Voluntary Administration is a formal restructuring process contained within Part 5.3A of the Corporations Act. It has more recently become a strategic tool used by directors to protect themselves from insolvent trading breaches but also to ‘reset the business’ in times of shock.
The Corporations Act makes it clear that the normal outcome for an administration is either:
- A Deed of Company Arrangement is entered into; or
- The company’s creditors resolve to end the administration and hand back to directors; or
- The company’s creditors resolve to end the administration and place the company into liquidation.
The process of administration is outlined below.
Step 1 – Appointment
Voluntary Administration (VA) is the process whereby the directors of a company place the company into administration on the basis that the company is insolvent or likely to become insolvent in the future (s436A Corporations Act 2001).
A company may also be placed into administration by a liquidator or provisional liquidator or a secured creditor.
The purpose of appointing the administrator is contained at s435A of the Corporations Act and is twofold:
- To maximise the chances of the company or the business continuing into the future; and
- If there is not a chance for the company or business to continue, then the highest return for creditors.
Step 2 – First Meeting
Once administrators are appointed, they must prepare and serve on the creditors a declaration of relevant relationships and indemnities.
A creditor is an individual or company who is owed money by the company in administration. There are many potential situations where the definition of a creditor is dubious. This will be explored in a future article.
Within eight days of the administrator’s appointment they must call the first meeting of creditors. This meeting is to determine whether a committee of inspection is appointed and whether a different administrator needs to be appointed. The mechanics of this meeting are outlined in the Insolvency Practice Schedule and the Insolvency Practice Rules (2016).
Step 3 – Investigations and Management
Section 437A of the Corporations Act defines what the role of an administrator is during administration. In short, the administrator has control over the company’s assets and affairs, the right to continue to run the business of the company, the right to terminate or dispose of assets of the company and the right to perform any duty that an officer of the company may perform.
The administrator during the period of administration is to investigate the affairs of the company and consider possible courses of action (s438A Corporations Act 2001). During this period the directors must assist the administrator with their investigations (s438B Corporations Act 2001).
Step 4 – Report to Creditors
Within 20 or 25 days from the appointment of the administrators (depending on the time of year) the second meeting of creditors is to be convened. The purpose of this meeting is for the administrator to present their report (s439A) and for the creditors to vote on what course of action should be taken (s439C).
The outcome of the meeting is either:
- The creditors vote in favour of a Deed of Company Arrangement; or
- The creditors vote in favour of the company being returned to directors; or
- The creditors vote in favour of liquidating the company.
It is usual practice and very common for the creditors to follow the recommendation of the administrator as contained within their report.
Conclusion
The process of Voluntary Administration can be seen as daunting for both creditors and directors; however, it is a great tool that should not be ignored or disregarded. With the right advice it can be a great option for directors and for creditors.
Key Takeaway
Voluntary Administration is like having a road map in German. If you speak German, it is great. If you don’t speak the language, it is confusing and stressful. Make sure you have someone that speaks the language of the liquidator.
If you have further questions about Voluntary Administration, please contact James Frank at jfrank@franklaw.com.au
This is not legal advice.
Photo by Airam Dato-on on Unsplash
