If your business is insolvent, you may appoint a voluntary administrator (VA) to manage your company’s affairs, business and property. The purpose of voluntary administration is to allow an insolvent company to continue operating and attempt to restructure or sell the business as a going concern.
What is voluntary administration?
Voluntary administration is a formal insolvency process in Australia that allows businesses to restructure and continue operating. The process is overseen by a court-appointed administrator, who works with the company directors and creditors to develop a plan for the business. If the plan is successful, the company can emerge from voluntary administration and continue trading. However, if the plan is unsuccessful, the company may be wound up and sell its assets to repay creditors.
Benefits for a Company in Financial Trouble
There are several benefits that a company in financial trouble may experience by going into voluntary administration.
Firstly, it provides the company with some much-needed breathing space from its creditors. This means that the company can focus on restructuring its affairs and coming up with a plan to return to profitability without the pressure of having to repay its debts immediately.
Secondly, it allows the company to continue operating and its employees to keep their jobs. This is important because it means that the company can still generate revenue and have a chance of repaying its debts.
Finally, it gives creditors more certainty about getting paid back, as they can negotiate with the administrator on the repayment plan. This is often more favourable than if the company was liquidated, as in that case, the creditors would only receive a percentage of what they are owed.
Why should you consider Voluntary Administration?
Voluntary administration can be a good option for businesses struggling to repay their debts. The process gives the company time to restructure its affairs and develop a plan to return to profitability. It also allows creditors to be repaid in full or partially before the company is wound up.
Voluntary administration can be a better alternative to liquidation, as it allows the company to continue operating and its employees to keep their jobs. It also gives creditors more certainty about getting paid back, as they can negotiate with the administrator on the repayment plan.
If you consider voluntary administration for your business, you should get advice from a qualified insolvency practitioner. They will be able to assess your situation and advise you on the best course of action for your business.
Voluntary Administration Process
1. Appointing a Voluntary Administrator
This is done by the company’s directors, who must appoint an insolvency practitioner as the administrator. The voluntary administrator then takes control of the company’s affairs and begins to assess its financial situation.
2. Creditors’ Meeting
The voluntary administrator will convene a meeting of creditors, where they will present their plan for the company. The creditors vote on whether to accept or reject the plan. If it is accepted, the voluntary administrator will implement it. If it is rejected, the company may be wound up.
3. Implementing the Plan
If the creditors’ meeting accepts the voluntary administrator’s plan, they will work with the company’s directors to implement it. This may involve selling off some of the company’s assets, reducing its workforce, or renegotiating its debts.
4. Returning to Profitability
Once the plan has been implemented, the company will aim to return to profitability and repay its creditors. If it is successful, the company can emerge from voluntary administration and continue trading. However, if it is unsuccessful, the company may be wound up and its assets sold off to repay creditors.
Risks for a Company in Financial Trouble
There are also some risks associated with voluntary administration.
Firstly, the process is overseen by a court-appointed administrator, who may not have the company’s best interests at heart. They may be more interested in maximising their fees or selling off the company’s assets to repay its debts. This could leave the company in a worse position than if it had gone into liquidation.
Secondly, the administrator may not be able to develop a viable plan for the company to return to profitability. If this happens, the creditors may vote to wind up the company, which would result in its assets being sold off and its employees losing their jobs.
Finally, there is always the risk that the company will not be able to emerge from voluntary administration and will have to be wound up anyway.
What is the Role of Voluntary Administrator?
Review the company’s financial situation.
The voluntary administrator’s primary role is to review the company’s financial situation and assess its options. This includes looking at the company’s debts, assets, and income. They will also speak to the company’s directors and creditors to get a better understanding of the situation.
Prepare a report for creditors.
Once the voluntary administrator has reviewed the company’s financial situation, they will prepare a report for the creditors. This report will set out the administrator’s proposals for how the company can be restructured and returned to profitability.
Convene a meeting of creditors.
The administrator will then convene a meeting of creditors to present their plan for the company. The creditors will vote on whether to accept or reject the plan.
If the creditors accept the plan, the company will be allowed to continue trading and will have some time to repay its debts. If the creditors reject the plan, they can vote to wind up the company.
Follow all legal rules at every step.
The administrator must follow all legal rules and regulations at every step of the process. This includes getting the court’s approval before taking any actions and providing regular reports to the court and creditors.
Alternatives to Voluntary Administration
Voluntary administration can be the best solution for a company in financial difficulty; the biggest problem with Voluntary Administration is that it is a highly regulated process, which will always be expensive to go through.
