Voluntary Administration process: What to expect – a guide for the uninitiated.

Times being what they are, some businesses and industries are faring better than others. That statement will hold in most instances but 2020 has been particularly ruthless for some. Furthermore, the oft media touted ‘road to recovery’ is likely to leave more businesses facing potential insolvency into 2021 and beyond. 

Insolvency, in a nutshell, is when a company can no longer meet its financial obligations. If more than a temporary lack of liquidity it will most likely result in one of two options: Liquidation or Voluntary Administration. 

Liquidation brings a company to an end by distributing its assets to all creditors – effectively liquidating its assets to pay back as much debt as possible.

Voluntary administration is when the directors of the company aim to resolve the company’s future with a potential outcome of the business being saved and pay back creditors.

This article will focus on Voluntary Administration, the processes and what to expect.

What is ‘Voluntary Administration’?

Glance over the ASIC website and you’ll stumble into the below definition… ‘Voluntary administration is designed to resolve a company’s future. An independent registered liquidator (the voluntary administrator) takes full control of the company. This allows the director or a third-party time to find a way, if possible, to save the company or its business.’

It’s probably worth noting that only around a quarter of companies that find themselves in voluntary administration are saved.

What to expect during the Voluntary Administration process

In brief, the process allows businesses that are experiencing cash flow or solvency problems the necessary space from its creditors, allowing a restructure to assess if the company is salvageable.

It is usually only for a short time (approximately one month). In this timeframe the director(s) hand control of the company to an independent administrator.

In that month, the administrator secures and protects the assets and assesses the business to provide a recommendation to creditors. This results in one of these recommendations;

  • Liquidate the company, or
  • Execute a deed of company arrangement (DOCA) – meaning compromise the debts in some way and allow the company to continue in existence, or
  • Return the company to the control of the directors.

It’s important to acknowledge that the final decision on the future of the company rests with the creditors.

The above dot points outline the future of the company, for the sake of simplicity let’s call them options; A, B or C.

Option A – Liquidation (no more company)

A registered liquidator takes control of the company’s assets to benefit the creditors and satisfy as much debt as possible. There are two types of insolvent liquidation. Creditors’ voluntary liquidation or court liquidation. Voluntary liquidation is more common.  

Option B – Deed of company arrangement (a bit of a compromise/slow winding down)

The administrator aims to administer the company’s affairs to obtain better returns to its creditors than if the company had been liquidated. The benefit here is that creditors can get a bit more of what is owed – especially employees. There’s also the option of a payment schedule etc and in some cases, the business can also be saved.

Option C – Return the company (touchdown & get back to work)

The administration restructures and creates a way to pay back creditors and keep the doors open for business. Unfortunately, it is as hopeful as it sounds.

Option A and C are pretty much self-explanatory, option B – the DOCA, needs a better explanation.

More about the deed of company arrangement (DOCA)

With immediately saving the business and liquidation off the table, the voluntary administrator aims to administer the company’s affairs to obtain a better return for the creditors. The most common mechanism of doing this is the ‘Deed of Company Arrangement’ (DOCA).

It’s a complicated area and as a director of a company or as a creditor, professional advice is tantamount and a registered liquidator is required.

Essentially the DOCA can maximise the chances of the company continuing, and/or provide a better return for creditors than an immediate winding up of the company.

What are the responsibilities of Creditors and Directors in case of a DOCA?

As a creditor, you’ll need to give the deed administrator all the correct information and documents to prove your debt. Copies of relevant documents like invoices and receipts etc may be requested. Additionally, you may be required to complete a ‘proof of debt’ claim form.

The DOCA can release the company from certain debts, and lay down provisions and timelines for other debts to be paid. A DOCA can also affect the payments and prioritise employee entitlements. A meeting with the creditors is held and the creditors in attendance vote for the DOCA proposal – if the proposals are approved, the company MUST sign the DOCA within 15 business days or go into liquidation.

IMPORTANT: If you are a creditor seeking your restitution or a business trying to do the right thing by all your stakeholders, it is vital to seek expert legal advice to navigate the DOCA. 

Once approved, creditor claims are paid in a specific order as outlined in the DOCA. Employee entitlements are generally prioritised over other creditors. 

Summary 

There is a tremendous amount of complexity involved with voluntary administration and managing a DOCA, not to mention the necessity of navigating sensitive areas of businesses and creditor issues. However, it can be smooth sailing if all parties work together.

As a business owner, the goal will be to produce options for you to minimise your losses and ensure your best interests are protected. As a creditor, you will need to work alongside your fellow creditors to ensure the best outcome is attained. 

Despite the complexities involved in DOCA it can help to keep a company solvent and remain active while also securing a fair deal for creditors. 

Sajen Legal – the Business Law Experts

As 2020 winds down and as the full effects of a global economic standstill make themselves known, many companies will face creditors at the door. Unfortunately, this means that more businesses will be faced with the reality of insolvency leaving two options: Voluntary Administration or Liquidation. 

Need to see what your options are as a creditor or company?  Contact Sajen Legal for helpful advice and discretion – CONTACT US

References 


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