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.
An Administrator may be appointed by company directors, a company’s creditors, or the court. An 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 an administrator reviews the company’s finances, and evaluates available options for the company. This 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), or
- liquidate the company and distribute the proceeds of assets to creditors.
How can entering Voluntary Administration alleviate my financial distress?
When you’re undergoing financial distress in business, sourcing a solution can feel like another overwhelming challenge to tackle. Entering voluntary administration allows you to hit pause on your financial troubles. One of the key advantages of entering into voluntary administration is that it allows you time to minimise and pause the pressure you are receiving from creditors.
We can help reduce your pressures by examining your situation, we determine whether voluntary administration is the most suitable option. There are specific warning signs that may indicate your business is in trouble and outlines that entering voluntary administration is the best course; these indicators may look like:
- Continuous trading losses
- Unpaid taxes
- Struggling to make payments to creditors as agreed
- Action of a landlord for eviction due to non-paid rental or other dispute
Making payments without indicating which invoices they are for to achieve a delivery of a service or product
- Inability to provide up-to-date and precise financial records
- Creditors raising legal action to recover debt/receiving a wind-up notice
- Inability to gain additional financing from existing or new lenders
- Suppliers asking for payment upfront
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 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 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 including any proposal for restructuring via a Deed of Company Arrangement (DOCA). 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 days’ 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 the role of a Voluntary Administrator?
When a business goes into Voluntary Administration, an administrator is appointed to take charge of the situation. Their duties are extensive and include assessing the chances of a successful administration. An administrator’s roles may also include:
- organising meetings with creditors
- advising directors on creating a proposal for a Deed of Company Arrangement,
- 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 an 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 administration?
Once an administrator is appointed, creditors’ claims are temporarily halted suspended via a moratorium on recovery action to give the company some financial breathing room, and administrators time to assess the company’s financial position. This includes a company being provided with an opportunity to improve its cashflow by temporarily delaying certain payments of debts to creditors. Furthermore, it prohibits property owners and lessors from taking any legal action against the company, even if they are behind 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 actions?
Absolutely. When a company enters into voluntary administration, creditors are legally barred from pursuing any legal actions against them. It is important to note that during this time, the company is protected from legal actions, ensuring its survival and allowing it to get back on its feet. Additionally, the prohibition extends to enforcement of guarantees against the directors, but this is only valid for the duration of the administration. Once this period is over, creditors who have personal guarantees from a director may take further actions 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 Deed of Company Arrangement is reached, the details of employee compensation will be outlined in that agreement. Lastly, if the company goes 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 Deed of Company Arrangement (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. You may be eligible for FEG assistance if you:
- have lodged a FEG claim within 12 months of:
- the date you were made redundant
- the date of liquidation or bankruptcy of your former workplace
- have lost your job due to the insolvency of your employer or were terminated after, or within six months before, the appointment of a liquidator or bankruptcy trustee for your employer
- during the time of your employment, you were an Australian citizen or the holder of a permanent visa or special category visa that allows you to stay and work in Australia.
What happens to creditors in 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 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.
Voting on a DOCA
In order for a DOCA to be approved and a poll required, 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 of creditors are in support of the proposal while the majority in value oppose it, the Voluntary Administrator as Chairperson has a deciding vote to break the deadlock. Administrators must make the decision based on what they believe is in the best interests of creditors.
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.
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 on the very first day of the year 2021. This system is designed to be less bureaucratic to voluntary administration. 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?
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 any debt incurred after the insolvency date, as long as they can prove that the chosen course of action would benefit the company and its creditors more than immediate 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 cannot find a way to make the company profitable again and meet its financial obligations, then liquidation becomes 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 Administration be removed?
Yes. It may be that a creditor, or several creditors are unhappy with the directors’ choice of Voluntary Administrator. If so, it is part of the voluntary administration process that at the First Creditors Meeting creditors get the chance to propose a new Administrator. If there is a proposal for a replacement Administrator, then there will be a vote at that meeting. Also, creditors or other stakeholders could also apply to a Court to have an 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 operate without Court involvement. In some cases, a creditor or other Stakeholders may be unhappy with some aspect of the administration and so they may apply to the Courts 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;
- 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 on a proposed DOCA.
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 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
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 amount 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.