Restructuring & Insolvency

What is Voluntary Administration?

The voluntary administration process is designed to maximise the chances of a company or its business continuing to exist.

When a company is insolvent or likely to become insolvent, directors must take action to prevent further debts being incurred and minimise trading losses (preserve cash). This usually involves one of two pathways, Liquidation or Voluntary Administration. Director(s) must determine which pathway is appropriate given their businesses unique situation. Voluntary administration may be appropriate if there is interest in:

  • Salvaging the company’s business (wholly or partially), although this can also be achieved within a liquidation;
  • Retaining the support of a secured creditor who may seek to appoint a receiver should the company be placed straight into liquidation;
  • Dealing with a winding up proceeding that is already on foot. A liquidator cannot be appointed when a winding up application has been made;
  • Retaining the company at the end of the process i.e. for tax losses; and or
  • Specifically, the Directors and/or members do not want to pursue a liquidation.

If one, or all, of the above criteria, are met, then a further external administration process called Deed of Company Arrangement (DOCA) may be warranted. A DOCA is a formal restructure process, injection of capital, or alternative way of dealing with the company’s assets that provides creditors with a return that is higher than the return expected from liquidation. If no DOCA is proposed or viable, then liquidation may be the best path for the company. DOCA’s are explained further below.

Voluntary administration may also be the best course of action if it is not possible to obtain sufficient shareholder support to place the company in liquidation. However, as voluntary administration has higher reporting requirements, the process is more costly when compared to liquidation.
Below is a detailed guide on the voluntary administration process to assist directors and other stakeholders.

What is a voluntary administration?
The voluntary administration process is designed to maximise the chances of a company or its business continuing to exist. It helps insolvent companies deal with their debts, by ensuring that they either:

  1. Come to a formal arrangement with their creditors through a DOCA; or
  2. Be placed into liquidation, quickly and inexpensively.

How is a voluntary administrator appointed?
A voluntary administrator can be appointed in three ways:

  • The directors of a company resolve by simple majority that the company is, or is about to become, insolvent;
  • A liquidator determines that a proposed DOCA will provide a better return to creditors than the continued liquidation; or
  • A secured creditor after the terms of their finance agreement have been breached.

Does the company have to be proven to be insolvent?
No, directors can appoint a voluntary administrator if they believe the company is insolvent snow or is likely to be insolvent in the future – i.e. there is an approaching debt and the company does not have enough resources to service that debt.

What does the administrator do?
The administrator assumes control of a company’s business, property and financial affairs.

They assumes sole responsibility to perform all functions and exercise any and all director powers that could be exercised if the company was not under administration, including continuing to trade or dispose of all or any part of a business or property.

The directors and other officers lose all powers to act on behalf of the company unless expressly allowed by the administrator.

What happens in voluntary administration?
The voluntary administrator will:

  • Take control of the company’s assets;
  • Investigate the company’s affairs;
  • Report any offences to ASIC;
  • Provide limited assistance to interested parties to formulate a DOCA proposal;
  • Review liquidation recoveries such as insolvent trading claims or preference claims to compare the financial recovery of these actions, and subsequent distribution to creditors, against any DOCA proposal;
  • Report to creditors on the course of action that offers the best outcome for creditors; and
  • Call the required meetings of creditors to decide the future of the

It is common for the administrator to trade on the company especially if a sale of business is contemplated. The merit of doing so is assessed at the time of the appointment and is considered carefully as debts incurred by the company during the voluntary administration become personal debts of the administrator if the company is unable to pay them.

The administrator meets with the company’s creditors on at least two occasions:

  1. The first meeting is held within 8 business days of the appointment. At this meeting creditors can resolve to replace the administrator and form a creditors’ committee of inspection to assist the administrator in the voluntary administration process; and
  2. The second meeting is usually held 25 business days after the appointment. At the second meeting, creditors will choose the option they believe will best serve their interests. The available options are:
  3. Accept a proposal for a DOCA;
  4. End the voluntary administration and pass control of the company back to the directors; or
  5. Liquidate the company.

Find our article on ‘What is a Deed of Company Arrangement (DOCA)’ explained in more details here

Secured creditors during voluntary administration
Secured creditors (typically banks) have 13 business days from the appointment date to enforce their security – i.e. appoint a receiver, or receiver and manager to take control of the company’s assets that comprise the security. If they do not do so within that time, their powers are effectively frozen for the duration of the voluntary administration period.

This decision period gives the secured creditor time to decide whether to enforce their security, and the administrator some certainty regarding their powers during the administration.

