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What is Voluntary Administration?

Posted by Revive Financial on Sep 19, 2019 10:47:00 AM

If your business is regularly paying bills late, struggling to make profit and experiencing a decline in sales growth, you may be facing insolvency. When faced with insolvency, its best to act fast and seek professional advice straight away. The faster you decide to obtain help, the higher the chance your business has of surviving.

If your company is in this position, Voluntary Administration can provide a useful tool in helping to regain its financial stability and deliver a better financial return for all parties involved. This process allows directors to take advantage of a moratorium period during which an external, independent Voluntary Administrator takes control to investigate the company’s affairs and help it survive. During this period, one or more proposals for a Deed of Company Arrangement (DOCA) can be submitted to the Voluntary Administrator with a view to producing a compromise or arrangement with the company’s creditors. This may save the company, its business and jobs while maximising the return to creditors.

Unsure if Voluntary Administration is the right solution for your business? We cover the pros and cons and how your employees and creditors are affected in our article below.

What are the Advantages and Disadvantages of Voluntary Administration?
What's the Difference Between Voluntary Administration and Liquidation?
How are Employees Affected During Voluntary Administration?
How are Creditors Affected During Voluntary Administration?

What are the Advantages and Disadvantages of Voluntary Administration?

Advantages

  • Provides the best deal for creditors – offers the possibility of greater financial return for creditors than putting your company straight into liquidation.
  • Gives your company a respite from legal action – a moratorium is placed on all legal action from creditors, allowing you time to take a step back and assess the best way forward for your company.
  • Allows for company restructuring – the powers of appointing an independent administrator may leave your company in a vastly improved position after restructuring efforts.
  • Offers your company a second chance – gives you the ability to continue trading your company as opposed to the finality of being wound up through Liquidation.
  • Directors are protected from liability for insolvent trading – your company can continue trading without the risk of directors being liable for insolvent trading during the Voluntary Administration process.

Disadvantages

  • Loss of control – company director/s lose control of the company as the appointed administrator takes control of its business and makes decisions regarding ongoing trading and potentially dealing with staff and assets.
  • No guarantee of a positive outcome – Not all businesses can be saved. If a DOCA is not approved by creditors, the company will most often be placed into Liquidation.
  • Various unwanted effects of Voluntary Administration may affect the company – the company’s reputation may be impacted, affecting its ability to win work, obtain finance and establish supplier accounts.

What’s the Difference Between Voluntary Administration and Liquidation?

The main difference between Voluntary Administration and Liquidation is its purpose. The purpose of Liquidation is to wind up a company, whereas the purpose of Voluntary Administration is to assess your company’s viability, saving it or its business if possible, or providing a better return to creditors if it’s not. Voluntary Administration is not always a sign of a company’s demise, whereas Liquidation puts an official end of the company’s operations.

How are Employees Affected in Voluntary Administration?

Employees of a company that is under Voluntary Administration who are owed money for unpaid wages, superannuation, annual leave, sick leave, long service leave, retrenchment pay or other benefits are classified as creditors of the company. During the Voluntary Administration process, employees generally continue to work until the appointed Voluntary Administrator has made a decision to a) reduce the number of staff employed, b) cease trading the business, or c) the company enters Liquidation. If creditors approve a DOCA, employee entitlements will generally be carried forward if the company continues trading. However, if trading has ceased, outstanding employee entitlements are paid in accordance with the terms of the DOCA. This is generally in priority to other unsecured creditors.

If there is no DOCA proposed, or creditors vote against the proposed DOCA, the company will be placed in Liquidation. In this case, employees will cease to be employed and will have claims for their outstanding entitlements. The Australian Government will pay all unpaid employee entitlements, except superannuation, for eligible employees who lose their job due to the Liquidation through the Fair Entitlements Guarantee (FEG) scheme.

To find out more, you can view the Australian Securities and Investments Commission (ASIC)’s guide for employees during Voluntary Administration.

How are Creditors Affected in Voluntary Administration?

Someone is classed as a creditor of a company if the company owes them money. There are generally two categories of creditors, secured and unsecured. Secured creditors have a security interest over some or all of the company’s assets, whereas unsecured creditors have no security. During Voluntary Administration:

  • Unsecured creditors can’t begin, continue or enforce their claims against the company,
  • Secured creditors can’t recover their property or enforce their security interest against the company’s assets,
  • A court application to force the company into Liquidation can’t be commenced, and
  • Creditors holding a personal guarantee from the company director can’t act under the personal guarantee without the court’s consent.

Creditors are allowed to attend and vote at the two meetings of creditors. If a DOCA is proposed, creditors can vote for or against approval. If creditors approve the DOCA, it will be signed by all parties within 15 business days and control of the business will return to the director/s.

To find out more, you can view ASIC’s guide for creditors during Voluntary Administration.

Voluntary Administration Can Save Your Company

If you suspect your company may be in significant financial difficulty, or that your company may be approaching insolvency, then it’s time to act now. Many directors we speak to at Revive Financial are initially hesitant to acknowledge their company is insolvent and appoint a Voluntary Administrator. However, Voluntary Administration should not be seen as a sign of failure or as an admission of defeat. Instead, Voluntary Administration should be regarded as an opportunity to get your business back on track.

Get in touch with our experienced team today on 1800 560 557 for a free, confidential consultation to find out if Voluntary Administration is the right solution for your situation.

Topics: Voluntary Administration

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