If you are thinking about insolvency, there are so many new terms that a business owner may face in a very short period of time. Understanding who does what and what their obligations are can often be clouded, because whilst you may have employed or engaged a third party, they may have obligations to people other than you.
How does a voluntary administration start?
The appointment of the administrator commences when a majority of Directors resolve to appoint an administrator. For the initial period of the voluntary administration, most recovery action against the company will cease and the enforcement of personal guarantees against Directors will also stop.
The appointment of the administrator is not something that is simply decided as a quick option, it needs to be carefully considered as there are substantial implications for businesses and it is a situation where professional advice is a necessity.
When is voluntary administration a good option?
The utilisation of voluntary administration generally occurs when the business has a viable option to trade, but needs a period of time as breathing space. We find that businesses that undertake this approach are:
- Insolvent and need to make a deal with creditors
- Struggling with a trading loss or a period of bad trading and need some relief
- And has a viable underlying business but needs some help in terms of debt relief, cost reduction or time in order to manage business issues
The voluntary administration process is not always ideal and needs to be carefully considered prior to commencement. We not only need to understand the overall business situation but also what will be achieved through the voluntary administration process and what the business would look like at the conclusion of the voluntary administration.
What’s the difference between voluntary administration and liquidation?
The contrast between voluntary administration and liquidation is that where a liquidator collects the assets of the business for the purpose of sale and paying creditors, whereas the administration process is where the business trades on with a view to coming to an arrangement with the creditors of the business. There are situations, however, where the voluntary administration process will turn into a liquidation, either because the business is not viable or there is not sufficient creditor support for the continuation of the voluntary administration process.
So, does voluntary administration work?
It is estimated that about 25% of businesses that have the appointment of administrator will survive. This is a concerning statistic, but confirms that the voluntary administration process is one that requires specialist advice.
We find that it is not the first option for most businesses in trouble and has limited successful applications, especially when compared with other alternatives to resolve business liabilities. Our preference is to explore all options first before moving to a voluntary administration outcome.
How can a voluntary administration help my business?
For some businesses, especially those with a strong underlying business, the appointment of an administrator and the commencement of voluntary administration can provide a commercial outcome which will allow for the business to trade on, or be sold in a rational and sensible manner.
Administration works best where the time is used to renegotiate debt facilities or creditor payments, where non-performing or underperforming business assets are jettisoned in a sensible rather than distressed environment and if necessary, employment conditions are changed to allow for a viable continuing business. Equally, if a business needs to be sold as a going concern, the protection of administration is such that it can be more likely to be kept intact during the voluntary administration process.
An administration is generally not a cheap process and can, for some business owners, be a difficult decision as working cash flow may be diminished as a result of entering into voluntary administration.
Who is a voluntary administrator?
A Registered Liquidator and licenced by ASIC, a voluntary administrator supervises the business under the auspices of the voluntary administration process, in effect stepping in as almost a director of the company. They take responsibility for the actions of the company and are required to act in the best interests of the creditors.
For business owners that have appointed a voluntary administrator, it is important to remember that they act for the company and the interests of the company. Whilst they may have input from the Director, the Director has no influence on the decisions of the voluntary administrator, they are the sole decision maker.
It can come as a shock to business owners that they have no influence over the actions of the voluntary administrator, and this is where it is necessary to get good advice prior to appointment. We have assisted several businesses who have appointed a voluntary administrator without understanding the consequence and then been shocked that this voluntary administrator has acted against their wishes. It is important to remember that the voluntary administrator acts in the best interests of the creditors.
What does a voluntary administrator do?
As the voluntary administrator takes control of the company during the period of the voluntary administration, their role includes:
- Operating the business as normal (if this is the approach taken)
- Reviews the position of the business and makes sure that the business is able to continue
- Pays expenses of the business on normal terms
- Investigates the operations of the company and provides recommendations as to the options for creditors
- Prepares or is involved in the preparation of a Deed of Company Arrangement (“DOCA”)
- Post voluntary administration assists in the implementation and supervision of the DOCA
The role of the voluntary administration is to protect the assets of the company and take all reasonable steps to maximise the result for creditors. They will call a meeting where creditors will determine the future steps of the business.
