should also grant access to the physical property and allow the administrator to inspect or review anything of relevance.

If the administrator recommends and the creditors vote for a DOCA, the company directors’ roles will be outlined in the DOCA, but at that stage, the voluntary administration is technically over.

Preparing for possible outcomes

The directors will likely closely follow the voluntary administration process and be prepared for the possible outcomes. Whether the company ends up entering liquidation or a DOCA or is returned to the management of the directors, the company directors will want to be aware of what has been decided so they can fulfil their responsibilities in a timely manner. Attending creditors’ meetings and holding regular discussions with the external administrator is a way to keep ahead of what’s happening.

Steps for directors to be aware of

Company directors should be aware of the key stage of the voluntary administration process from start to end. This not only helps them understand what’s just around the corner but allows them to meet their responsibilities at each stage. Generally, they’re required to relinquish control to the voluntary administrator and assist him or her throughout the process with information and documents.

• Appointment – Once the administrator has been appointed, the company directors need to give up control of the company. The company ceases trading in the meantime.
• Investigation and review – The administrator reviews the company’s financial situation. At this stage, the company directors should assist the administrator with any relevant information or documents. Access to facilities and financial records are likely to be required.
• Outcome – The administrator will provide a recommendation and the creditors will vote on an outcome. If the company goes into liquidation, the company directors will need to facilitate this further insolvency step. If the company enters a DOCA, the company directors need to respect any terms and conditions the DOCA places on their role as directors and manage the company on that basis. If the company returns to trading, the directors will take up their roles in directing the company as before.

It is important for directors to be well informed with respect to their rights and obligations as it can help avoid common pitfalls in voluntary administration.

What is the role of the administrator during a voluntary administration?

The administrator is the party responsible for guiding and directing the voluntary administration process. Once the administrator is appointed, they’re required to identify the company’s assets, protect them, and review the company’s financial situation. They’ll meet with company directors to talk about the company’s prospects and future direction, and throughout the whole process, they’ll need to observe strict timeline rules.

Review the business

The administrator’s core responsibility is to take control of the company and its assets to conduct a thorough investigation of the company’s operations. He’ll review financial records, the business’s documents, and any other relevant information to consider its future operating prospects given the interests of the creditors.

If the creditor’s best interests are best served by continuing to operate or operating under a DOCA, the administrator is obligated to recommend such a course of action. If creditors’ interests are best served by liquidation, the administrator will act impartially, with the creditor’s interests at the top of mind, to recommend that course of action.

Act in creditors’ best interests

As noted above, the administrator’s key priority should be creditors’ best interests. This means they’ll investigate and make a final recommendation based on achieving a specific goal: the course of action that gives creditors the best chance of being repaid. Whether it’s proceeding with a DOCA, returning control to the directors, or going into liquidation, the administrator needs to disregard the interests of the company, company directors, and employees. They should address only the creditors’ interests.

Hold creditors’ meetings

The administrator needs to call two creditors’ meetings. The first meeting is called within eight business days of the administrator’s appointment, and creditors must be given at least five business days notice for the meeting. At this first meeting, creditors can vote on whether or not to replace the administrator, and whether they wish to create a committee of creditors to liaise with the administrator. The committee is responsible for ensuring the creditors are kept up to date with what’s happening in the administration process.

The second meeting is called within 25 or 30 business days of the appointment, and five business days notice is also required for this. At this meeting, the creditors decide on the outcome: liquidation, DOCA, or returning power to the directors.

Specific information regarding voluntary administration for creditors can be found on the ASIC website.

Hold discussions with directors

The administrator will hold regular discussions with the company’s directors about the future prospects of the company. For example, they might consider whether it’s feasible for the company to continue to trade. This may be accompanied by a business restructure plan that addresses areas of concern and provides specific recommendations that should be undertaken.

In contrast, the can also recommend liquidation if the company is unlikely to return to profitability and meet its creditor obligations. Thirdly, they might consider returning to trade under a DOCA, which would bind the company to certain things with respect to repaying creditors and its ongoing operations.

Observe legal requirements at each stage

The voluntary administration process is regulated and administrators, like directors and creditors, have certain obligations and rights at each stage. They need to notify secured creditors as soon as possible after their appointment, and no later than the next business day. In calling the creditors’ meetings, the administrators need to observe the notice and timeline rules. Finally, the administrator is required to act in the creditors’ best interest at all times.

