Creditors During Voluntary Administration: Knowing Your Rights
Voluntary administration is a process for determining the best course of action for a business in trouble. Creditors play a significant role during a voluntary administration, but creditors usually won’t be be entitled to debt repayment or allowed to pursue enforcement action while the process is being undertaken.
If you’re a creditor, you should be aware of your rights so you can protect your financial interests during a voluntary administration.
Who is a creditor during voluntary administration?
A creditor is anyone the business owes money. You could be a supplier with unpaid invoices, an employee with outstanding wages and entitlements, or a financial institution with unpaid debt.
Secured creditors are those who hold a charge or security interest over some or all of the assets of the company, such as a mortgage. Unsecured creditors are those who are owed money but don’t have a charge over the business. Employees are considered to be a specific category of unsecured creditors, and they usually have priority over other unsecured creditors when it comes to paying money owed.
What creditors are entitled to during voluntary administration
Voluntary administration can turn the business around but this is rare. It could also meanentering a Deed of Company Arrangement (DOCA) or entering liquidation. Voluntary administration hits the pause button for businesses in financial trouble, so it has certain implications for creditors.
As an example, for unsecured creditors voluntary administration means they’re temporarily unable to enforce claims against the business without specific permission from a court or the administrator. The same goes for secured creditors seeking to enforce their charge over the business’s property in most cases, and owners and landlords are generally also unable to recover their property.
Any personal guarantees from company directors can’t be enforced, and liquidation processes can’t be commenced (apart from the creditors voting on this).
Voting for company’s future direction
If you’re a creditor to a company in voluntary administration, at some stage you could find yourself voting for a DOCA as recommended by the administrator.
After reviewing the company’s finances, the administrator could recommend the company returns to trading under a DOCA, and you (and other creditors) will have a chance to vote on it.
Recovery or repayment of debt
During the voluntary administration process, the company is in an interim “paused” stage. Creditors are unable to enforce their debt-recovery actions, and your legal entitlements come into effect after the voluntary administration process is over.
- Return to trading or DOCA – If the company returns to trading, whether under a Deed of Company Arrangement or not, you as the creditor could have a good chance of recovering your money if the company becomes profitable.
- Liquidation – If liquidation is found to be the best course of action, priority creditors will be paid first. This means secured creditors will be paid before unsecured creditors.
Independent review of the company
You’re prevented from enforcement action against the business during voluntary administration, but this does not mean the process is a waste of time for creditors. Voluntary administration gives you and other creditors a chance to find out what’s happening in the business.
You will have an independent expert (the administrator) look over the finances of the business and decide on the best course of action, whether that’s liquidation, DOCA, or return to trading as normal.
The administrator is required to act in creditors’ best interests to find a solution that gives creditors’ the best chance of being repaid. This process thus gives you a chance to work with the business to find a mutually-rewarding outcome.
You’ll have a right to stay updated on what’s going on, with the administrator required to hold two creditors’ meetings. At the first meeting you can vote on whether you want to replace the administrator, as well as forming a committee to liaise with the administrator. At the second meeting, you can vote on the outcome for the business, whether it’s to be liquidation, DOCA, or return to normal trading.
Alternative courses of action
As a creditor, you don’t have to wait for insolvency processes such as voluntary administration to protect your financial interests. You could take proactive measures like entering into a creditor arrangement to encourage the debtor business to pay what they can. Alternatively, you could escalate recovery by using a collections agency, or even pursue legal action where necessary.
And while creditors usually won’t be be entitled to debt repayment or allowed to pursue enforcement action during voluntary administration, the process is designed to protect the interests of creditors, and the administrator has to act in your best interest. Given this, voluntary administration is an important process to understand so you can exercise your voting power to maximise your chances of debt recovery.
Australian Debt Solvers are industry leaders when it comes to providing voluntary administration services, andwe have a nationwide team of experts ready to assist Australia businesses. If you’re a creditor and would like to speak with one of our experts about your business interests, contact us today.
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