Will a voluntary administration assist or protect a Director?
The primary benefit for a Director is that Director Penalty Notices (“DPNs”) are generally no longer a personal liability for Directors on the basis that the voluntary administrator is appointed. This does not always extinguish a personal liability, but it can assist where the notice is live and the business will be unable to pay the debt.
Will voluntary administration freeze legal action?
In the first instance, the appointment of a voluntary administration will mean that legal action is frozen and under a moratorium during this period. This only extends to debt collection processes, whereas other court proceedings may continue, depending upon the action. For secured creditors who have security over the entire assets of the company, they are not under the same rules and have the option to enforce their position.
It is important to understand that the voluntary administration process may result in the advancement of a secured position, so that prior to any appointment it is important to seek specialist advice as to your options.
Will a voluntary administration impact my ability to borrow?
In most situations, yes, as the voluntary administration is an act of insolvency. Business owners need to be aware that finance facilities may be drawn in or cancelled and their personal options may be limited as a result of the voluntary administration.
What is the timeline of voluntary administration?
There are strict timelines in the administration process, with a theoretical intention that the process will be completed in a little over a month. There is a requirement for a first meeting within eight days of the appointment and then a secondary meeting no less than twenty days after the second meeting.
The second meeting is generally to accept the proposal, and to put forward or to appoint a liquidator to the company.
What investigations are undertaken?
A voluntary administration process includes investigations, these cover:
- When the company became insolvent
- Whether there was insolvent trading
- Whether there were breaches by directors
- If there are preference payments and if they are recoverable
- If there are hidden or removed assets from the company
These findings will be reported to creditors for the purpose of allowing the creditors to be fully informed as to the position of the company.
What is a Deed of Company Arrangement (“DOCA”)?
The Deed is a proposal made to the voluntary administrator to cease the voluntary administration process and deal with creditors. The DOCA amount is aimed to be a greater return than would be received in a liquidation.
A DOCA can be proposed by any party and is not limited to a Director or their associates, whilst it is rare that a third party may propose a DOCA, it is not uncommon where there is business dispute, litigation or an advantage for the third party to take control of the business that has been in voluntary administration.
What is in a DOCA?
There are no clear rules as to what a DOCA must consider or propose, they can be flexible but should provide a commercial option for creditors that is better than any other alternative. In understanding a suitable DOCA it is important that the interests of creditors are considered. We have seen where a DOCA has been proposed and has only caused friction with major suppliers who were aggrieved at the terms of the DOCA and simply refused future supply, which resulted in the business failing.
The terms of the DOCA need to be practical, commercial and achievable and we always recommend understanding what is proposed prior to the appointment of the administrator.
Who votes and why is it important?
The DOCA process involves a vote of creditors, with a majority of number and value being the decision, or if it is split then the voluntary administrator will have the casting vote as to which decision is made (and often this is in line with his recommendation to creditors).
It is not uncommon for a DOCA proponent to seek the support of creditors for a solution and to communicate with them during the process.
This is a complex field and one where expert advice is important.
Can an unsecured creditor refuse the terms of a successful DOCA?
At the conclusion of the voluntary administration process, all unsecured creditors are bound by the terms. Practically, this can be difficult if there is resentment or there are unhappy creditors, so it is important to manage this process.
What happens to my personal guarantees?
For Directors with personal guarantees, they are protected during the voluntary administration, but at the conclusion of this, these guarantees are back in force and can be collected by creditors. It can be a shock for business owners to find at the end of the process that personal debts have not been extinguished and they are not in the better position.
Should I consider voluntary administration?
The Team at C&D Restructure and Taxation Advisory have worked with business owners at all stages of the voluntary administration process, we work with you to not only navigate the insolvency maze but to assist you plan the best option for the protection of your business and personal assets.