When your company is in financial trouble, deciding on your next move isn’t easy. If you’re facing insolvency, voluntary administration is one of the options available to you.
But what exactly does it involve, and how can you be sure it’s the right option for you?
What is voluntary administration?
Voluntary administration (VA) is a process where you hand the reins of your insolvent but viable company over to an independent administrator. Their job is to assess the damage, help figure out a plan of action to satisfy the demands of creditors and, best case, save your business. Think of it as a final potential lifeline.
What does the voluntary administration process involve?
During the voluntary administration process, the appointed administrator works with you, the director, and your creditors to ensure the best outcomes for everyone.
After assessing whether survival is possible, and meeting with all involved, they will help you prepare a Deed of Company Arrangement (DOCA). This sets out what your company can ‘reasonably afford’ to pay its creditors, as well as suggested terms of payment.
The administrator proposes this to your creditors, alongside the expected financial returns of liquidation, giving an opinion on which is best. Your creditors then vote on whether to accept the DOCA. A majority voting by number, as well as value, determines whether your company will be saved or wound up.
What are the advantages of voluntary administration?
Voluntary administration gives you the chance to assess the viability of your insolvent business and stabilise its finances. It also allows you to make a final proposal to creditors and bring your debts to a manageable level to avoid liquidation.
When you enter into voluntary administration, no further legal action can be taken against your company during the process. In addition, you, as director, can avoid being held liable for insolvent trading.
How do you enter into voluntary administration?
Voluntary administration is entered into when you, or all directors, agree your company is insolvent, or likely to become insolvent, and appoint an administrator. You, and your directors, must then sign a Notice of Appointment to kick things off.
How long is the voluntary administration process?
The voluntary administration process is generally pretty quick. It typically winds up four to five weeks after it starts, as soon as creditors have taken their decision on the DOCA.
When is voluntary administration the best option?
Voluntary administration is the best option for directors keen to rescue their insolvent business, where available turnaround measures would be insufficient. It’s also a good choice if you’re looking to wind down affairs in an orderly fashion and avoid liquidation.
Sometimes administration isn’t a choice. It can be triggered when a creditor (often the ATO) has issued a statutory demand and filed winding up proceedings at Court, or the ATO has issued a director penalty notice. In these cases, it’s the only way to save the company.
Companies that benefit from entering voluntary administration generally:
- are insolvent and have creditors, such as suppliers or the ATO, pressing for payment;
- have significant accrued debts they cannot pay;
- can demonstrate they have a viable business – one that can trade profitably and manage its cash flow if debts can be reduced or deferred for payment over an extended period;
- have access to further funding from related parties, a financier or future trading profits, to cover administration costs and pay additional amounts to creditors as proposed in the DOCA.
Is administration right for you?
If your company is struggling to pay its debts and/or has major bad debt and you haven’t been able to improve the situation by other measures, or you want to wind things up smoothly, it might be time to call in an administrator. Just make sure you have the funds or assets to cover their fees and any potential DOCA payments.
Your administrator will help you assess your company’s viability, aka whether it’s able to return to profit, and work with you and your creditors to try and make it happen. If the DOCA is unsuccessful, liquidation and the litigation risks will follow – but at least you gave your company its best shot.
Does voluntary administration sound like the right move for your business? Contact us today to discuss your options and get the help you need to turn things around - 1800 560 557.