All businesses experience turbulent times. It’s a fact of life. Entering into Voluntary Administration stabilises the situation, allowing you to hit pause, reset, and get back on track when your business is undergoing financial distress.
What is Voluntary Administration?
The Voluntary Administration process is an insolvency procedure giving distressed companies breathing space from creditors and a chance to restructure.
A Voluntary Administrator may be appointed by a company director, secured creditors, or a Liquidator. A Voluntary Administrator must be a registered Liquidator by ASIC and may also be a member of professional associations such as Chartered Accountants Australia & New Zealand (CAANZ) or a Certified Practicing Accountant (CPA). Further preferred and qualified Liquidators are trained and registered with the Australian Restructuring Insolvency & Turnaround Association (ARITA).
Once appointed a Voluntary Administrator reviews the company’s finances and available records and evaluates available options for the company. This process includes analysis and vetting of proposals for a compromise of company debts via a Deed of Company Arrangement (“DOCA”) proposal which may be submitted by the company’s management or third party. The Voluntary Administrator then makes an independent recommendation to either:
- Return control of the company to you (the directors),
- Enter a Deed of Company Arrangement (“DOCA”) and distribute a return to creditors based on the terms of the DOCA, or Liquidate the company and distribute the proceeds of commercially assets and recovery claims of the Liquidation to creditors.
Key Takeaways
- Voluntary Administration is a process initiated by directors of financially troubled companies to restructure and potentially return to profitability.
- It provides legal risk protection, debt load reduction, access for stakeholders and the opportunity to create a legally binding DOCA.
- Alternatives such as informal restructuring, safe harbour legislation and small business restructuring can also be tailored towards unique circumstances.
Why would you enter Voluntary Administration?
1. To avoid trading while insolvent
Directors are legally required to take measures to avoid insolvent trading (severe consequences can result if they don’t), and voluntary administration is often used by distressed business owners to avoid insolvent trading. By initiating this process, a company and its directors can raise the defence that steps were taken to avoid insolvent trading by appointing a Voluntary Administrator and avoiding incurring further debt.
Voluntary Administration not only helps companies in strife hit the pause button on creditor demands. It also gives them a chance to bring in an independent expert – the Voluntary Administrator. The Voluntary Administrator examines the company’s operations and assets to recommend the best step for resolving the situation. The company can focus on resolving problems, including creditor issues, instead of constantly reacting to creditor actions, market conditions, and other factors.
Similarly, creditors will have a chance to review what’s happening in the business with the administrator’s reports. They’ll have a chance to find out the details and vote on the Voluntary Administrator’s recommendation, whether that is a DOCA, Liquidation, or returning to trading under the directors.
3. To attempt to enter a Deed of Company Arrangement (“DOCA”)
One aim of the Voluntary Administration regime was to allow otherwise viable businesses to have a chance to restructure and survive. Another is to administer the company’s affairs in a way that would lead to better outcomes for creditors than if the company was to immediately be placed into liquidation. The short break from creditor demands and most actions to recover debt gives the company access to expert advice (from the administrator) and possibly enter a DOCA.
The DOCA is one of the three main possible outcomes of Voluntary Administration. It is a highly flexible arrangement that is effectively a compromise of the company’s debts. Through the DOCA, the company will pay all or part of certain debts and then be released of these debts from further recovery by creditors.
A DOCA can incorporate different arrangements, including payment of a lump sum to pay all debts due, instalment payments, and/or sale of assets and payment of proceeds. The DOCA could also include a return to trading and meeting DOCA instalments from profits or a lump sum from a business sale, or relisting the company on the ASX.
The DOCA, once approved also binds all unsecured creditors. However, it does not prevent creditors with personal guarantees from the company’s directors or another person taking action, in relation to the personal guarantee, to have their debt repaid.
