When a business gets into financial difficulty and is unable to pay debts to its creditors then it can be really difficult to see a way out, or to see a light at the end of the tunnel. If things cannot be resolved in order to keep the business afloat whilst a resolution takes place, it may back the owners or management team into a corner, making decisions or doing things that could be even more detrimental to themselves or the failing business.
Voluntary administration can provide alternative solutions, the process and what it entails looks something like this;
Voluntary Administration in a nutshell
The process of voluntary administration is an opportunity for a business that has become insolvent, (a company that is unable to meet its financial obligations) to get some ‘breathing space’ in order for the managers or owners to get help and figure things out.
The administration of the business is passed over to a specialist whom is independent, a person who has had no prior involvement with the financial events leading up to the issues at hand and, whom can evaluate all of the choices that are available to produce the best result for the business owners and its creditors.
When does voluntary administration become a consideration?
Voluntary administration should become a consideration when a business becomes insolvent over time and is unable to pay its creditors, but needs to make a ‘deal’ to settle financial commitments.
Perhaps the business has just had a bad time over a short period that has caused havoc with cashflow causing things to come to a standstill or, the business may be perfectly viable and just needs a little time to put things on hold whilst restructuring in order to save costs in order to generate money to pay off debts.
How Voluntary Administration can help a company in financial turmoil?
For the most part, voluntary administration provides the following benefits to a company who needs financial breathing space:
- Quick and easy to instigate whilst also being very cost effective
- Provides an opportunity to be able to take a step back and regroup, an opportunity for improved maintenance
- The process helps to provide creditors with an independent overview of the company and how they intend to cover any outstanding monies.
- It also provides a system so that a fair agreement can be met between the company and its creditors who are in need of repayment
- Depending on the circumstances, the business owner may be able to maintain control of the company or a portion of it. Alternatively, the business might be able to be sold as an ongoing project, allowing workers to keep their jobs.
How successful are Voluntary Administrations?
Generally speaking, voluntary administrations aren’t successful all of the time, in fact only around 30% manage to execute a Deed of Company Arrangement, also known as a (DOCA). Clearly, the percentage of cases that get as far as executing a DOCA suggests that it isn’t an easy process and something that will require somebody that really knows what they are doing.
The thing to consider is that, although 30% doesn’t sound like much, it’s certainly better than 0 and, bear in mind that some of the companies that are owed money to will likely rely on the income to keep themselves afloat and might not be able to hang around waiting for you to agree or come to some kind of settlement terms.
What does the process involve?
The process of voluntary administrations is designed to be easy to start and, quick to execute, with the right help. The goal is to either liquidate the company or, to agree to a DOCA.
There are usually two meetings which involve the administrator, the creditors and the court (if the courts are involved), the initial meeting should be straightforward and there will be deadlines put in place in order to ensure that the creditors don’t have to wait too long and, so that the shareholders have enough time to get all of the required documentation in place.
Having said that, in complex situations it is quite common for the administrator to apply to postpone or to delay the second meeting for one of two reasons, either to buy some more time, or to make sure that all of the required documentation is in order. Any extension of time will of course need to be agreed by the court and or the creditors.
How to start Voluntary Administration
To commence a voluntary administration, the majority of directors must pass a Resolution, and as above, the procedure can normally be completed in about one month. During that time, creditors are prohibited from pursuing any recovery actions against the company, and personal guarantees against directors are prohibited from being enforced.
When you appoint an administrator
When you appoint an administrator, the directors’ powers are essentially suspended, and control of the corporation goes to the administrator. As a result, the administrator decides on a plan of action that they believe would maximize the return to creditors and to the shareholders.
The administration has numerous avenues that can be explored, like such as, if it would be viable for the administrators to run the business, part of it or to close the company down entirely and to cease all trading. As soon as the appointment is made, the administrator will notify all relevant parties and send out an Initial report to the creditors.
The volunteer administrator is in charge of the company and its reorganization with a view of saving the company or, at the very least, to achieve the best possible outcome for stakeholders. At the end of the process, the Corporations Law outlines three broad possible outcomes;
- Return the company to the control of the directors in order for it to resume trading (this option is seldom if ever chosen)
- Put the business up for sale; or
- Implement a Deed of Company Arrangement (DOCA), which is the document that details “the deal” struck with creditors
At what point do the creditors get involved?
The creditors will be involved as soon as the administration is ready to start proceedings and to arrange an initial resolution meeting. By voting at creditors meetings, the creditors play a huge part in the success or the failure of a voluntary administration i.e. (The acceptance or the refusal) of any requests by the administrator. The Administrator convenes at least two meetings to provide adequate time for both parties to collaborate on the best outcome of the business administration. The two gatherings serve slightly different functions:
The initial meeting is to be held within 8 working days of the official administration notification. The primary purpose of that meeting is to get put proposals forward to the creditors and for them to agree, or not. They may agree, but request a change of administration, unusual, but it’s not unheard of.
A second meeting is held around 5 weeks after the commencement of the voluntary administration process, its purpose is to hear the thoughts of the creditors and what they have decided upon based upon the proposals provided by the administration.
As you would expect, prior to any meetings, the administrator is responsible for and, expected to provide detailed reports which enable to creditors to make calculated decisions on which avenue they will take moving forward.
After the initial meeting, the administrator will need to conduct a thorough investigation of the business in question so that they can put forward a proposal, until this is done, the second meeting cannot commence.
Concluding the voluntary administration
The process of a voluntary administration can usually come to an end when a decision has been made as to whether the creditors will accept or refuse the terms and application put forward by the administration based upon one of the three possible outcomes listed below:
- To give control back to the directors.
- To instigate a DOCA or finally.
- To put the company into liquidation and sell off its assets to cover any monies owed.
If a court is involved, it is important to keep in mind that, they can call an end to the voluntary administration if they have sufficient grounds to do so.
Are there any alternatives?
Although companies in financial trouble may benefit from voluntary administration, there is one fundamental problem with the overall process, it is a highly controlled procedure, and as a result, the expense of getting through the voluntary administration process can be considerable.
Another option for a firm that cannot pay its debts is to use informal and more cost-effective procedures to restructure the company. Despite the fact that many directors dislike it, liquidation is often the best option when a business is just unviable.
Laws on small business restructuring
At the beginning the year there was a new law put in place called The Small Business Restructuring Process, essentially it is designed to be shorter and less regulated than a voluntary administration. The idea is to help the struggling business as much as possible and to keep the costs down, which sometimes can just become an added burden that adds to the financial dilemma.
The directors keep control of the company as long as the total sum of money owed is less than a million dollars and that, they can demonstrate how an informal restructuring of their business will aid in the repayment of monies owed.
Interesting related article: “What is Bankruptcy?“