Voluntary Administration- The Basics
This is the fifth in a series of articles aimed at informing directors of their duties and options for small to medium enterprises (SME) if faced with insolvency. Following on from our previous article around the Director’s Penalty Notice (DPN), we now look at one of the distinct options to save a business, being a Voluntary Administration (VA).
What is Voluntary Administration
VA is one of the formal corporate rescue and restructuring mechanisms in Australia. The process is designed to provide a company with a temporary reprieve from its creditors to allow directors to find the best course of action for all stakeholders.
The main purpose of a VA, as outlined in Section 435A of the Corporations Act 2001 (Cth) (the Act), is to:
maximise a company’s chances of continuing its business and existence; or
where it is not possible for the business to continue, to result in a better return for the company’s creditors and members than would occur in an immediate winding up.
When a company is facing financial difficulties and is or may be insolvent, the company director may appoint an independent Registered Liquidator as a Voluntary Administrator to take over the company. The Administrator will remain in control of the business usually for a period of 25-30 business days (or longer if approved by the Court and/or creditors). During this period, the expected intention is for a formal offer to be put to creditors to compromise or settle their debts – this is referred to as a Deed of Company Arrangement (DOCA).
What is Deed of Company Arrangement
A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with. A DOCA is generally proposed by the director (it can also be proposed by any third party i.e. Virgin Australia) and is administered by a Deed Administrator.
The DOCA binds all creditors with debts or claims against the company that arose on or before the relevant date referenced in the DOCA. It also binds owners of property, those who lease property to the company and secured creditors (if they voted in favour of the DOCA). However, if a secured creditor abstains from voting on the DOCA, they will effectively stand outside the terms of the DOCA and will be free to enforce their security interests under Section 444D(2) of the Act.
The primary benefit of a DOCA for the directors is that the company does not go into liquidation and therefore, there are no claims for insolvent trading or voidable transactions claims that can be made against the directors or related entities.
Are there creditors meetings in a Voluntary Administration?
Unlike in a liquidation, an Administrator is required to convene and hold two creditors’ meetings. These are key opportunities for creditors to be involved in the process, ask questions of the Administrator and understand the position of the company.
1. The First Meeting of Creditors
Once the Administrator has been appointed, they must hold the first meeting of creditors within 8 business days after the administration begins. At this meeting, creditors can vote to:
Replace the administrator; or
Create a committee of inspection
2. Second Meeting of Creditors
Following the Administrator’s investigation and report, the administrator must convene a second meeting to decide the company’s future within 25 business days of being appointed (or 30 business days if the appointment is around Christmas or Easter) unless the court allows an extension of time. At this meeting, creditors decide on an outcome for the company. The three options are:
End the administration and return control to the directors of the company; or
Have the company wound up and placed into liquidation (called a creditor’s voluntary winding up); or
Have the company enter into a DOCA.
Why do SMEs appoint Voluntary Administrators?
A VA offers several benefits for a financially distressed company, some of which are outlined below:
Facilitates a turnaround of the business;
Allows an independent and suitably qualified person to assess the company’s financial situation and future viability;
Provides the company with breathing space to deal with creditors in an orderly manner to explore the options available;
Allows a proposal to be considered and prepared, with the intention of providing the best possible outcome to all stakeholders versus liquidation;
May allow the company to avoid liquidation;
If approved, the DOCA will eliminate the possibility of claims that may be available to a Liquidator, such as insolvent trading; and
Provides breathing space for the Director faced with personal guarantee claims.
What is the downside of Voluntary Administration?
If not managed correctly, some of the most common downsides may include the costs involved, potential for negative publicity, loss of control over day to day operations and the future of the business, termination of supplier and customer relationships and a certain degree of unpredictability. In particular, as the business is taken over by a third party (Administrator) who will need to inform stakeholders, with the future of the Company then decided by creditors.
In our next article, we will look at what is coined a pre-pack arrangement or transaction, which involves a sale of assets or a business as a going concern arranged prior to, and completed before or shortly after, a formal insolvency appointment.