4. To respond to a Director Penalty Notice (“DPN”)
Companies with cash flow and insolvency issues could be falling behind on their ATO-related compliance. For example, they could have outstanding PAYG tax and superannuation liabilities. In this case, the ATO has the discretion to pursue directors personally for this unpaid PAYG tax and superannuation through a director penalty notice (DPN).
However, placing a company into Voluntary Administration addresses the DPN on the basis it relates to sums reported but unpaid to the ATO within three months of the end of the reporting period.
Although Liquidation is a possible outcome of Voluntary Administration, the Voluntary Administration process gives the company an opportunity to assess whether other options could be viable before creditors vote for liquidation upon the Voluntary Administrator’s recommendation.
The goal of Voluntary Administration is to provide the best likely outcome for creditors based on the circumstances, so if either a DOCA or returning the company to the directors’ control is more desirable than Liquidation, the Voluntary Administration process gives the company the opportunity to avoid Liquidation.
What is the process of entering Voluntary Administration?
The first step is to appoint a Voluntary Administrator, from there, we provide a proposed roadmap of regaining control.
Voluntary Administration involves strict procedures and time limits that must be adhered to by the administrator. Once appointed, the Voluntary Administrator 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 days’ notice must be provided to creditors. At this meeting, creditors can vote to replace the Voluntary 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.
- Voluntary 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 including any proposal for restructuring via a Deed of Company Arrangement (“DOCA”). The Voluntary Administrator will review available 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 20 or potentially 25 business days of the administrator’s appointment, and at least 5 business days’ notice must be provided to creditors. Based on the Voluntary Administrator’s report, creditors can vote at this meeting whether to return control to the directors, accept a DOCA, or place the company in Liquidation (in which case the Voluntary Administrator immediately becomes the Liquidator).
What is the role of a Voluntary Administrator?
When a business goes into Voluntary Administration, a Voluntary Administrator is appointed to take charge of the situation. Their duties are extensive and include assessing the chances of a successful Voluntary Administration. The role also includes:
- Organising meetings with creditors
- Advising directors on creating a proposal for a DOCA.
- Providing opinions to creditors after analysing the company’s situation.
- Assisting with the implementation of the DOCA in the majority of cases.
The role of a Voluntary Administrator is crucial in helping the business get back on track, to ultimately return the business back to the directors.
What happens to creditors and employees during Voluntary Administration?
Once a Voluntary Administrator is appointed, creditors’ claims are temporarily suspended via a moratorium on recovery action to give the company some financial breathing room, and Administrator time to assess the company’s financial performance and position. This includes a company being provided with an opportunity to improve its cashflow by analysis of expected key recoveries and income as well as any proposed expenditure. Furthermore, it prohibits property owners and lessors from taking any legal action against the company, even if they are in arrears on payments. Moreover, banks and other secured creditors are less likely to take any legal action whilst any DOCA proposal is being developed to enforce recovery on the company’s property.
Can a Voluntary Administration stop creditor legal action?
When a company enters into voluntary administration, creditors are legally barred from pursuing any legal action against them without further approval of the court. The prohibition extends to enforcement of guarantees against the directors, but this is only valid for the duration of the administration. Secured creditors and certain third parties can retain right in certain circumstances depending on the individual circumstances. Once this period is over, creditors who have personal guarantees from a director may take further action against the responsible party if necessary. The consideration of an acceptable DOCA proposal will impact on the willingness of a creditor to undertake or continue if any further action.
What happens to employee entitlements in a Voluntary Administration?
During a Voluntary Administration, the fate of employee entitlements hinges on the events that occur during the Administration process. Typically, any entitlements that were in place prior to the start of the Voluntary Administration are not paid out at this time. However, if the business continues to operate, employees must be compensated for their work. In the event that a DOCA is reached, the details of employee entitlements will be outlined in that agreement. Lastly, if the company is placed into Liquidation, the laws surrounding employee entitlements can be complex. Nonetheless, employees are generally treated well during Voluntary Administration and will often receive payment through the DOCA or the FEG employees’ scheme if the company is liquidated.
