Voluntary administration: What is the process?

A voluntary administration allows directors to collaborate with an insolvency expert to craft a strategy to satisfy the company’s debts and, if possible, return to a healthy trading prospect with creditor support.

What is voluntary administration?
The voluntary administration process is designed to assist insolvent companies satisfy their debts, by ensuring that they can either:

  1. come to a formal arrangement with their creditors to pay those debts through a Deed of Company Arrangement (DOCA), or
  2. be placed into liquidation, quickly and inexpensively.

The voluntary administration process maximises the chances of a company continuing to exist by giving it the opportunity to propose a DOCA to its creditors.

Why choose voluntary administration?
A voluntary administration offers a collaborative approach to satisfying the company’s debts. It restrains creditors from enforcing their claims, and can assist a company to trade out of short-term difficulties caused by cash-flow restrictions or one-off financial problems. When appropriate, it can also provide a way to restructure a business or the company itself to revive it to a healthier financial position.

How does a voluntary administration begin?
A voluntary administration begins when an appointment document is executed by either:

  • the directors of a company after they have resolved that the company is, or is about to, become insolvent
  • a liquidator if a proposed DOCA will provide a better return to creditors than the continued liquidation
  • a secured creditor after the terms of their finance agreement has been breached and the administrator consents to the appointment.

What is the voluntary administration process?
A voluntary administrator is appointed to control a company’s affairs. The administrator convenes two meetings of creditors. The first meeting is held within 8 business days of the appointment. The second meeting is usually held 20 business days after the appointment. At the second meeting, creditors will choose the option they believe will best serve their interests.

The two most common outcomes of a voluntary administration are the execution of a DOCA or the liquidation of the company.

What is the effect on secured creditors?
Secured creditors have 13 business days from the appointment date to exercise their security. If they do not do so within that time, they are bound by a moratorium for the duration of the voluntary administration period. This decision period gives the secured creditor time to decide whether to exercise their charge, and the administrator some certainty during the administration.

What is the effect on unsecured creditors?
A moratorium is imposed on unsecured creditor actions—they cannot enforce their claims or apply to wind up a company.

A provisional liquidator cannot be appointed to a company without the leave of the court, and all proceedings or enforcement action against a company’s property is placed on hold.

What are the administrator’s powers?
The administrator assumes control of a company’s business, property and financial affairs. The administrator assumes sole responsibility to perform all functions and exercise any and all director powers that could be exercised if the company was not under administration, including continuing to trade or dispose of all or any part of a business or property. The directors and other officers lose all these powers.

What does the administrator do?
The voluntary administrator will:

  • take control of the company’s assets
  • investigate the company’s affairs
  • report any offences to Australian Securities and Investments Commission (ASIC)
  • assist the directors to formulate a DOCA proposal
  • report to creditors on the course of action that gives for the best outcome for creditors
  • call the required meetings of creditors to decide the future of the company.

Does the administrator look at preferences?
The administrator is required to investigate potential voidable transactions, but only to carry out sufficient investigations to justify any recommendations made in the report to creditors. The administrator has no power to commence any recovery proceedings.

Personal Property Securities Act 2009 and Voluntary Administrators
In the event of the appointment of a voluntary administrator to the company under Part 5.3A, section 440B of the Corporations Act 2001 imposes restrictions on:

  • an owner of property used by the company from taking possession of or recovering the property
  • a lessor from levying distress rent, taking possession, or otherwise recovering the property
  • a secured party with possessory security from selling the property or otherwise enforcing the security interest.

The voluntary administrator may still sell or dispose of assets:

  • with the consent of the secured party
  • with the consent of the court
  • in the ordinary course of business.

Any disposal made by the voluntary administrator requires the sale proceeds from the secured property to be distributed to those holding relevant security interests.

How does the voluntary administration affect a landlord?
A landlord is bound by the same moratorium applying to all creditors, providing the landlord did not commence enforcement proceedings prior to the appointment.

The administrator can occupy the company’s leased premises for up to seven calendar days without paying rent, but must pay rent for the remainder of the voluntary administration period.