What is the voluntary administration process?

Voluntary administration takes place with a number of fixed steps, starting from the decision to enter voluntary administration to the appointment of administrator, and the investigation and creditors’ meetings to decide the future.

1. Decision

The directors of the company will first meet to decide putting the company into voluntary administration. The organisation of the meeting should fulfil the requirements of properly convene meetings, so it needs to be by a resolution of the Board and be in writing. If it’s initiated by a secured creditor, the administration process will start through a charge over all or a substantial part of the company’s property.

2. Appointment

The next step involves the appointment of a voluntary administrator. Once the administrator is appointed, the company is technically in voluntary administrator and the benefits or protections from creditors’ claims start applying. The external administrator is then responsible for locating the company’s assets and protecting them as he investigates the company’s financial affairs.

During this time, the external administrator will have regular discussions with directors to explore the direction of the company. For example, together they might consider whether it’s feasible to continue trading.

Although directors give up control at this stage, it is important to understand that appointing an administrator rather than a liquidator is one of many ways to save a company.

3. First meeting of creditors

The first meeting of creditors will be called within eight business days of the administrator being appointed. The creditors need to be given at least five business days notice for the meeting. The purpose of the first meeting is to allow creditors the option to vote to replace the administrator and to create a creditors’ committee to oversee the administration process.

4. Investigation

The next stage involves the investigation of the company’s affairs. The administrator takes time to review the company’s financial affairs before preparing a report for the creditors. The report is for the company’s creditors and should contain background information, such as details about the company’s directors. It should also include a detailed analysis of the business’s financials and the outcome of the investigation. It’s aimed at giving creditors all the information they need to make an informed decision about the company’s future.

5. Second meeting

The second meeting of the creditors is called within 25 or 30 business days of the external administrator being appointed. The administrator calls the meeting and the creditors will meet to vote on the future of the company. The company can be returned to the directors’ control, enter into a deed of company arrangement, or proceed to liquidation. Again, creditors must be given at least five business days notice for the meeting.

6. Control of directors, deed of company arrangement, or liquidation

If the company is returned to the control of the directors, then the voluntary administration processes cease and the business resumes trading like before.

If the creditors vote to enter the company into a deed of company arrangement, the business needs to sign the deed within 15 business days. Once it’s signed, the deed administration process begins. A secured creditor or the company’s shareholders can also initiate the deed administration process.

If the company can’t recover from its liabilities, the creditors will decide on liquidation, the company is placed into liquidation immediately and the administrator becomes the liquidator.

If this is the case, directors should conduct their on due diligence to ensure company has been liquidated.

How are employees affected by a business going through voluntary administration?

Whether you’re an employee or director of the company, understanding the impact of voluntary administration on employees is important. As an employee, you’ll want to know about your claims to proceed if the company is liquidated. As a company director, you’ll probably want to keep your employees informed about their rights, especially in regards to their pay, throughout the process.

Three outcomes are possible if your company is going through voluntary administration. The administrator could recommend and the creditors could vote to put the company under a deed of company arrangement (DOCA), return it to the control of the directors, or put it into liquidation. Whether it’s the first two or the third option can have different consequences for you as the employee.

Scenario 1: Company enters a deed of company arrangement (DOCA)

If the company returns to trading under a DOCA, you’ll receive your outstanding employee entitlements according to the DOCA. This might mean your entitlements are paid out in the same order as they would be in liquidation. In this case, as an employee, you’ll have priority ahead of unsecured creditors.

The DOCA could outline another priority order, but if it doesn’t, you’ll have your outstanding wages and super paid first, then outstanding leave of absence, and then any retrenchment pay. Each class will be paid in full before moving on to the next one, so if the funds are exhausted before the next class is reached, that class won’t be paid.

Scenario 2: Company is returned to the control of directors

If your company is returned to the control of the directors, your job probably won’t be affected either. You’ll likely return to work and continue getting paid as before. In this case, the company directors (your employers) are responsible for paying your outstanding entitlements as they become due.

