A company facing insolvency may be liquidated either voluntarily or involuntarily. Alternatively, voluntary administration, may be a viable option to avoid liquidation and to assist a company in financial difficulty to achieve better outcomes for the company, its members and creditors.
What is voluntary administration?
Voluntary administration involves the appointment of an administrator, generally affected through a resolution of company directors, but sometimes at the instigation of a liquidator or creditor holding substantial secured interests over the company’s assets.
The purpose of voluntary administration, as an alternative to winding up, is to:
- facilitate continuance of all or part of the company’s operations; and / or
- administer the company’s affairs;
to enhance the company’s chances of success or at least achieve the best possible return for its creditors and members.
What happens when an administrator is appointed?
Once appointed, the administrator assumes control of the company, investigates its affairs and may negotiate with creditors to propose a strategy with the objective of minimising loss and generally trading out of the company’s financial difficulties.
The proposed strategy, which may include a restructure or amalgamation, is documented in a Deed of Company Arrangement (DOCA) which is presented to the company’s creditors. If the DOCA is not deemed satisfactory by the creditors, then they may instigate winding up proceedings and the company may be liquidated.
The result of voluntary administration is that liquidation of the company is avoided or at least postponed for the purposes of facilitating a better return. The administration is only effective until a DOCA is implemented or the company goes into liquidation. During this period creditors may not recover from directors pursuant to a director’s guarantee and shares may not be traded.
The administration is noted on ASIC records and the words ‘administrator appointed’ must appear after the company’s name on all documents.
If creditors vote for the proposal, a DOCA is entered which binds the company and all unsecured creditors (regardless of whether they voted in favour of the deed) as well as any secured creditors who voted in its favour.
The Deed of Company Arrangement
A DOCA is a binding agreement between a company and its creditors. The contents will vary depending on the circumstances of the company and the compromises the creditors are willing to accept.
Conducive to one of the primary objectives of voluntary administration, the DOCA will usually provide that the company is allowed to continue trading. It may also identify available property to creditors and the order of payment from proceeds of liquidated assets. Provided the terms of the arrangement are being fulfilled, the company is relieved of pressure from existing creditors. The directors’ powers and any restrictions will be set out in the DOCA.
Once all provisions of the deed are fulfilled, including making final payments to creditors, the deed terminates, and the company may continue to trade.
When a company faces insolvency issues, the decision to enter voluntary administration may be a feasible option to avoid liquidation and assist the company to trade out of its financial difficulties.
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