Voluntary administration: Implications for Companies (Updated 2021)
Companies in financial trouble have a few different options when it comes to insolvency proceedings and potential business turnaround. One of these is voluntary administration.
For companies facing the prospect of insolvency, voluntary administration is like hitting the pause button for some breathing room. It lets you bring in external experts who can make recommendations as to the best future course of action for the company.
What is voluntary administration?
Voluntary administration is an insolvency process – usually lasting around a month – designed to resolve a company’s future quickly. A voluntary administrator is appointed, and he or she will take control of the company, with the company directors relinquishing all control. The administrator’s job is to try to work out a way to save the company or its business. If this isn’t possible, the next priority is to administer the company’s affairs in such a way that gives the creditors a better return than they would have with the company going straight into liquidation.
Despite what the term might suggest, voluntary administration isn’t always voluntary. In some cases it could be initiated by the company’s secured creditors (or a liquidator). However, this is less common. Usually the process is started by the company’s directors when they decide the company is likely to become insolvent or is already insolvent.
During the process, unsecured creditors and other parties usually can’t begin, continue, or enforce their claims against your company. Personal guarantees against directors are also stopped during the voluntary administration process.
Voluntary administration is sometimes misused, but it could help companies in certain cases. If the company has could trade profitably and be cash flow positive within a short period of time provided its debt burden is resolved, voluntary administration could be the ideal course of action for the business.
Voluntary administration has three possible outcomes for your company:
- Liquidation – The creditors could vote to put the company into liquidation. A liquidator is appointed and the company’s assets will be liquidated to pay its creditors.
- Deed of company arrangement – If the administrator recommends it, the creditors could vote to execute a deed of company arrangement (DOCA), which is a binding agreement between the company and its creditors. Typically through the DOCA the company will agree to pay some or part of its debts and be free of these debts. Some experts argue a DOCA is the best outcome of voluntary administration, as it could ensure the creditors obtain at least some return on their debt whilst letting the company carry on.Research suggests 33% of voluntary administrations result in a DOCA.
- Return to trading – Return to trading is always a possible outcome. In this case, the creditors vote to return the company to the control of the directors. The directors then become responsible for making sure the company pays its debts when they’re due.
What companies should do during voluntary administration
If the voluntary administration is initiated by the directors, then it begins with a resolution by a majority of directors. The directors then appoint the administrator. Once the administrator has been appointed, staff and especially directors should relinquish control to the administrator. So the company, its directors, and its staff should step aside and allow the administrator to take charge by giving full access to the records and premises.
From there, the administrator will take charge of the process, including convening meetings of the creditors, investigating the company’s affairs, and preparing reports for the creditors. The directors might work with the administrator on things like preparing a proposal or a DOCA.
If the voluntary administration results in a DOCA, the company needs to sign the deed within 15 business days of the second creditors’ meeting. If it doesn’t, the company will automatically go into liquidation.
Once a company is in administration, their name is listed on this website here.
How companies could minimise the risk of voluntary administration
However, while it is possible to return to trading following a voluntary administration, minimising the risk avoiding it in the first place could be the best approach. For example, your company could work with creditors directly to negotiate settlements or payment arrangements.
If you know what’s wrong with your business and how you can stop a debt issue from recurring, getting finance or capital injections could be the answer if it’s a one-off need.
Similarly, if you can develop effective turnaround strategies to return to profitability, you could avoid insolvency processes like voluntary administration. Working with turnaround experts, financial advisors, and accountants could help you identify the weak points and allow you to formulate a clear strategy for getting back to making a profit.
Voluntary administration could be a way to save your business, but it’s important to understand it could also result in liquidation. Once an administrator has been appointed, company directors and staff should relinquish all control to the administrator. If creditors vote for a DOCA, the directors might work with the administrator on preparing it and the company may be required to sign it in agreement. Turnaround strategies and prioritising profitability could help companies avoid voluntary administration and so potentially liquidation.
Australian Debt Solvers are are all about helping you get past the tough times of voluntary administration and into a better position. Contact us on 1300 789 440 to speak with our expert team on your voluntary administration needs.
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