Scenario 3: Company is placed into liquidation

Employee If the company is placed into liquidation, it will be wound up and your employment will cease. However, you might be able to recover some of your entitlement through the Fair Entitlements Guarantee (FEG).

The FEG is considered a scheme of last resort. If you’re eligible, you might be able to claim unpaid wages for up to 13 weeks, unpaid annual leave and long service leave, and payment in lieu of notice for up to five weeks. You could also be eligible for redundancy pay for up to four weeks per full year of service.

To be eligible you need to lodge a claim within 12 months of losing your job or the date of liquidation of your employer company. Also, you need to have lost your job due to your employer’s liquidation or within six months prior to the liquidation.

Note you won’t be eligible if you were a contractor, or if you were a director of the company or a relative of the director of the company within 12 months of liquidation.

How are creditors affected by a business going through voluntary administration?

Unsecured creditors

If you’re an unsecured creditor planning to launch or who have launched some type of action against a company entering voluntary administration, you can’t begin, continue, or enforce your action unless you have the administrator’s consent or the court’s permission.

You will not be able to receive payment for your claim during voluntary administration, but you might get paid if the company enters a deed of company arrangement or goes into liquidation.

Secured creditors

If you’re a secured creditor, you’re unable to enforce your charge over the company’s property if the company has entered voluntary administration (you might be able to in limited circumstances). However, as a secured creditor, you might be able to enforce a security within the decision period, which usually starts soon after the administrator gives notice of his or her appointment to you.

Supplying to the business

If you’re a creditor who continues to supply to a business during voluntary administration, the voluntary administrator should be able to pay you from the available assets as part of the costs of the voluntary administration. If funds from asset realisations are insufficient, the voluntary administration is personally liable for any differences. To ensure you’re paid, make sure you get a purchase order authorised in a way the voluntary administrator has specified.

Creditors’ meetings

As a creditor, you (or your proxy) will be able to attend several meetings during the voluntary administration process. It’s important to be aware of these meeting because they’ll give you a chance to vote on how the administration will proceed and what the outcome will be. To be invited and notified of the meeting, you need to contact the voluntary administrator and lodge details of your debt or claim. You can do this by giving the administrator a proof of debt form, with supporting evidence.

The first creditors’ meeting is usually called within eight days of the voluntary administrator being appointed. At this meeting, you’ll get a chance to vote on whether you want a committee of creditors to be formed to liaise with the administrator on your behalf. You’ll get a say in who you want to serve on the committee. You’ll also vote on whether you want a new voluntary administrator to be appointed or to have the existing one continue serving.

The second creditors’ meeting takes place after the voluntary administrator has had a chance to investigate the company’s finances. The meeting is usually held five or six weeks after the company goes into administration. You’ll get at least five business days notice, along with the voluntary administrator’s report and recommendations before the meeting date.

Voting on a Deed of Company Arrangement (DOCA)

Both liquidation and the company returning to business under its directors’ management can impact your claim as a creditor, but the company entering a DOCA could have unexpected implications. For this reason, it’s important to carefully review the DOCA as soon as the administrator provides a copy to you and seek professional advice on how it could impact your claim.

Note: DOCAs have been successfully challenged in court by minority creditors who voted against it.

How are shareholders affected by a business going through voluntary administration?

Shareholders usually don’t have a key role to play during voluntary administration. The voluntary administrator isn’t required to keep you updated or notify you about developments. Unlike the creditors, you don’t get an opportunity to vote on how the voluntary administration proceeds or how it’s resolved.

The voluntary administrator doesn’t have an obligation, as he or she does towards creditors, towards shareholders. Other considerations, such as any DOCA approved and transfer of shares during a voluntary administration are also important to highlight.

Shareholder’s claim to financial payments

Shareholders can’t claim for their interest or ownership stake in the company during voluntary administration. If the insolvency action proceeds to liquidation, as a shareholder, you are also unlikely to receive any proceeds from asset realisation. This is because shareholders are ranked behind creditors. Unless you’re also a creditor of the company, you’re unlikely to receive anything in liquidation.

Transfer of shares

While the voluntary administration is still in progress, any transfer of shares or change of status of shareholders is ineffective without the voluntary administrator’s written consent (or a court order).