Unsecured creditors during voluntary administration
A freeze or moratorium is imposed on unsecured creditor actions meaning they cannot enforce their claims or apply to wind up the company. A provisional liquidator cannot be appointed to a company without the leave of the court, and all proceedings or enforcement actions against a company’s property are placed on hold.

What happens to existing winding up proceedings?
The administrator is required to notify the Court and the petitioning creditor of the appointment to ensure the proceedings are halted during the voluntary administration process. The Court still holds the power to appoint a liquidator, however, in practice the Court usually allows the voluntary administration process to continue.

The administrator notifies the Court on the proposals being bought to creditors for the future of the company, whether that be a DOCA, liquidation, or return of the company to director(s).

What happens to goods captured under the personal property securities act 2009?
The laws governing voluntary administration are designed to preserve the company to maximize the chances of the business being saved. In general terms this means that creditors cannot ‘reach in’ and interfere with the company’s assets and activities. In particular, the Act prevents:

  • An owner of property used by the company from recovering the property;
  • A lessor (e.g. landlord) from charging distress rent, taking back possession, or otherwise recovering the property; and
  • A secured party with physical possession of security.

from selling the property or otherwise enforcing the security interest.

The voluntary administrator may still sell or dispose of assets that are subject to a security interest:

  • With the consent of the secured party;
  • With the consent of the Court; or
  • In the ordinary course of

Any disposal made by the voluntary administrator requires the net sale proceeds from the secured property to be distributed to those holding relevant security interests.

Voluntary administration’s effect on landlords
A landlord is bound by the same moratorium applying to all creditors, providing the landlord did not commence enforcement proceedings prior to the appointment.

The Act permits the administrator to occupy the company’s leased premises for up to seven calendar days without paying rent. After that he must pay rent for the rest of the voluntary administration period or vacate the property.

The administrator’s liability to the landlord ends at the conclusion of the voluntary administration or when the premises are vacated, whichever is earlier. The administrator will not be liable for rent if she does not occupy the property. However, the company may continue to incur liability for the rent as an unsecured claim.

Voluntary administration’s effect on personal guarantees
Creditors holding personal guarantees from directors cannot take action under the guarantee during the voluntary administration period. Personal guarantees can be enforced when the voluntary administration ends.

Can a voluntary administrator distribute funds to creditors?
No, a voluntary administrator is not permitted to pay a dividend to creditors.

A distribution or dividend to creditors can only be done by a liquidator when the company is being wound up or a deed administrator when the company is under a DOCA.

Do creditors need to decide on a course of action at the second meeting?
Not necessarily. The second meeting may be adjourned for up to 45 business days for further investigations to be carried out, or for a proposed DOCA to be amended.

The Court has the power to further extend this period if there is a genuine reason for an extension – i.e. if a sale of business is progressing.

What does voluntary administration cost?
The administrator’s professional fees and disbursements are paid first out of the company’s assets. If those assets prove to be inadequate, the administrator may request funding from a DOCA proponent or from other sources to allow the process to continue.

However, the administrator is unable to force a party, including directors, to fund the process.

Each administration is different and will therefore have a different cost depending on the work required. The work conducted can be broken into two categories: statutory and non-statutory.

Statutory work is required on every file regardless of size or complexity, and includes:

  • Notifying ASIC;
  • Issuing notices to creditors;
  • Issuing notices to utilities and statutory authorities, such as the Australian Taxation Office;
  • Conducting the first meeting of creditors;
  • Dealing with creditors’ enquiries;
  • Performing preliminary investigations into preferential payments, insolvent trading and other voidable transactions;
  • Preparing and issuing a detailed report to creditors;
  • Conducting the second meeting of creditors; and
  • Notifying creditors and ASIC of the outcome of the second meeting of

Non-statutory but still necessary work may include:

  • Trading on the business;
  • Dealing with secured creditors;
  • Dealing with finance companies;
  • Selling some or all of a company’s assets or the company’s business;
  • More detailed investigations into potential recoveries and asset ownership; and
  • Considering the viability of any DOCA proposal.

When does a Voluntary Administration end?

  • The DOCA agreement is The parties to the DOCA agreement, usually the company and the proponent of the DOCA, have 15 business days to sign the DOCA, otherwise the company is placed into liquidation;
  • The creditors resolve to wind up a company;
  • The creditors resolve that the voluntary administration should end (and control revert to the directors);
  • The court orders that the administration is to end
  • The period for calling the second meeting ends without the meeting being called; or
  • The court appoints a liquidator to the company.

If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.

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