The Meaning of Voluntary Administration

When companies face financial turmoil, resolving their situation can be a challenging task. The good news is that there is help available. 

Engaging with a Voluntary Administrator can provide expert support and potentially help turn around a struggling business. 

However, the process of voluntary administration is a substantial commitment and should not be taken lightly. 

It’s crucial to thoroughly understand the process and potential outcomes before diving in. In this Voluntary Administration guide from SV Partners, we will walk you through the four-step voluntary administration process and delve into the implications of appointing an Administrator for your company.

Appointment of the Administrator 

Voluntary Administration becomes an option for a company when it’s insolvent or on the brink of insolvency. The Administrator can be appointed by one of three entities:

  • The directors and/or shareholders (determined by majority vote)
  • A secured creditor, like a bank or lender with a security interest in a significant portion of the company’s assets
  • A liquidator or provisional liquidator

The voluntary administration process officially starts as soon as the Administrator takes the helm. After accepting their appointment, the Administrator immediately takes control of the business and assumes responsibility for its daily operations.

Inaugural Creditors’ Meeting

The Administrator is obliged to convene the initial creditors’ meeting within eight business days of their appointment. 

Before the meeting, the Administrator is required to inform as many creditors as possible in writing. Additionally, notice of the meeting must be published on ASIC’s website. 

The primary purpose of the first creditors’ meeting is to empower creditors to make informed decisions about the company’s future. For example, if the Administrator has prior affiliations with the insolvent company or a major creditor, creditors may consider another party better suited for the role. In such a scenario, attending creditors can vote to:

  • Remove the current Administrator and appoint a replacement
  • Establish a Committee of Inspection to provide guidance to the Administrator throughout the process

A Committee of Inspection ensures that the Administrator’s actions are monitored, advice is provided, and certain steps in the administration process require their approval. 

This grants creditors some level of control over the voluntary administration process and prevents the Administrator from being influenced by pre-existing relationships or conflicts.

  • Administration Period: This phase marks the commencement of substantial work. Once creditors have been notified, and the Administrator’s appointment is confirmed, the Administrator initiates an in-depth investigation of the company’s operations.

This investigation encompasses an evaluation of the business’s financial status, its daily functioning, and the conduct of its directors. The ultimate objective is to identify the reasons for the company’s insolvency or impending insolvency and assess the potential for rescuing the company from liquidation.

It’s important to note that the Administrator’s primary duty is to the creditors. Consequently, their investigations are unbiased, even if they may not always favor the company or its directors.

For instance, if any directors are found to have breached their duties, this information will be reported to the creditors and ASIC.

  • Report to Creditors: Following the conclusion of investigations, the Administrator will convene a second creditors’ meeting to present their findings.

    This meeting must take place within 25 business days of the Administrator’s appointment. 

During this meeting, the Administrator will discuss their findings, provide recommendations for the way forward, and allow creditors to vote on the company’s future.

In certain situations, the second creditors’ meeting may be postponed by court order, especially when the company’s financial situation is complex or when misconduct extends the proceedings.

Outcomes of Voluntary Administration

The primary purpose of voluntary administration is to offer expert assistance to companies facing insolvency. 

At the final creditors’ meeting, the Administrator will release a report outlining the company’s financial data, their findings, and their recommendations. Under the Corporations Act 2001, the Administrator must propose one of three potential outcomes:

  1. Return control of the company to its directors, allowing it to continue operating as usual.
  2. Immediate liquidation of the company.
  3. The company enters into a Deed of Company Arrangement (DOCA) with its creditors.

The third option is often the most attractive for companies. 

A Deed of Company Arrangement (DOCA) is a formal agreement between the company and its creditors for repaying its debts. 

Under a DOCA, the company can continue its operations, and creditors may accept partial or delayed repayments of their owed money. 

This typically results in more favorable outcomes for the company, its creditors, and its employees.