Impact of deed of company arrangements (DOCA)

You as a shareholder will be bound by any DOCA the creditors approve, so you will want to make sure you obtain a copy of the DOCA if the creditors decide that’s the best course of action for the company. Keep in mind once the deed is signed, the deed administrator can transfer shares in the company as long as he or she has written authorisation from you, the shareholder, or a court.

At this stage, if the deed administrator believes there’s no likelihood shareholders will receive any distribution in the future, you can realise this as a capital loss. However, you need to make sure the deed administrator puts this in writing, and your shares need to have been purchased after 19 September 1985.

Staying updated as a shareholder

The outcome of the voluntary administration will obviously impact your interest in the company, but you won’t be getting updates from the voluntary administrator as he or she isn’t obligated to contact you. However, if you want to obtain as much information as you can, you can purchase from ASIC Business Centre minutes of creditors’ meetings and of any committee meetings, along with lists of receipts and payments.

ASIC requires the administrators to lodge these documents with ASIC on a regular basis, so if you can’t obtain any information directly from the company, this might be your best option. It is important for investors and shareholders to understand the potential impact of insolvency.

Investors are different to shareholders

If you’re a direct investor in the company – for example, you lend money through a debenture arrangement – you’re considered a creditor. This means you may be able to recover money if the company proceeds to liquidation. Once it enters voluntary administration, the external administrator places a freeze on your payments. If the creditors then vote to liquidate, you might be able to claim some or all your money back, depending on whether you’re a secured or unsecured creditor.

What are the consequences of a voluntary administration?

As discussed above, voluntary administration can result in either a DOCA, liquidation or a return of management to company directors (in very rare cases). Understanding the consequences at the start can help you as a company director make an informed choice.

Note: While the voluntary administrator provides recommendations about which outcome is best for the creditors’ interests, it’s ultimately the creditors who vote and decide on the outcome. So, the administrator has an advisory role, while the creditors are decision-makers.

Liquidation

In this scenario, the company is wound up. This could happen if no DOCA is proposed by the voluntary administrator or if the creditors don’t vote for a proposed DOCA or for a return to directors’ management. The company enters liquidation, with assets being realised by the liquidator and the proceeds being paid to creditors in order of priority.

DOCA

If the creditors vote for the administrator’s proposed DOCA, the DOCA becomes a binding agreement between the company and its creditors. The DOCA outlines how the company’s debt is to be repaid (and there could be partial debt forgiveness) and how the company might be completely released from creditors’ claims.

Back to the directors’ control

In rare cases, the company is returned to the management of its directors. This could happen if the administrator finds out the company is solvent after his or her investigation. If the company is returned back to the control of its directors and continues operating, the status of having been in voluntary administration could have an impact on the reputation of the business.

Your creditors will certainly be informed by the voluntary administrator, and your suppliers and customers will likely find out about it. Lists of companies in voluntary administration and other insolvency actions are published on the ASIC website.

Directors and offences

In addition to reviewing the company’s finances, the voluntary administrator is required to report any breaches of the Corporations Act to ASIC. They’ll also need to report to ASIC if creditors are going to get less than 50 cents for each dollar, which occurs most of the time.

Common offences are insolvent trading, poor recording keeping, and other breaches of duty of care to the company and stakeholders. ASIC could prosecute these directors, compel directors to cooperate with a liquidator, and/or ban or disqualify directors. Some directors end up with a mark on their credit report.

Tax

One major consequence not to be overlooked is tax. Administration, no matter the outcome of the proceedings, could have tax implications. For example, when your business assets are sold to pay your debt, the proceeds are still taxed as normal, whether it falls under ordinary income, capital gains, or some other category.

If your company ends up selling trading stock below market value, in some cases the Australian Taxation Office (ATO) could still treat this as if you’d sold it at full market price. If your creditor or lender forgives debt, you might have to reduce the value of tax losses, capital losses and assets by the amount forgiven. Finally, distribution to shareholders in liquidation is tax free until it goes above their original investment.

Directors should be aware of how tax debt applies to a company in liquidation.

What should your next step be?

If you’re a company director considering voluntary administration, always get advice on what happens with tax before you make a decision. If you have already run into issues with your company and require an administration expert to assist with getting your business back on track, contact the experts at Australian Debt Solvers today.