How Voluntary Administration can reveal options for your business

Dec 16, 2022 | Voluntary Administration

Voluntary Administration is a valuable tool for businesses in Australia facing financial difficulties. This option can provide an opportunity for companies to stay afloat and improve their financial situation with the help of a qualified administrator.

This process allows businesses to restructure and gain greater control over their debt while providing creditors with the assurance they will be repaid.

In this article, we’ll explore why Voluntary Administration may be a smart business decision, what the process involves, and how it can help businesses stay afloat and improve their financial situation.

Why Is Voluntary Administration a Smart Business Decision?

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If the directors of a business are facing financial difficulties and are struggling to pay debts, they may be worried about becoming insolvent. It’s understandable they want to avoid putting the company straight into liquidation, as this will mean having to cease trading altogether. However, directors should avoid breaking the law by continuing to trade when the business is insolvent.

Fortunately, there is an option to potentially save your business; Voluntary Administration. This process allows a registered financial professional to assess the state of the business and potentially come up with a solution to enable the business to continue trading. It may also involve a formal agreement with creditors on the best course of action. If you’re in this situation, don’t despair, there is help available.

How Do I Know if I Should Consider Voluntary Administration?

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If you find yourself considering taking action to address financial issues within your company, you are not alone. There could be several factors causing you to take action, from struggling to pay debts on time to losing clients or facing legal action from creditors.

Be aware of the potential consequences of continuing to trade while insolvent, as this has legal implications and could lead to imprisonment.

Seeking expert financial advice is an essential step in understanding the options available to you and how best to move forward. Addressing financial issues sooner rather than later can help to mitigate the impact on your business and help you to avoid more serious consequences down the line.

The Signs Your Business May Need Expert Financial Assistance

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If you’re running a business, it’s essential to keep an eye out for the warning signs your company could be in financial trouble.

Declining sales are a clear indication you may be heading towards insolvency, especially if your stock isn’t turning over. Another red flag is if you’re having problems with creditors, such as being unable to pay them on time or receiving demands for payment.

Missing payments to the ATO is another alarming sign, as this can result in directors being held responsible for debts. If you’re unable to secure funding or credit to help cover your debts, this is a final warning sign you need to seek professional financial assistance as soon as possible.

Remember, the earlier you address these problems, the better chance you have of turning things around.

What Is the Role of the Administrator?

he Voluntary Administration process is overseen by an independent registered professional known as the Administrator. This individual assesses the financial situation of the company and works with its directors to develop a plan to address issues with the ultimate aim to keep the company trading.

As an administrator, there are two critical tasks needing attention when a company is in financial trouble.

  1. Investigate the company’s financial affairs, which is essential to understanding how the company ended up in financial difficulties in the first place. The administrator must determine whether the company directors violated any laws in their management of the company, and this can help to determine what actions need to be taken in the future.
  2. Determine what the best future for the business is, as they are acting on behalf of the creditors who have unpaid debts. The aim is always to repay all debts in full if possible.

The Voluntary Administrator’s role is to make decisions in the best interest of both creditors and shareholders, while also preserving potential jobs and protecting the assets of the business.

They will review all necessary documents, including financial statements, legal contracts, financial reports and more, to gain an understanding of the company’s current position. They will then explore possible courses of action with stakeholders such as creditors and employees before recommending a course of action.

What Is the Voluntary Administration Process?

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The Voluntary Administration process in Australia is designed to help businesses restructure and improve their financial situation. The Administrator will typically first investigate the company’s financial position and identify potential solutions. For instance, they may recommend selling off certain assets or restructuring existing debts. The Administrator will also liaise with creditors, who are usually given preferential treatment during the Voluntary Administration process.

Once a proposal is reached, it must be approved by both the Administrator and creditors before it can be put into action.

Creditors Meetings

As the Administrator, it is important to understand there are two crucial meetings.

  1. The first meeting is known as the “meeting of creditors,” during which the creditors have the power to make significant decisions.

    These decisions could include the replacement of the administrator, who was originally appointed by the company directors. The creditors also have the option to form a “committee of inspection,” which is a subset of creditors or representatives who will be responsible for assisting, advising and monitoring the administrator.

    As the Administrator, it is imperative to provide the creditors with all the necessary information and assistance to ensure a smooth and effective meeting.

  2. At the second meeting of the creditors, the administrator will present the three available options – liquidation, DOCA, or resumption of normal trading, and explain the pros and cons of each. The final decision on which option to choose lies with the creditors and will be based on the administrator’s recommendation.

Once a plan has been approved, the Administrator will work to implement it over a period of time as set out in the Voluntary Administration procedures established by law.

During this period, creditors cannot take legal action against the company but must wait until after the Voluntary Administration process is completed before taking any such steps.

Explain the Possible Outcomes of Voluntary Administration

There are three potential outcomes resulting from Voluntary Administration:

  1. The company continues to trade (the most common outcome). This option is presented when the administrator’s investigations indicate the company’s financial situation is recoverable, and there is a clear path to profitability. In this scenario, the company is returned to the directors’ control, and the administration comes to an end. All outstanding debts should be paid at this point.

    In some cases, creditors may agree to write off some of their debt in order for the business to continue trading as normal; however, this will depend on numerous factors such as the value of debts and how many creditors there are involved.

    This outcome offers hope for struggling businesses and proves seeking help early can aid in a return to financial stability.

  2. Entering into a Deed of Company Arrangement (DOCA) between creditors and shareholders. This agreement is made between the company and its creditors, outlining a plan to pay off all or some of the outstanding debts. If a DOCA is entered into, this means both sides have agreed on an arrangement for repaying the debt over time according to terms outlined in the agreement, often the debts are not repaid in full.

    The DOCA should also provide a clear roadmap for how the company will raise funds to repay the debt and include specific timelines. If the company successfully pays off its debts as outlined in the agreement, it will be able to resume trading.

    While voluntary administration can seem daunting, a DOCA can provide a valuable lifeline for struggling companies to get back on their feet.

  3. Going into liquidation occurs when the administrator determines the company’s financial situation is not recoverable.

    In this scenario, a liquidator is appointed to handle the disposal of company assets, with the funds raised being used to repay the outstanding debts to creditors. While liquidation can be a difficult process, it may be necessary in order to provide closure and pay off as many debts as possible.

Corporate Lifeline Provides the Help and Support You Need

Are you feeling like your business is struggling to stay afloat? We know being a great business owner doesn’t necessarily mean you are a financial expert. However, at Corporate Lifeline, we have the financial experts you need!

Our team of financial, business and systems experts can help you get your company where it needs to be. Whether you need help identifying sources of funding, drafting strategic plans or implementing changes, we’ve got your back. We’ll investigate your current financial structure and create a customised plan to help you achieve your goals.

If Voluntary Administration is the best choice for you, we’ll be there, alongside you with help and advice.

Contact us today for more information.

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