The administrator’s liability to the landlord ends at the conclusion of the voluntary administration or when the premises are vacated. The administrator will not be liable for rent if they do not have possession of the property. However, the company will continue to incur liability for the rent.

How does a voluntary administration affect guarantees?
Creditors holding third-party guarantees from directors are bound by the moratorium during the period of the administration. After the voluntary administration ends, guarantees can then be enforced.

Can a voluntary administrator pay dividends?
No. A voluntary administrator does not have the authority to pay dividends.

What happens at the first meeting of creditors?
The first meeting of creditors is held within 8 business days after the appointment of the voluntary administrator. The Corporations Act requires two matters to be considered at this meeting:

  1. if creditors wish to replace the administrator with another administrator
  2. if creditors wish to elect a number of representatives to form a committee that will advise and assist the administrator.

What happens at the second meeting of creditors?
A second meeting of creditors is normally held 20 business days after the appointment. Creditors will decide the future of the company at this meeting. Before this meeting the administrator will issue a report detailing the results of investigations, offences (if applicable) and the viability and suitability of each options available to creditors.

The report must include sufficient information for creditors to make an informed decision in respect of the future of the company, and provide a recommendation to creditors.

What options are available to creditors?
The creditors can pass a resolution to:

  1. accept a proposal for a DOCA (if one is proposed)
  2. end the voluntary administration and pass control of the company back to the directors
  3. liquidate the company.

How complete must a draft deed of company arrangement be?
Commonly a draft DOCA is submitted to the administrator in summary form. A full draft DOCA is preferred to be tabled at the meeting of creditors, as the final DOCA will include many technical provisions.

Creditors should insist on the full draft, or at least as close to the final draft as practicable, so they are fully aware of all of the terms. The meeting can be adjourned to allow time to produce a more detailed draft.

Voting at meetings
A vote can be determined ‘on the voices’ if there is a clear majority of those present at a meeting. Each person (whether a creditor or a proxy) only has one vote.

If the vote is inconclusive, or if requested by creditors, the vote can be put to a poll. A poll works on a majority in both numbers and values. In the event of a stalemate (i.e. majority of numbers voting one way and the majority of value voting another), the administrator will generally exercise a casting vote and make the final decision. Otherwise the resolution will fail.

Do creditors need to decide on a course of action at the second meeting?
No. The second meeting may be adjourned for up to 45 business days for further investigations to be carried out, or for a proposed DOCA to be amended. The court has the power to extend this period if there is a genuine reason for an extension.

What does a voluntary administration cost?
Each administration is different and will therefore have a different cost depending on the work required. There are two types of work on insolvency files, statutory and non-statutory, but both are necessary.

Statutory work is required on every file regardless of size, complexity or other unique factors. Statutory work includes:

  • notifying ASIC
  • issuing notices to creditors
  • issuing notices to utilities and statutory authorities, such as the Australian Taxation Office
  • conducting the first meeting of creditors
  • dealing with creditors’ enquiries
  • conducting preliminary investigations into preferential payments, insolvent trading and other voidable transactions
  • preparing and issuing a detailed report to creditors
  • conducting the second meeting of creditors
  • notifying creditors and ASIC of the outcome of second meeting of creditors.

Non-statutory but still necessary work may include the following tasks:

  • trading on the business
  • dealing with secured creditors
  • dealing with finance companies
  • collecting and selling some or all of a company’s assets or the business of a company
  • more detailed investigations into potential recoveries, assets ownership and the viability of any proposal for a DOCA.

When does a voluntary administration end?
The voluntary administration ends when:

  • a DOCA is fully executed
  • the creditors resolve to wind up a company
  • the creditors resolve that the voluntary administration should end
  • the court orders that the administration is to end
  • the approved DOCA is not signed within 15 business days of the second meeting
  • the period for calling the second meeting ends without the meeting being called
  • the court appoints a liquidator to the company.

How should a company under voluntary administration be referred to?
While in voluntary administration, a company must advertise its status. For example, ABC Pty Ltd should be described as ABC Pty Ltd (administrator appointed) on all public documents.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017

 

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