Whenever we speak to clients about why their business is struggling and explore restructuring options we continually hear common myths about the Voluntary Administration (VA) process. We have detailed the 5 key myths below:
- VA is only for failed directors and businesses - FALSE
A great company can face cashflow issues. Take for example a cabinet maker who wins a major contract to install 200 kitchens in a high-rise development. This contract represents 30% of their work. If the developer goes bust and fails to pay their invoice the company may suffer a possible insolvency event as a result of the domino effect. This doesn’t mean the business is bad or has failed, it means that it needs a ‘break’ of a ‘reprieve’ from creditors. This is a perfect example of where a Deed of Company Arrangement could result in a great outcome for all. Voluntary Administration does not always mean the business has failed.
- VA means I will automatically be sued – FALSE
If you have not breached your directors’ duties, traded insolvent or have agreed to personal guarantees then it is unlikely you will be sued personally. The administration process can protect you as a director and reset the obligations of the company. If done in a timely manner this can result in the personal protection of a director. The key is to act fast and get expert help!
- VA will result in irreparable damage to my business reputation - FALSE
This is a very common thing that we hear, that administration is a ‘shameful event’. The reality is that administration can be caused by a number of factors outside your control (see above). The administration system is designed to save businesses and if done well can be a really good way to reset and strengthen the foundation. The key throughout the process is honesty and transparency. If your intention is to enter into a Deed of Company Arrangement, then it is crucial to be open and honest with suppliers and key customers. This can be managed if you are doing this in a timely and controlled manner. The real damage done to a businesses’ reputation is when decisions are knee jerk and out of the blue. If the process is managed correctly and all things are done in a timely manner, then the potential reputational damage can be minimised. Further to this, administration needs to be a viewed as a tool or tactic not as a mechanism of failure.
- VA is uncontrollable - FALSE
The administration process is very defined and controlled process enshrined in law. Most administrators who we have a relationship with spend a significant amount of time prior to the administration educating the directors around the process and the necessary steps. How the business runs during administration is usually more controlled than how the business was running prior to administration. This is because administrators (official liquidators and their staff) are specifically trained to run and administer business affairs.
- VA means I will lose my business – PARTLY FALSE
The objects of the VA are to see whether it is possible for the business to carry on and if not then to obtain the maximum return for creditors. The first object is to try and resurrect the business and keep it going. Whether you lose your business or not depends entirely upon the circumstances of administration. For example, if you have at the core a good solid business but have suffered some shock like a significant client going bust or an unexpected piece of litigation, then the business’ core may be worth keeping but the baggage needs to be cut loose. If, however, the business at its core is not good, such as selling an unprofitable product or the business hasn’t modernised, then it is likely the result of administration is for the company to be liquidated and wound up; a result that probably would have occurred in any event. Each and every circumstance is different and it is crucial to review each business on its own merits.
How do I know if my business is struggling?
Your business may be struggling if:
- You cannot pay your tax on time;
- You cannot pay your wages on time;
- You are making a loss each month or a very small profit;
- You are not able to pay your creditors on time
Conclusion
Voluntary Administration needs to be viewed as a tactic or tool not as the result of bad business management. Administration can be the best thing for a good business with baggage and for a director seeking to minimise their personal exposure.
If Voluntary Administration is done well it can be the reset button a business needs to succeed.
The Key Takeaway
Timely Voluntary Administration is like having a defibrillator in your office. You hope to never have to use it, but when you need to, it can be a life saver.
If you have further questions about Voluntary Administration, please contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
Photo by Joshua Ness on Unsplash