Can employees get FEG in a Voluntary Administration?
The Fair Entitlements Guarantee (“FEG”) is a government-run program that provides monetary assistance to employees who have been laid off due to their employer’s bankruptcy. However, this program does not apply to workers affected by Voluntary Administration if the expectation is the Company will enter a DOCA (DOCA) FEG will step in to ensure that the employees receive their rightful entitlements. It is essential to note that FEG is only available to eligible employees and not all workers. Employees may be eligible for FEG assistance if they:
- have lodged a FEG claim within 12 months of:
- the date an employee is made redundant
- the date of Liquidation or Bankruptcy of the former workplace
- have lost their job due to the insolvency of the employer and or the employee was terminated after, or within six months before, the appointment of a liquidator or bankruptcy trustee for the employer
- during the time of the employment, the employee was an Australian citizen or the holder of a permanent visa or special category visa that allows them to stay and work in Australia.
What happens to creditors in Voluntary Administration?
Although creditors are generally restricted from taking action, there are certain circumstances under which they may be permitted to do so. Creditors who hold a security over the majority of a company’s property have certain privileges, such as the ability to seize the assets by appointing a Receiver within thirteen business days of the Voluntary Administration’s commencement. This information is important to know for both creditors and those who are in the process of a voluntary administration.
What is a Deed of Company Arrangement (DOCA)?
A Deed of Company Arrangement (DOCA) is essentially a compromise arrangement that is offered to the creditors to agree and be bound to. 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 DOCA to begin, continue and cease operation.
The success of a DOCA depends entirely on the creditors consideration that it is in their best interests, and it must be approved by at least 50% of creditors at a meeting convened by the Voluntary Administrators. If they vote in favour of the DOCA, the company must sign it within 15 business days, after which the Deed Administration process commences.
Voting on a DOCA
In order for a DOCA to be approved it needs to have the support of the majority of the creditors present and voting at the meeting. In situations where there is a stalemate and the majority in number of creditors are in support of the DOCA proposal while the majority in value may oppose it (and visa vera), the Voluntary Administrator as Chairperson has a deciding vote to break the deadlock. Voluntary Administrators must make the decision.
Effects of a DOCA
The DOCA has a significant impact on all aspects of a business, including its creditors and stakeholders. It is a legally binding agreement that commits the new administration of the company. Throughout this process, As expected the control of the Company, and its financial affairs reverts to be the responsibility of the directors.
During a specific period of time, the company is required to indicate “subject to a Deed of Company Arrangement” on all public records and agreements. This legally binds the company, its representatives, and its stakeholders to the terms of the DOCA. Additionally, the DOCA provides relief and binds creditors to specific timeframes and financial agreements. The DOCA can free the organisation from certain debts, and the Directors of the company can reclaim governance with a few limitations.
The DOCA has a significant impact on all aspects of a business, including its creditors and other stakeholders. It is a legally binding agreement where the control of the Company, and its financial affairs normally reverts to be the responsibility of the directors.
During a specific period of time, the company is required to indicate “Subject to a Deed of Company Arrangement” on all public records and agreements. This legally binds the company, its representatives, and its stakeholders to the terms of the DOCA. Additionally, the DOCA provides relief and binds non secured creditors to specific timeframes and financial agreements. The DOCA can free the organisation from certain debts, and the Directors of the company can reclaim governance with a few limitations.
Are there any other options to entering Voluntary Administration?
If a business is facing financial difficulties, Voluntary Administration can be a helpful solution. However, it is important to keep in mind that this process is highly regulated and whilst it may be costly it enables an enormous opportunity for a Company to restructure its affairs for the longer term. There are informal methods of restructuring including with a more streamlined process that can in certain circumstances enable the control of the company to remain in the hands of the directors. It may be challenging for some directors to come to terms with, but sometimes liquidation is sometimes the best course of action when a company is simply no longer viable and a DOCA proposal is unable to be formulated. In these cases, a commercial sale of the Company’s business and assets can still be a practical option.
