Understanding Voluntary Administration: A Comprehensive Guide

Aug 8, 2023 | Voluntary Administration

In the world of business, financial turbulence is not an uncommon scenario. Companies, big or small, may face financial difficulties due to various reasons. It’s during these challenging times the concept of voluntary administration comes into play. But what exactly is voluntary administration, and how does it work?

This article will explore the intricacies of voluntary administration, providing you with a detailed understanding of this crucial business process.

Demystifying Voluntary Administration

Business Man Lifeline

“Voluntary administration” is often mentioned when a company is facing financial difficulties. The process can seem complex and daunting, but understanding its purpose, process, and potential outcomes can shed light on its role in business recovery.

Purpose of Voluntary Administration

The primary purpose of voluntary administration is to provide a lifeline to companies in financial distress. It’s a process designed to give a company a chance to restructure its debts, potentially avoid liquidation, and provide a better return for creditors than immediate winding up.

  • Rescue mechanism: Voluntary administration acts as a rescue mechanism for financially distressed companies. It provides an opportunity for these companies to restructure their debts and continue their operations.
  • Avoiding liquidation: The process is often seen as a preferable alternative to liquidation. It provides a chance for the company to address its financial issues and potentially avoid the process of liquidation.
  • Better return for creditors: Voluntary administration aims to provide a better return for creditors than they would receive from an immediate winding up of the company.

Process of Voluntary Administration

The process of voluntary administration involves several key steps, each designed to ensure the company’s affairs are handled in a fair and transparent manner.

  • Appointment of an administrator: The process begins with the appointment of an ASIC registered administrator. This is usually done by the company’s directors when they believe the company is insolvent or likely to become insolvent.
  • Meeting with creditors: The administrator who is appointed to manage the affairs of the company during the voluntary administration, provides an overview of the company’s financial situation, assets, liabilities, and the circumstances that led to the appointment of voluntary administration.
  • Investigation and report: The administrator presents their preliminary report, outlining their initial findings and recommendations. This report typically includes an assessment of whether the company can be saved through a deed of company arrangement (DOCA), liquidation, or other means. Creditors have the opportunity to ask questions and seek clarifications about the report.
  • Voting and decision-making: Creditors play a pivotal role in determining the company’s fate. They vote on the administrator’s recommendations, particularly regarding whether to proceed with a DOCA proposal or move towards liquidation. The voting is crucial, as it guides the next steps in the voluntary administration process.

Potential Outcomes of Voluntary Administration

Creditors Meeting

Voluntary administration is a process with various outcomes, each with its own implications for the company and creditors:

Returning the company to the directors

One possible outcome of voluntary administration is the return of control to the company’s directors. This typically happens when the administrator concludes the company is solvent, or if the creditors decide to return the company to the directors’ control during the second meeting of creditors.

  • Implications for the company: If the company is returned to the directors, it can continue to operate as before, albeit with a renewed focus on financial management to avoid future insolvency.
  • Implications for the creditors: Creditors may not receive immediate repayment of their debts, but they may stand a better chance of recovering their money if the company can return to profitability under the directors’ control.

Entering into a Deed of Company Arrangement

A DOCA is one of the potential outcomes of voluntary administration. It is a documented agreement, accepted by creditors, governing how the company’s outstanding debts will be dealt with. It aims to maximise the chances of the company continuing to exist.

  • Implications for the company: A DOCA can provide a lifeline for the company, allowing it to continue trading under agreed terms. This can often be a better outcome than liquidation, as it allows the company to preserve its business while paying its debts.
  • Implications for the creditors: Creditors may agree to a DOCA if they believe it will result in a better return than immediate liquidation.

Going into liquidation

Liquidation is the process of winding up a company. Its assets will be sold to repay creditors. It’s usually the last resort when a company is unable to pay its debts.

