Voluntary administration is executed over a series of steps, beginning with the decision to enter into voluntary administration, proceeding with the appointment of an administrator who investigates the status of the organisation, and culminating in creditors meeting to decide future courses of action. Let’s consider these processes in detail.
Why is voluntary administration necessary?
The purpose of voluntary administration is to determine the future courses of action for a company that’s in financial distress. Voluntary administration, as the name suggests, involves the appointment of an external administrator, called the voluntary administrator, to manage the affairs of a company in ways that would maximise benefits to creditors and shareholders, and decide the future course of action for the company.
According to ASIC, the administrator’s role is to yield greater benefits to creditors than what they would receive if the company were placed straight into liquidation. Voluntary administration, hence, is not to be confused with liquidation, where a liquidator takes control of an insolvent company so as to wind up the affairs in all fairness to the company’s creditors.
Appointment of the voluntary administrator
The decision to appoint the voluntary administrator is normally made by the company’s director(s) after they determine that the company is, or is likely to be, insolvent. There may also be instances where a voluntary administrator is appointed by a liquidator, a provisional liquidator, or a secured creditor.
The voluntary administrator is required by law to be a registered liquidator with the ASIC. They also tend to hold professional memberships with industry bodies such as Chartered Accountants of Australia and New Zealand, the Australian Restructuring Insolvency and Turnaround Association etc.
The voluntary administration process
A company in voluntary administration is in a brief moratorium, a period of investigation of the company’s financial position. This is followed up with preparation of a proposal that is formally submitted to creditors.
The role of the administrator is to decide and recommend if the company should enter into a deed of company arrangement (aimed at maximising the chances of the company or its businesses continuing its operations rather than winding up immediately). The other options before the voluntary administrator are to bring the administration to an end or to appoint a liquidator for the company to be liquidated. It is then left to the creditors to determine the future course of action through a voting process.
But who are the creditors?
A person is considered a creditor if the company owes them money. This could be on account of unpaid wages and other entitlements when the creditor is an employee or due to payments to be paid for the goods and services purchased from a supplier.
Creditors could be secured or unsecured. A secured creditor is someone who holds a ‘charge’, as in the case of a mortgage or other assets, which help in securing the debt owed by the company. Anyone who is owed money by the company but does not have a ‘charge’ is an unsecured creditor. Employees are deemed to fall under a special category of unsecured creditors where, in the event of liquidation of the company, they are given priority over other unsecured creditors for some of their outstanding entitlements to be paid.
Implications of voluntary administration
Voluntary administration is a moratorium. The implications of voluntary administration for various stakeholders are as follows:
- Secured creditors, invariably, cannot enforce their charge.
- Unsecured creditors have to wait for approval by the administrator or the courts to be in a position to enforce their claims against the company.
- Property owners would not be able to recover their properties
- Personal guarantees secured from company directors cannot be enforced
- Liquidation processes cannot be commenced
An important aspect of voluntary administration is the arrangement of two creditor’s meetings. These meetings are arranged after the administrators have analysed the company’s financial situation in the process of deciding future courses of action to be taken.
The first creditors’ meeting should be conducted within 8 days of the appointment of the voluntary administrators. The administrators inform the creditors about the meeting in writing. The main purpose of the first creditors’ meeting is to form a creditors’ committee and appoint its members, and for the creditors to propose the replacement of the administrators if they chose so.
Should the creditors decide to replace the administrators, they should have arranged for the replacement administrator’s consent through a letter of confirmation from the newly proposed voluntary administrator, who should also be a registered liquidator. Voting at the first meeting is by prior registration through lodging details of debt or claims with the administrator.
The second creditors’ meeting essentially decides the company’s future, usually held around 5 – 6 weeks after the company goes into administration (more complex voluntary administration scenarios may require more time for the analysis to be done and reports to be prepared, which could be arranged through an extension granted by the court).
Submitting the creditor’s claim form makes the creditor eligible to vote in the creditor’s meeting. Voting is done on the resolution prepared by the voluntary administrator outlining the future courses of action to be taken (discussed earlier under “The voluntary administration process” – a majority vote of more than 75% of creditors in favour of the resolution decides the future of the company). Voting could also be done by proxy or by post through prior arrangements with the voluntary administrator.
Understanding the process
Voluntary administration is a process that several firms have and will enter. It can be complex and involved multiple parties, so it is important for creditors to understand the steps in the process and their specific involvement.