How to Avoid Common Pitfalls in Voluntary Administration
Most Australian companies that enter voluntary administration are deregistered within three years of the commencement of the administration. But that doesn’t have to happen to you.
Understanding the legal framework
It’s vital to be fully aware of the legal requirements and strict timetable you will be held to during the process.
Once the decision to enter administration has been made the next step is to appoint an external administrator who will take total control of the company and its assets during the process. Once voluntary administration is entered, trading ceases and all claims by creditors, landlords or other stakeholders are put under a stay until the company’s future is decided.
The administrator’s role, as sanctioned under the Corporations Act 2001, is to review the prospects of the company and present these finding with options for next steps to its creditors to be voted on. Crucially, although every effort should be made to find a way to return to trading, an external administrator’s primary responsibility is to a company’s creditors, not its directors or their employees. Once this process is underway there is a clear framework to follow:
The administrator must contact creditors no later than the next business day after they are appointed to schedule the first meeting of two meetings. The first meeting must occur within eight days of the voluntary administration beginning and creditors must be given five days notice
At the first meeting, creditors can vote on whether to retain the current external administrator or not. Creditors and directors will also be updated regularly throughout the process about fees incurred and options being explored by the administrator
Directors give up control of the company during the review stage but they are still required to fully cooperate with the administrator by making financial records available and providing other essential information
The second meeting must be between 25 and 30 days into the process, also with five days notice. At this point, creditors must vote on the options presented by the administrator
The external administrator can recommend one of three options based on their analysis of the company:
- The company is deemed viable and returned to the directors’ control
- A Deed of Company Arrangement (DOCA) is designed, stating the company’s intentions going forward (this must be signed by all relevant parties within a further 15 business days
- The company is wound up and put into liquidation(this begins immediately)
How to make a voluntary administration successful
It’s possible that a creditor may be arguing for liquidation in order to recoup their investment and distance themselves from the failed venture. Meanwhile, company directors may want to restructure and continue trading. This means that whether a voluntary administration process has been a success or not is partially subjective. That said if the option of voluntary administration is being considered it’s highly likely that, unless the company’s fortunes change significantly, all stakeholders have already realised some losses on their investment. Therefore, one of the main success criteria for any administrative action that everyone can agree on should be to minimise these losses.
Beyond the legal requirements laid out in the Corporations Act, there are several considerations that can make all the difference in whether you achieve your goals from the administrative process or not.
When it comes to the timing of voluntary administration, the key is to take action before it’s too late. As the Productivity Commission notes, earlier entry into a formal restructuring process like administration could facilitate restructuring because it’s more likely you still have the assets, time, and scope for success.
Since the administrator could recommend return to directors’ control, DOCA, or liquidation, starting the process of administration before it’s too late could give a business the best chance of survival. This is because the external administrator must have reasonable grounds to believe that the company is capable of being a viable business not to recommend liquidation. So the further a company falls into insolvency and the longer the directors leave it without exploring insolvency processes, the more likely there will be fewer assets, time, or other resources for the administrator to work with when deciding on the best way to proceed.
Additionally, because directors are legally obligated to prevent insolvent trading and insolvent trading can come with criminal charges and civil penalties, it’s in the best interests of any company director to act quickly if administration is the right step forward. By consulting with insolvency experts as soon as possible, you can get accurate advice on whether voluntary administration is appropriate.
Keep costs down
The Productivity Council’s study also revealed that insolvency costs are around 8% of business value in Australia, which is comparable with the United States but high relative to New Zealand and the United Kingdom. If your business is suffering from cash-flow problems you will want to keep this figure to a minimum to avoid further exacerbating the issue.
Although the voluntary administration is designed to assist cash-strapped business back into the black, the costs associated with it can quickly mount. The cost of hiring an external administrator, although unavoidable, is not insignificant and other auditing costs will come with it. In this regard, another success criteria would be to keep the timeframe of the administration process to a minimum, which should be around 30 days. Although most of the process is held to a legal timetable there are some areas where creditors can extend the process, such as by voting to select a new external administrator or using all 15 days allowed to sign the DOCA. The less money that is spent analysing the company’s options the more is left over to repay creditors in the case of liquidation or be pushed back into investing in new growth opportunities if trading resumes.
Commit to your chosen course of action
This point relates to the first two but it is important enough to warrant its own explanation. Once the external administrator has made their assessment and the company’s creditors have agreed on a suggested course of action, that plan should be implemented immediately.
According to the commission’s report, the median time spent in winding up a company is around 500 days, which is comparable with or slightly above overseas processes.
A substantial part of the delay and cost in insolvency is due to the processes involved in creditors approving and challenging the insolvency practitioner’s fee, which comes out of what sum, if any, can be recovered from the liquidated business.
Read the fine print
Finally, there is good news for directors hoping that entering administration will just be a temporary blip on their company’s long history. A newly implemented reform on ipso facto clauses in a commercial contracts could offer fresh hope for business leaders looking to return to trading after voluntary administration. The amendment, which came into force on 1 July 2018, states that a contract can no longer be terminated solely due to one party entering voluntary administration.
This reform aims to tackle the catch 22 of the previously common scenario where a company would enter administration in order to restructure its finances only for its trading contracts to be terminated, thereby rendering its situation unviable. The stay on contract terminations will remain in force for the duration of the administrative period.
By leveraging this new opportunity to retain value in the business, companies entering voluntary administration today will have a greater chance of successfully re-entering the market and turning to profit.
Take the first step
Australian Debt Solvers specialises in voluntary administration to help save your business. So to make sure the process is done right, contact us today or give us a call on 1300 789 499.
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