  • Implications for the company: Liquidation effectively means the end of the company. The liquidator takes control of the company’s assets, which are then sold to repay creditors. Once the liquidation process is complete, the company is deregistered.
  • Implications for the creditors: In a liquidation, creditors may receive some repayment from the sale of the company’s assets. However, unsecured creditors are last in line for repayment and may not receive the full amount they are owed.

Advantages and Disadvantages of Voluntary Administration

Business Owner Analyzing

Voluntary administration, like any business decision, comes with its own set of advantages. These benefits can often provide a lifeline to companies in financial distress, offering them a chance to restructure and potentially avoid liquidation.

Moratorium on Legal Proceedings

One of the significant advantages of voluntary administration is the moratorium on legal proceedings. Once a company enters voluntary administration, a moratorium period begins. During this time, unsecured creditors cannot commence or continue with legal proceedings against the company. This freeze gives the company breathing space to strategise and plan its next steps without the constant threat of legal action.

Potential for the Company to Continue Trading

Voluntary administration can provide a struggling company with a chance to continue trading. If the creditors agree to a deed of company arrangement, the company will be able to continue trading as long as it settles outstanding debts as documented in the DOCA. This opportunity can be crucial for fundamentally sound companies facing temporary financial difficulties.

Better Return for Creditors

Voluntary administration can potentially provide a better return for creditors than immediate liquidation. When a company goes into liquidation, the assets are often sold quickly, sometimes at a lower price than their actual worth. However, under voluntary administration, the company may continue trading, potentially improving its financial position and providing a better return to creditors.

Understanding the Disadvantages of Voluntary Administration

Company Strategy

Despite its advantages, voluntary administration also comes with potential downsides. These disadvantages are important to consider when deciding whether voluntary administration is the right course of action for a company.

Potential Loss of Control by the Directors

Once an administrator is appointed, the directors lose control of the company. The administrator takes over the management of the company and makes decisions about its future. This loss of control can be challenging for directors who have invested significant time and resources into the company.

Uncertainty for Creditors

The future of the company is uncertain until the second meeting of creditors. During the voluntary administration process, creditors may not know whether they will recover their debts in full, or when they will receive payments. This uncertainty can be stressful and can impact the financial planning of the creditors.

Potential Additional Costs

The process of voluntary administration can be costly. The administrator’s fees, the cost of meetings, and other associated expenses can add up. If the company ultimately goes into liquidation, these costs are often paid from the company’s assets, potentially reducing the return to creditors.

Exploring Alternatives to Voluntary Administration

Creditors Payment

While voluntary administration can be a viable option for companies in financial distress, it’s not the only solution available. There are several alternatives companies can consider, each with its own set of advantages and disadvantages:

Liquidation: The Last Resort?

Liquidation, also known as winding up, involves ending a company’s operations, selling its assets, and distributing the proceeds to creditors. This is usually the last resort when a company is unable to pay its debts.

  • Cessation of business: In liquidation, the company ceases to operate. The liquidator takes control of the company, sells its assets, and distributes the proceeds to creditors.
  • Order of payment: The proceeds from the sale of assets are distributed to creditors in a specific order. Secured creditors are paid first, followed by unsecured creditors and shareholders.
  • Finality: Liquidation brings finality to the company’s financial distress. However, it also means the end of the company, which can have significant implications for employees, shareholders, and other stakeholders.

Navigating the Complexities of Voluntary Administration

Voluntary administration is a complex process with many potential outcomes. It’s a tool with the potential to provide breathing space for a company in financial distress, allowing it to restructure, avoid liquidation, or ensure a better return for creditors. However, it’s not without its challenges and potential downsides.

When facing financial difficulties, it’s crucial to seek professional advice to understand the best course of action.

At Corporate Lifeline, we specialise in helping businesses navigate through these challenging times. Our team of experts can provide the guidance and support you need to make informed decisions about your company’s future.

Don’t let financial distress take control – reach out to us today and take the first step towards a brighter future for your company.

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