We are, hopefully, approaching the end of two years of uncertainty, lockdowns and other restrictions in response to the global Coronavirus pandemic. However, at the time of writing, a war in Eastern Europe is impacting the price of oil and increasing the cost of living across most of the world.
Many Australian businesses are struggling to survive. This is always stressful if it is your company or your business has unpaid debts with a struggling company.
One option for a business struggling with financial issues is voluntary administration.
We will detail what happens during a voluntary administration and the possible outcomes.
We will also explain the costs involved in the process, including how they are incurred and the approval process.
What is voluntary administration?
Voluntary administration is a way of deciding on the future of a business. A financial expert takes over the management of the business, reviews the company’s financial affairs and decides on the best outcome on behalf of the company’s creditors.
Why choose voluntary administration?
The directors of a business may decide they are in danger of becoming insolvent if they continue to trade. They are struggling to pay debts but would prefer to avoid putting the company straight into liquidation.
They also want to avoid breaking the law by continuing to trade when they are insolvent.
Voluntary Administration provides the opportunity for a registered financial professional to assess the business and, potentially, agree with creditors on an option for continued trading.
How is the Administrator appointed?
Normally, the company’s directors decide to put the company into voluntary administration. They will appoint an external administrator to take over running the company.
The administrator must be a liquidator formally registered with ASIC and should have no known connections to the company or any of the creditors.
What’s the role of the administrator?
The administrator takes control of the company and runs affairs while investigating finances. The administrator must ensure the best outcome for creditors and will try to pay outstanding debts and return the company to profitable trading.
What is the Voluntary Administration process?
The administrator has two main tasks:
- Investigate the financial affairs of the company
- How did it get into financial difficulties in the first place?
- Did the company directors break any laws in their running of the company?
- Decide on the best future for the business
- The administrator is acting on behalf of the creditors. The aim is to repay all, or part, of the outstanding debt.
The creditors have some influence during the voluntary administration process, particularly via the two creditors’ meetings:
The first creditors’ meeting
The first meeting is held within eight days of the administrator being appointed. The administrator will have notified creditors and published an advert for the meeting on ASIC’s website.
There are normally two items on the meeting agenda, concerning the rights of the creditors to
- Form a committee of inspection
The committee of inspection is a subset of the creditors or their representatives. The committee of inspection may advise and assist the voluntary administrator and also monitor the conduct of the administrator and team.The committee of inspection has the authority to approve some stages of the process and also to provide directions to the administrator. The administrator does not have to comply with the directions if they are deemed not to be reasonable. - Replace the voluntary administrator
Before the meeting, the administrator will have sent the creditors declarations regarding any relationships relevant to the voluntary administration. This helps the creditors to decide on whether to replace the administrator.Any creditor wishing to replace the administrator must have approached an alternative registered liquidator and obtained written confirmation the alternative choice is prepared to take over as a replacement voluntary administrator.
The second creditors’ meeting
The second, and final, meeting normally happens around 5 weeks after the start of the voluntary administration. At this meeting, the creditors will vote to decide the future of the company.
The meeting again is advertised on ASIC’s website and, at least five days before the meeting the administrator will issue the creditors with:
A claim form
Also known as a ‘proof of debt’ form, the creditor must set out the details of their claim, including the amount of the debt and what the debt is for.
A proxy voting form
The creditor may nominate a proxy, to vote on their behalf.
The voluntary administrators’ report
This is a report following the voluntary administrators’ investigation into the company. The report covers the company’s financial and business circumstances plus the conduct of the directors, if relevant. The report must also detail company property and assets.
The report will present an analysis of the three possible outcomes for the company.
The report should enable creditors to decide on the future of the company and it should be read before attending the second creditor’s meeting.
The voluntary administrators’ statement
The voluntary administrators’ statement is guidance from the administrator on which of the possible outcomes from the voluntary administration is in the best interests of the creditors.
The statement must contain enough information on each of the available options to enable creditors to make their decision on the future of the company.
What is the outcome of a voluntary administration?
There are three possible options, as put forward by the voluntary administrator, for the future of the company:
- Return control of the company to the directors
The voluntary administrator’s investigations have suggested the business’s finances are recoverable and the business may continue to trade and become profitable again.The company is returned to the control of the directors and the voluntary administration ends. All outstanding debts should be paid. - Put the company into liquidation
The administrator deems the company’s financial state to be beyond saving. The company would be wound up. A liquidator is appointed to arrange for the disposal of company assets. Funds raised may be used to repay some, or all, debts outstanding to the creditors. - Approve a DOCA
A Deed of Company Arrangement is an agreement between the company and creditors to pay off some, or all, of the outstanding debts. The deed should call out how funds will be raised to pay the debt (normally by the sale of assets) and provide timescales.When the debts have been paid, as per the agreement, the company may begin trading again.
What happens to the employees of the company?
Employees of the company may have unpaid wages, superannuation, sick pay and are considered unsecured creditors of the company. They normally receive priority for payment of outstanding superannuation and wages.
As creditors, employees are entitled to attend and vote at the two creditors’ meetings.
What are the costs of Voluntary Administration?
The costs for a voluntary administration are the fees, or remuneration, payable to the Administrator and any staff.
The Australian Securities and Investments Commission (ASIC) maintains a register of liquidators. Only one of these registered liquidators may act as an external administrator during a voluntary administration process.
Administrators’ fees
ASIC publishes rules and guidelines for creditors and the liquidators themselves regarding fees chargeable.
The Administrator is entitled to receive payment for the work they undertake. These fees may be:
- An hourly rate, the total fee will be based on the time spent by the administrator and any staff
- A fixed price. A quoted price, based on an estimate
- A proportion of the funds realised from the disposal of assets
The administrator seeks approval for their fees, via a vote of the company’s creditors. Charging for the time spent, via an hourly rate, is the normal method.
The approval of fees includes approval of a cap (a maximum amount expected to be charged). If the work exceeds the estimate (is greater than the ‘cap’) the administrator must provide details of work done to date and ask the creditors to approve another set of fees for the remaining work.
The administrators’ fees are normally paid before any payments are made to the creditors.
Administrators’ costs incurred
They may also claim for any expenses incurred. These may include
- Office expenses (‘phone and postage, photocopying and any stationery)
- the cost of storage for the company, records and documentation
- the cost of retrieving data from company computer systems
- Professional fees paid out to
- Auctioneers, valuers and real estate agents
- lawyers and solicitors for legal advice
Disputed fees – maximum payable
In the event the administrator fees and expenses are not approved, ASIC sets out a maximum default amount. The administrator is entitled to this amount even if their official remuneration has not been approved.
For the Australian financial year commencing 1 July 2021, the maximum default amount is $5,448 exclusive of GST.
Corporate Lifeline for professional, expert financial assistance
At Corporate Lifeline, we’ve helped hundreds of Australian companies recover from financial difficulties. We’ll review your financial circumstances and offer solutions to return your business to successful, competitive trading.
Voluntary Administration may be an option for you. If it is, our team of registered liquidators are available to provide you with the best chance of success.