Each business is different, there are alternative solutions to relieving debt that may include:
What are the laws for Small Business Restructuring?
A fresh system dubbed Small Business Restructuring was introduced in 2021. This system is designed to be less bureaucratic to Voluntary Administration in limited circumstances. During the Small Business Restructuring process, the directors of the company retain control whereas in voluntary administration, control is transferred to the Administrator. Small businesses with creditors of less than one million dollars can benefit from this process. To dig deeper into Small Business Restructuring, you can refer to additional information available here.
What is the difference between Voluntary Administration and Safe Harbour restructuring?
The 2017 Insolvency Reform Law Act brought in the Safe Harbour legislation, which allows directors to confidentially address the financial struggles of their company with the assistance of a qualified advisor. The Safe Harbour reforms protect directors from being held responsible for debt incurred after the insolvency date, as long as they can reasonably support the chosen course of action would benefit the company and its creditors more than an alternative immediate Voluntary Administration or Liquidation. For more details on how Safe Harbour legislation can be a useful tool for directors to navigate the challenging financial landscape, learn more here.
Should I enter Voluntary Administration or Liquidation?
When a company is in financial trouble, majority of businesses look at these two options: Voluntary Administration or Liquidation. The former is aimed at saving the business and keeping it operational, while the latter is intended to wind the business down. However, there are instances where reviving the company is not feasible. In such cases, if the directors are unable to find a way to make a company profitable again and meet its financial obligations, then liquidation can be the most logical solution.
If I have received a wind-up notice, can I enter Voluntary Administration?
Yes. Even though a creditor may have lodged a wind-up petition at Court, it is still possible for a company to go into Voluntary Administration. There is some logic to that situation – if a Voluntary Administration can result in a better outcome for creditors than a court winding up. However, once there is an application for winding-up submitted to Court then the Court will decide whether to let the Voluntary Administration proceed continue or place the company into Liquidation.
Can a Voluntary Administrator be removed?
Yes. It may be that a creditor, or several creditors are unhappy with the directors’ choice of Voluntary Administrators. If so, it is part of the Voluntary Administration process that at the First Creditors Meeting creditors get the chance to propose a new Voluntary Administrator/s. If there is a proposal for a replacement Voluntary Administrator, then there will be a vote at that meeting. Also, creditors or other stakeholders could also apply to a Court to have a Voluntary Administrator removed or replaced.
What is the role of the Court in Voluntary Administration?
In most Voluntary Administrations, the Courts will play no role. Voluntary Administration is designed to minimise any Court involvement. In some cases, a creditor or other stakeholders may be unhappy with some aspect of the Voluntary Administration, and they may apply to Court to have the matter reviewed. Typical matters where the Courts may get involved could be:
- Disputes over the amount a creditor is owed and rights to enforce recovery.
- Disputes on claims of and between related parties.
- Access and use of assets which are subject to dispute by third parties and crucial to the Company.
- Disagreement on who should be acting as the Voluntary Administrator.
- Disagreement over voting at meetings of the Voluntary Administration.
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 Voluntary 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 financial crime for which they can be held personally liable).
- It can be an opportunity for the company to negotiate with creditors and work with them to find an amicable solution, instead of automatically responding to demands for payment on an ad hoc basis.
- Improve the prospects of employees maintaining their employment and related employee entitlements.
- Improve the prospects of customers receiving ongoing products and services from the Company.
- It can give creditors a likely better chance of recouping some or all of their losses, something which is generally unlikely 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 and or any number of subsequent developments occur which were beyond the control of the Company’s directors. Many directors can however demonstrate to stakeholders they attempted to minimise the prospects of a financial loss to Company creditors at the time of engaging a Voluntary Administrator.
However, if expert advice is sought in a timely manner and the right voluntary administrator is appointed, the results can be markedly different.
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.