Voluntary Administration: Legal Ramifications for Directors

As a director, you have legal duties and obligations to fulfil throughout the stages of your company’s life cycle. Going through voluntary administration can be difficult for company directors as it accentuates a range of legal implications. You’ll want to be aware and prepared for these, so you can continue to fulfil your obligations and duties towards the company, as well as reducing personal risk and liability.

What is voluntary administration?

Voluntary administration is an insolvency process and is initiated to help a company that’s in financial trouble. Generally, the companies that turn to voluntary administration are facing debt issues, such as not being able to pay creditors. It involves the appointment of an independent voluntary administrator to take over the company and is designed to assist with resolving the company’s future direction quickly.

The voluntary administrator is tasked with investigating the company’s previous and current affairs. Their goal is to recommend a strategy to save the business or maximise the outcome for creditors. For example, an outcome could be to return control to the directors and continue trading or approve a deed of company arrangement providing a solution to the debts. The last resort for a voluntary administrator is to place the business into liquidation.

The voluntary administrator is usually appointed by the company’s directors, but sometimes he or she could be appointed by a liquidator or a secured creditor.

The director’s powers during voluntary administration

As the company director, you have to cede control to the voluntary administrator once the voluntary administration process has started. By handing over control of the day-to-day affairs of the company, you allow the voluntary administrator to investigate the company’s business, property, affairs and financial circumstances.

The director’s obligations during voluntary administration

Not only do company directors need to give up their control over the company during voluntary administration, they’re also required to give assistance to the voluntary administrator. This includes providing access to the company’s books and financial records, giving a report about related matters like property and affairs, and providing any relevant information the administrator reasonably requires. Failure to assist the voluntary administrator is considered a serious breach of the corporations’ legislation.

It should also be noted that the voluntary administrator’s powers are comprehensive, and the Director has no authority to object the recommended future course of the company.

Director penalty notices

Putting an insolvent company into voluntary administration could help directors observe their duty to avoid insolvent trading in the future. It also reduces the risk of personal liability for debts incurred during insolvent trading.

However, if the company director is seeking to avoid personal liability (for example, for PAYG withholdings or superannuation guarantee charge liabilities) putting the company into voluntary administration might not help in some cases. This is where the amounts owing have been unreported and unpaid for over three months. So directors should avoid being complacent about director penalty notices, and any recovery action by the ATO just because the company is in voluntary administration.

Personal guarantees

The purpose of personal guarantees from creditors is to tie the Director’s personal finances to their business. However, while voluntary administration is in effect, personal guarantees by directors can’t be exercised or enforced – though they can be when it’s over, or if the company goes into liquidation.

Other types of action

Both the Director and voluntary administrator should be aware that secured creditors can’t enforce their charge during voluntary administration. As well as this, unsecured creditors must obtain approval from the administrator or a court in order to enforce their claims, and property owners can’t recover their properties.

After voluntary administration

It is important to know what happens immediately after voluntary administration, and the associated legal implications for the role of a director.

Deed of company arrangement

If the voluntary administrator decides to approve a deed of company arrangement, the powers of the Director will depend on the terms of the deed. The deed will be a plan to help the company pay off all or some of its debts. Once the deed is completed, company directors regain full control, except where the deed specifies the company will go into liquidation after the deed is complete.

Liquidation

The circumstance of the company may call for the voluntary administrator to recommend liquidation, either straight from voluntary administration or after a deed of company arrangement has been completed. If this were to occur, the Director will have no powers and will not regain control over the company, as it will be wound up.

Return to trading

If the administrator decides a return to normal trading is the best course of action, the Director will regain control over the company.

A responsible director understands voluntary administration

For directors, voluntary administration can be a way to help their company avoid trading whilst insolvent, and to get outside help on the future direction of the company. Voluntary administration can be useful to put a temporary stop on things, like creditors’ actions. Although it doesn’t hold the process of others, like director penalty notices for certain types of paid tax debt.

Voluntary administration is a complex process, and the best way for company directors to be certain about the legal implications is to obtain the advice of insolvency experts to guide them through the entire process.

Australian Debt Solvers are industry leaders in financial advisory for those with financial problems. Our business services include insolvency processes like voluntary administration, as well as business turnaround, restructuring, and finance. For timely expert advice, contact us today for a free, confidential discussion.