There are some alternatives to voluntary administration that a company in financial difficulty can consider:
Liquidation vs. Voluntary Administration
Liquidation and voluntary administration are both options for a company in financial difficulty. However, there are some key differences between the two:
- Voluntary administration is a court-ordered process, while liquidation can be initiated by the company’s directors or creditors.
- Voluntary administration gives the company a chance to restructure and repay its debts, while liquidation results in the company ceasing to exist.
- Voluntary administration is more expensive than liquidation, as it is a highly regulated process.
- Voluntary administration may provide some protection from legal action for the company’s directors, while liquidation does not.
Employees of a company in voluntary administration may be able to keep their jobs, while those in liquidation will usually be made redundant. - Voluntary administration is a process that a company can use in financial difficulty to restructure its affairs and repay its debts. It is a court-ordered process that is more expensive than liquidation, but it may provide some protection from legal action for the company’s directors and employees.
Safe Harbour vs. Voluntary Administration
Safe harbour is a provision in the Corporations Act that protects directors from personal liability for certain debts of the company. This protection is not available to directors of companies in voluntary administration.
The main difference between safe harbour and voluntary administration is that safe harbour is a defence against insolvent trading, while voluntary administration is a process that a company can use in financial difficulty to restructure its affairs and repay its debts.
Which is better?
There is no easy answer as to which option is better for a company in financial difficulty. It depends on the individual circumstances of the company and the options available to it.
If you are a company’s director in financial difficulty, you should speak to an insolvency practitioner to get advice on the best course of action for your company.
Informal Restructuring vs. Voluntary Administration
Informal restructuring is when a company in financial difficulty tries to negotiate with its creditors to reach an agreement on how the debts will be repaid. This can be done without the involvement of a court or an administrator. This is also the least drastic and most inexpensive option available to a company.
The main difference between informal restructuring and voluntary administration is that voluntary administration is a court-ordered process, while informal restructuring is not. This means that informal restructuring is less expensive and less risky than voluntary administration.
What is a Deed of Company Arrangement (DOCA)?
A Deed of Company Arrangement (DOCA) is an agreement between a company and its creditors that sets out how the debts of the company will be repaid. A DOCA can only be used if the company has gone through voluntary administration.
The main advantage of a DOCA is that it gives the company some breathing room to restructure its affairs and repay its debts over time without being wound up by the court.
The most significant disadvantage of a DOCA is that it is not binding on all creditors, which means that some creditors may still take legal action against the company.
What Is the Best Result for You?
The best result for you will depend on your individual circumstances. If your company is in financial difficulty, you should speak to an insolvency practitioner to get advice on the best course of action for your company.
If you’re a Secured Creditor:
If your company is in voluntary administration, you may be entitled to receive payment in full for the debts owed to you. This is because secured creditor prioritises unsecured creditors in the voluntary administration process. This gives you more protection, especially if the security interest is listed on the Personal Property Securities Register (PPSR).
If your company goes into liquidation, you may not receive payment in full for the debts owed to you. This is because liquidation gives unsecured creditors priority over secured creditors.
You should speak to an insolvency practitioner if your company is in financial difficulty to get advice on the best course of action for your company.
If you’re an Unsecured Creditor:
If your company is in voluntary administration, you will not receive payment in full for the debts owed to you. This is because unsecured creditor is given priority over secured creditors in the voluntary administration process.
If your company goes into liquidation, you will not receive payment in full for the debts owed to you. This is because liquidation gives unsecured creditor priority over secured creditors.
You should speak to an insolvency practitioner if your company is in financial difficulty to get advice on the best course of action for your company.
Is voluntary administration good?
There is no easy answer as to whether voluntary administration is good or bad for a company in financial difficulty. It depends on the individual circumstances of the company and the options available to it.
If you are a company’s director in financial difficulty, you should speak to an insolvency practitioner to get advice on the best course of action for your company. If you are a company’s director in financial difficulty, you should speak to an insolvency practitioner to get advice on the best course of action for your company.
What happens when company goes into voluntary administration?
When a company enters voluntary administration, an administrator is appointed to manage the affairs of the company. The administrator will assess the financial situation of the company and develop a plan to restructure the company and repay its debts.
The administrator may also negotiate with creditors to reach an agreement on how the debts of the company will be repaid. This can be done through a Deed of Company Arrangement (DOCA).
Once the administrator has developed a plan, they will present it to a meeting of company’s creditors. The creditors will vote on whether to accept the plan. If the plan is accepted, it will be implemented. If the plan is not accepted, the company may be wound up by the court.
What should your next step be?
If your business is in financial difficulty, you should speak to an insolvency practitioner to get advice on the best course of action for your company. They will be able to assess your company’s financial situation and advise you on the options available to you. Contact Small Business Restructuring Specialists now and book a free 30-minute consultation.
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