What is the purpose of a voluntary administration?
Voluntary administration is an insolvency procedure that can be applied to a company facing financial difficulties.
The objective of voluntary administration is to provide a mechanism whereby a company’s future can be resolved quickly.
A voluntary administration allows a company facing insolvency issues breathing space while its future is resolved.
Why would directors of a company decide to place it into voluntary administration?
When a company is facing financial difficulties, the director/s might decide to place it into voluntary administration. This has five possible benefits:
- Allows an independent and suitably qualified person (a voluntary administrator) to assess the company’s financial situation and decide whether it has a future.
- Gives the company breathing space to deal with creditors in an orderly manner and prepare a proposal that will give the best returns to stakeholders.
- Reduces the possibility of a secured creditor proceeding against the assets of the company.
- May allow the company to avoid going into liquidation.
- If approved, the deed will eliminate the possibility of an insolvent trading claim.
What is a voluntary administrator?
A voluntary administrator is an independent and suitably qualified professional who takes full control in order to try and save either the company or the business.
What does the voluntary administrator do?
After taking control of the company, the voluntary administrator investigates and reports to creditors on the company’s:
- financial circumstances.
The voluntary administrator then reports on the three options available to creditors:
- end the voluntary administration and return the company to the directors’ control
- approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts
- wind up the company and appoint a liquidator.
The voluntary administrator must give an opinion on each option and recommend the one that, in their opinion, is in the creditors’ best interest.
If the company or its business cannot be saved, the voluntary administrator will administer its affairs in a way that results in a better return to creditors than they would have received had the company been placed straight into liquidation.
Who appoints the voluntary administrator?
Most often, it is the directors of a company who appoint a voluntary administrator when they determine that the company is in financial difficulty.
However, in certain circumstances, a voluntary administrator may be appointed by a:
- secured creditor
- provisional liquidator.
What is the voluntary administration process?
Step 1: a decision to appoint a voluntary administrator is made
A decision to appoint a voluntary administrator is made by either:
- the directors (by a resolution of the board and in writing)
- a secured creditor (with a charge over all, or substantially all, of the company’s property)
- a liquidator
- a provisional liquidator.
Step 2: the voluntary administration begins
The voluntary administrator is appointed and the voluntary administration begins.
Step 3: the first meeting of creditors is held
The first meeting of creditors must be held within eight business days of the appointment of a voluntary administrator (at least five business days’ notice is required).
At this stage, the creditors must decide two questions:
- whether to form a committee of creditors to consult with the voluntary administrator or deed administrator
- and, if so, who will be on the committee
- whether to replace the existing voluntary administrator with a voluntary administrator of their choice.
Step 4: the administrator investigates the company’s affairs
The voluntary administrator must investigate the company’s affairs and report to the creditors on the options available.
Step 5: a meeting to decide the company’s future is held
Within 25 to 30 days of the appointment of a voluntary administrator (unless the court allows an extension of time), a meeting must be held to decide the company’s future (at least five business days’ notice is required).
At the meeting, the creditors must decide whether to:
- return the company to the control of the directors
- accept a deed of company arrangement
- put the company into liquidation.
If the creditors decide to accept a deed of company arrangement, the company signs the deed and the deed administration begins.
If the creditors decide to put the company into liquidation, the voluntary administrator becomes a liquidator.
Are you or your company facing an uncertain financial future? David Clout is a highly regarded expert in insolvency, an experienced negotiator and strategic thinker. As a registered Liquidator and Bankruptcy Trustee, he is qualified to accept a range of insolvency appointments. Call +61 7 3129 3316 to arrange a consultation.