Companies that are experiencing financial difficulties often have a tough time resolving their situation. The good news is that help is available, and working with a Voluntary Administrator can allow you to access expert support and turn your business around. While voluntary administration is an excellent tool, it’s also a serious undertaking that can have a lasting impact on your business, so it shouldn’t be taken lightly. Before entering into voluntary administration you’ll need to do your research and understand how the process works and the outcomes you can expect to achieve. In this article we’ll go over the 4-step voluntary administration process and discuss how appointing an Administrator may affect your company.
The Administrator is Appointed
A company can enter into Voluntary Administration if it is insolvent, or if it’s likely to become insolvent. The Administrator can be appointed by one of three parties:
- The directors and/or shareholders (decided by majority vote)
- A secured creditor (such as a bank or lender with a security interest over a substantial amount of the company’s assets)
- A liquidator or a provisional liquidator
The voluntary administration process begins as soon as the Administrator is appointed. After accepting their appointment, the Administrator takes immediate control of the business and becomes responsible for managing its day-to-day affairs.
2. First Creditors’ Meeting
The Administrator is required to hold its first creditors’ meeting within eight business days of being appointed. Prior to the meeting the Administrator is required to notify as many creditors as possible in writing. Notice of the meeting must also be published to ASIC’s website.
The purpose of the first creditors’ meeting is to allow the creditors to make an informed decision about the company’s next steps. For instance, the Administrator may have prior relationships with the insolvent company or a major creditor, and they may not be the best fit for the role. In this case, the creditors may attend the meeting and vote to:
- Remove the existing Administrator and replace them with another party
- Form a Committee of Inspection to advise the Administrator throughout the process
A Committee of Inspection monitors the conduct of the Administrator, provides advice and may be required to approve certain steps in the administration process. This gives creditors a modicum of control over the voluntary administration and ensures the Administrator isn’t influenced by existing relationships or conflicts.
This is where the real work begins. Once creditors have been notified and the Administrator’s appointment has been approved, the Administrator will begin investigating the company’s affairs.
This part of the process involves assessing the business’ finances, its day-to-day operations and the directors’ conduct. The goal is to figure out why the business is insolvent (or likely to become insolvent) and whether there is any possibility of saving the company from liquidation.
It’s important to note that the Administrator’s primary responsibility is to the creditors. That means their investigations will be fair and balanced, but they may not be beneficial to the company or its directors. For example, if any of the directors are found to have breached their duty, this information will be reported to the creditors and ASIC.
Report to Creditors
Finally, once their investigations are complete, the Administrator will convene a creditors’ meeting to present their findings. The second creditors’ meeting must be held within 25 business days of the Administrator’s appointment. During this meeting the Administrator will discuss their findings, make recommendations on how to proceed and allow creditors to vote on the company’s future.
The second creditors’ meeting can be pushed back to a later date by order of the court. This is common in situations where the company’s finances are complex or where misconduct slows down proceedings.
The Outcomes of Voluntary Administration
Voluntary administration is ultimately designed to provide expert support for businesses that are struggling with insolvency. At the final creditors’ meeting, the Administrator will issue a report detailing the company’s financial information, the Administrator’s findings, as well as their recommendation on how to proceed. Under the Corporations Act 2001, the Administrator’s must recommend one of three outcomes:
- Control of the company is returned to its directors and it continues trading as normal
- The company is immediately wound up in liquidation
- The business enters into a Deed of Company Arrangement with its creditors
The third option is the most appealing for businesses. A Deed of Company Arrangement (DOCA) is a formal agreement between a company and its creditors to repay its debts. Under a DOCA, the company continues to trade on, and its creditors may accept partial or delayed repayment of the money they are owed. This often results in better outcomes for the company, its creditors and employees.
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