The voluntary administration process is a significant mechanism that offers struggling companies a chance to restructure and potentially recover from financial distress.

What is Voluntary Administration?

Voluntary administration refers to a formal insolvency process designed to assist financially distressed companies in evaluating their options and potentially restoring their viability. It provides a company with a temporary respite from legal actions by creditors while an independent and qualified administrator takes control of the company’s affairs.

Causes of Voluntary Administration

Companies may find themselves in voluntary administration due to various factors such as cash flow issues, mounting debts, significant loss of customers, economic downturns, or poor management decisions. By initiating voluntary administration, a company aims to regain financial stability and prevent the business from winding up (also known as liquidation).

Overview of the Voluntary Administration Process

Duration: The voluntary administration process generally lasts around 20 to 30 business days. However, extensions can be granted by the court or with the approval of creditors.

Appointment of Voluntary Administrator: The shareholders or directors resolve to appoint an administrator at a meeting if the directors or shareholders.

First Creditor’s meeting: the first creditor’s meeting is held within 8 business days of the administrator’s appointment. This meeting is usually general in nature and provides an overview of the Company’s financial position.

Deeds of Company Arrangement (DOCA): A DOCA is a binding agreement between the company and its creditors that outlines how the company’s affairs will be dealt with. It may propose a restructure, repayment plan, or even the sale of the business. Creditors vote on the DOCA, and if approved, it binds all parties.

DOCA Proposal: a party interest in proposing a DOCA (most likely a director) will put forward a DOCA proposal that outlines key terms on which they are willing to compromise the Company’s debts or sell the business.

Second Creditor’s meeting: at the second creditor’s meeting the creditors will vote as to whether:

• the Company should enter into a DOCA based on a DOCA Proposal;
• whether the company should be placed into liquidation to be wound up; or
• if control of the company should be given back to the directors.

Roles of Creditors: Creditors have an active role in the voluntary administration process. They are informed about the company’s financial situation, attend meetings, and have the power to vote on the DOCA or choose to liquidate the company.

Roles of the Administrator: The administrator is an independent professional appointed to manage the company’s affairs during voluntary administration. They assess the company’s financial position, investigate its affairs, and provide recommendations to creditors regarding the best course of action.

Outcomes of Voluntary Administration

The outcomes of voluntary administration can vary depending on the circumstances. Potential outcomes include:

Company Restructure: A successful voluntary administration may result in a restructured company, enabling it to continue operating with reduced debts and a viable business plan.

Sale of Business: In some cases, the administrator may facilitate the sale of the business as a going concern, ensuring the continuation of operations and preserving jobs.

Liquidation: If restructuring or sale options are not feasible, the company may proceed to liquidation, where its assets are sold, and creditors are repaid according to the established priority.

Benefits:

Voluntary administration offers several advantages, including:

Breathing Space: The process provides a moratorium on legal actions by creditors, giving the company time to evaluate its options without the immediate threat of liquidation.

Expert Guidance: Administrators bring expertise and experience to assess the company’s financial position objectively and provide guidance on potential strategies for recovery.

Creditor Involvement: Creditors have the opportunity to be actively involved in the decision-making process, ensuring transparency and fairness.

Timeline and key events in the process

• Appointment of the administrator
• Assessment of the company’s financial position
• Informing creditors and holding meetings
• Development and voting on the DOCA
• Implementation of the approved DOCA or proceeding to liquidation

Alternative options

Alternatives to the voluntary administration process are Liquidation or the Small Business Restructure Process.

Considering voluntary administration? Contact us today

Voluntary administration offers financially distressed companies in Australia an opportunity to explore options for recovery and potentially avoid liquidation. By understanding the voluntary administration process, companies can make informed decisions about their future. Contact us today to assist with any queries that you may have.