5 Reasons to Consider Voluntary Administration

Voluntary administration is a type of insolvency process for companies in financial strife. It’s designed to help companies, with the help of an external, independent expert, to resolve their insolvency problems quickly by deciding on the best course of action. Since voluntary administration can serve the interests of not only creditors but other stakeholders like directors, it’s useful to understand the top reasons to consider entering it, if your company is in trouble.

What is voluntary administration?

The voluntary administration process is an insolvency procedure giving distressed companies breathing space from creditors and a chance to restructure.

During this period of approximately one month, an independent administrator takes control of the company. The administrator secures the assets and assesses the business to provide a recommendation to creditors on the best course of action. The creditors could choose between liquidating the company, executing a Deed of Company Arrangement (DOCA), or returning control to directors.

Why would you enter voluntary administration?

1. To avoid trading while insolvent

Directors are legally required to take measures to avoid insolvent trading (severe consequences can result if they don’t), and voluntary administration is often used by troubled businesses to avoid insolvent trading. By initiating this process, the company and its directors can raise the defence that the directors took steps to avoid insolvent trading by appointing an administrator and avoiding incurring further debt.

2. To resolve creditor issues

Voluntary administration not only helps companies in strife hit the pause button on creditor demands. It also gives them a chance to bring in an independent expert – the administrator. The external administrator examines the company’s operations and assets to recommend the best step for resolving the situation in favour of creditors. The company can focus on resolving problems, including creditor issues, instead of constantly reacting to creditor actions, market conditions, and other factors.

Similarly, creditors will have a chance to review what’s happening in the business with the administrator’s reports. They’ll have a chance to find out the details and vote on the administrator’s recommendation, whether that’s a DOCA, liquidation, or returning to trading under the directors.

3. To attempt to enter a Deed of Company Arrangement

One aim of the voluntary administration regime was to allow otherwise viable businesses to have a chance to restructure and survive. Another is to administer the company’s affairs in a way that would lead to better outcomes for creditors than if the company had immediately entered liquidation. The short break from creditor demands and most actions to recover debt gives the company to access expert advice (from the administrator) and possibly enter a DOCA.

The DOCA is one of the three main possible outcomes of voluntary administration. It’s a highly flexible arrangement that’s effectively a compromise of the company’s debts. Through the DOCA, the company will pay all or part of its debts and then be free of these debts.

A DOCA can incorporate different arrangements, including payment of a lump sum to pay all debts due, instalment payments, and/or sale of assets and payment of proceeds. The DOCA could also include return to trading and paying instalments from profits or lump sum from final sale, or relisting the company on the ASX.

The DOCA binds all unsecured creditors even if they voted against it. However, it doesn’t prevent creditors with personal guarantees from the company’s director or another person taking action, in relation to the personal guarantee, to have their debt repaid.

4. To protect directors from a director penalty notice

Companies with cash flow and insolvency issues could be falling behind on their ATO-related compliance. For example, they could have outstanding PAYG tax and superannuation liabilities. In this case, the ATO has the discretion to pursue directors personally for this unpaid PAYG tax and superannuation through director penalty notices (DPN).

However, putting the company into voluntary administration would help help if the DPN relates to sums reported but unpaid to the ATO within three months of the end of the reporting period. If the amounts owing are both unreported and unpaid for over three months, voluntary administration will not help the director reduce the risk of personal liability.

5. To prevent liquidation

Although liquidation is a possible outcome of voluntary administration, the voluntary administration process gives the company a chance to assess whether other options could be viable before creditors vote for liquidation upon the administrator’s recommendation.

The goal of voluntary administration is to provide the best outcome for creditors, so if either a DOCA or returning the company to the directors’ control is more desirable than liquidation, the voluntary administration process gives the company an opportunity to avoid liquidation for now.

Moving into voluntary administration

Voluntary administration can be an essential process for companies in financial trouble and/or at risk of insolvent trading. It can help directors fulfil their duty to avoid trading while insolvent and it can help companies find the best solution for creditors. It also lets the company take a time-out to consider whether options like a DOCA could be the best next step. Finally, it can also protect directors from DPNs and help companies avoid liquidation, at least for the time being.

If your business is experiencing financial difficulties, but you’re not ready to give up, consider entering voluntary administration and turning your company around. Contact our expert team and they’ll be able to help you with the next step. Call us now on 1300 750 599.