Voluntary Administration

What is the purpose of voluntary administration?

Voluntary administration is the process enacted pursuant to the recommendation of the Harmer Report.  The voluntary administration scheme has the underpinning concepts of corporate rescue or rehabilitation, which aims to give companies in financial distress an opportunity to get back on their feet and continue successfully trading.[1]  The process of voluntary administration allows an independent qualified voluntary administrator to take control of the company and investigate its affairs in order to determine whether or not the company and its business can be salvaged.  The voluntary administrator has the option to rehabilitate the company and continue its business, or place it straight into liquidation, allowing creditors to get an optimum return whatever the outcome.

voluntary administration

What is the effect of voluntary administration?

Once the company enters voluntary administration, a moratorium comes into effect.  This restricts creditors’ rights as it prevents the company from being sued by creditors without the written consent of the administrator or the leave of the court, with some exceptions. During this period, personal guarantees given by a director of the company are also unenforceable.

How does voluntary administration work?

voluntary administration in AustraliaA voluntary administration generally occurs where the board of directors of a company resolve to appoint a voluntary administrator. A voluntary administrator can also be appointed by secured creditors or a liquidator in some circumstances.

The first creditors’ meeting is called by the administrator within 8 business days after the administration begins. At this meeting, two issues are decided which include; firstly, whether the creditors wish to appoint a different administrator and secondly, whether they wish to form a committee of creditors and its membership.

The administrator has wide powers to take control of the company and conduct investigations on the company’s affairs including its business, property and financial circumstances.  The administrator will then make a report to the creditors and the Australian Securities and Investment Commission. 

After the investigations occur, the second meeting of creditor’s will take place.  The administrator must call this meeting within 5 business days before or after the end of the convening period which generally speaking is within 20 business days after the administration started.  This meeting is of vital importance as it effectively determines the company’s future. 

At the second meeting, the administrator must present the results of their investigations, form an opinion on each of the following options and determine which is in the company’s best interests;

  1. The company execute a Deed of Company Arrangement (“DOCA”);
  2. The administration should end and the company put back into the hands of the directors; and
  3. The company be put into liquidation.

Where the creditors resolve the company to be wound up in insolvency, the liquidation is deemed to have commenced when the voluntary administration began and the administrator generally becomes the liquidator.  In practice, it is evident that this is generally what occurs. 

What is a deed of company arrangement and how does it work?

Australian voluntary administrationA deed of company arrangement is an agreement between the company and its creditors to satisfy the company’s debts.  The terms of the deed are as agreed, however, generally it allows the company to continue operating and may maximize the return for creditors.

Creditors are able to vote for a deed of company arrangement at the second meeting of creditors, generally held 15 to 25 days after the appointment of the administrator. The company must sign the deed within 15 days of the creditors voting for the proposal to enter a deed of company arrangement. Failure to comply within the time period will automatically put the company into liquidation.

It is important to note that all unsecured creditors are bound by deed of company arrangement, even in the event that they did not vote for it. Secured creditors and owners of property used by the company are not bound if they did not vote for the deed of company arrangement, unless the court orders that they be bound. The deed administrator appointed under the deed of company arrangement is responsible for monitoring the company.

What are the benefits of entering voluntary administration?

Entering voluntary administration can provide a solution for companies to:

  1. avoid insolvent trading;
  2. come to an arrangement with creditors in relation to the company’s debts;
  3. give the company ‘breathing room’ which may allow it to get back on its feet;
  4. maximize the returns to creditors.

What are the criticisms of voluntary administration?

Voluntary administration has been criticised as merely being the ‘scenic route’ to liquidation.

Also, due to the harsh penalties of directors breaching their duties to prevent insolvent trading and the limited success in running defences, directors find may find themselves in a dangerous position where their company is financially unstable.  Often due to their strict duty to prevent insolvent trading, directors may be forced to make a quick decision about their company’s future and whether to place the company into voluntary administration or liquidation. 

One defence to insolvent trading is that the director took all reasonable steps to prevent the company incurring a debt, which may include putting the company into voluntary administration. Therefore it is evident that directors are being incentivized to avoid personal liability by prematurely placing their companies into administration which is a conflict between the director’s personal interests and the best interests of the company. 

What are my rights as an unsecured creditor?

An unsecured creditor’s rights include:

  1. lodging a proof of debt;
  2. attending creditors’ meetings;
  3. voting at creditors’ meetings (if a proof of debt form has been lodged);

What are my rights as a secured creditor?

A secured creditor’s rights include:

  1. lodging a proof of debt;
  2. attending creditor’s meetings;
  3. exercising their rights over their security within 13 business days; and
  4. voting at creditor’s meetings (for the full amount of the debt).

Need to know more about Voluntary Administration? Contact our experienced team at Professional Insolvency Services on 1300 306 619

[1] Tristan Howes ‘Must the captain go down with the ship? The avenues available to directors to protect themselves from liability for insolvent trading’ (2002) 30 C&SLJ7, 7.