Author
Domenic CalabrettaChief Executive Officer & ASIC Registered Liquidator
Voluntary administration is the process whereby a business in financial distress is assessed by an independent administrator to determine the best financial resolution for that company. The administrator could be appointed by the company directors, the creditors of a company, or by the court.
The voluntary administrator should be a registered liquidator with ASIC, and may also be a member of professional bodies such as Chartered Accountants Australia & New Zealand and the Australian Restructuring Insolvency & Turnaround Association (ARITA).
The administrator will investigate the company’s finances, review the available options, and recommend a plan to either:
- Return control of the company to the directors;
- Enter into a Deed of Company Arrangement (DOCA); or
- Liquidate the company to pay creditors.
How does voluntary administration work?
When a business enters voluntary administration, everything that has been going on until then is frozen. Creditors can’t take legal action to enforce their claims against the company, owners and landlords can’t recover their property, and trading is temporarily paused – meaning the company’s directors can’t be held liable for trading whilst insolvent.
Voluntary administration involves strict procedures and time limits that must be adhered to by the voluntary administrator. Once appointed, he/she must ensure that the following actions take place:
- First meeting of creditors – This must be held within 8 business days, and at least 5 business day’s notice must be provided to creditors. At this meeting, creditors can vote to replace the administrator (which is unlikely) and whether they want to create a committee of inspection to liaise with the administrator and keep the creditors up to date with progress.
- Administrator investigation– An investigation of the company’s affairs is then undertaken by the voluntary administrator and a report prepared for the creditors on the alternatives available. The administrator will review financial records, documents and other information, and weigh up the company’s future operating prospects in light of the interests of the creditors.
- Second meeting of creditors – This must be held within 25 or 30 business days of the administrator’s appointment, and at least 5 business day’s notice must be provided to creditors. Based on the administrator’s report, creditors can vote at this meeting whether to return control to the directors, accept a Deed of Company Arrangement (DOCA), or place the company in liquidation (in which case the administrator immediately becomes the liquidator).
What is a Deed of Company Arrangement (DOCA)?
A Deed of Company Arrangement is essentially a deal that is offered to the creditors. Its purpose is to maximise the chances of the company continuing to operate, or alternatively to provide a better return for creditors than they would otherwise receive if the company was immediately liquidated.
The kinds of proposals in a DOCA can be flexible and will depend on the particular circumstances of the company. A typical proposal might provide for the company to continue trading and pay off all or part of its debts over time.
Whatever the proposal, the DOCA must contain the following information:
- The name of the Deed Administrator (can be the voluntary administrator or someone else appointed by the creditors and directors)
- The property that will be used to pay the creditors
- The debts that are covered by the deed and to what extent
- The order in which the funds will be paid to the creditors (employees usually have priority)
- The details of any suspension of rights against the company
- The conditions for the deed to begin, continue and cease operation.
The success of a Deed of Company Arrangement depends entirely on the creditors belief that it is in their best interests, and it must be approved by at least 50% of creditors at the second and final meeting. If they vote in favour of the DOCA, the company must sign it within 15 days, after which the deed administration process commences.
What are the benefits of voluntary administration?
Voluntary administration can provide several important benefits to a company in financial trouble.
- It can unearth valuable insights during the administrator’s investigations that could help the company continue trading under a DOCA and return to profitability with the cooperation of its creditors.
- It can provide a breathing space for company directors and protect them from the risk of trading whilst insolvent (a crime for which they can be held personally liable).
- It can be a chance for the company to negotiate with creditors and work with them to find an amicable solution, instead of automatically responding to demands for payment.
- It can give creditors a better chance of recouping some or all of their losses, something which might not happen if immediate liquidation were to occur.
Voluntary administrations are not always successful, and this can be because they are sometimes recommended when a company is beyond the recovery point.
However, if expert advice is sought in a timely manner and the right voluntary administrator is appointed, the results can be markedly different. For example, 80% of companies who have entered into voluntary administration with Mackay Goodwin in the past two years have succeeded with a Deed Of Company Arrangement (DOCA).
To find out more, contact us for a free consultation anywhere in Australia by filling in our online form, or calling Mackay Goodwin on 1300 750 599.
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