Voluntary Administration and DOCAs
Voluntary administration is a formal process for determining the future of a company that is insolvent or likely to become insolvent.
I am a registered liquidator and Principal at Worrells with more than 27 years’ experience in insolvency and restructuring. I assist directors and professional advisers with voluntary administration appointments, business sales, restructuring proposals and deeds of company arrangement.
What is voluntary administration?
Voluntary administration is a formal process for determining the future of a company that is insolvent or likely to become insolvent.
Once appointed, the voluntary administrator takes control of the company, investigates its business, property, affairs and financial position and reports to creditors.
Creditors ultimately decide whether the company should enter into a deed of company arrangement, have the administration end and control return to the directors, or be wound up.
A deed of company arrangement, commonly called a DOCA, is a flexible statutory compromise between the company and its creditors. A DOCA is not automatic. A proposal must be developed and assessed during the administration and approved by creditors.
When voluntary administration may need to be considered
Voluntary administration may need to be considered where a company cannot pay its debts, or is likely to become unable to do so, but there is still something worth preserving or a restructuring outcome worth investigating.
- Significant ATO debt or creditor arrears are placing pressure on the business.
- Legal action, enforcement or a winding-up application has been commenced or threatened.
- A director has received a Director Penalty Notice, or unpaid PAYG withholding, GST or superannuation is creating potential personal exposure.
- A short-term funding failure, loss of a major customer or other event has created an immediate cash-flow problem.
- A viable underlying business is burdened by historical liabilities.
- Time is needed to complete a refinancing, recapitalisation or business sale.
- Directors, shareholders or another party are prepared to fund a proposal to compromise creditor claims.
The voluntary administration process
Appointment and control
The directors appoint a registered liquidator as voluntary administrator. Control of the company passes to the administrator immediately and the directors’ powers are substantially suspended.
First creditors’ meeting
The first creditors’ meeting is generally held within eight business days. Creditors may consider replacing the administrator and whether to appoint a committee of inspection.
Investigation, proposals and report
The administrator investigates the company’s business, property, affairs and financial position, assesses any sale, refinancing or DOCA proposal and compares the available outcomes. Before the second meeting, the administrator issues a report to creditors setting out the options and a recommendation as to which outcome is in creditors’ interests.
Creditors decide the future
At the second meeting, creditors decide whether the company should enter into a DOCA, go into liquidation or have the administration end.
What does voluntary administration mean in practice?
The practical consequences depend on the company’s business, funding, employees, contracts, secured creditors and any restructuring proposal. My detailed guide explains the major issues that commonly arise, including:
- how the administrator is appointed and when control passes;
- the records, information and assistance directors must provide;
- whether the business will continue trading and how trading is funded;
- business sales, contracts, leases and company property;
- the statutory moratorium and the rights of secured creditors;
- personal guarantees and Director Penalty Notices;
- the administrator’s investigations and possible recovery claims;
- the first and second creditors’ meetings;
- how a DOCA proposal is developed, funded and assessed; and
- the administrator’s report, recommendation, creditor voting and possible outcomes.
Business Financial Health Check
The Business Financial Health Check asks 12 Yes or No questions across five areas and provides an indicative summary of potential warning signs. It takes about three minutes and does not determine whether the company is insolvent or whether voluntary administration is appropriate.
Other options that may be available
Voluntary administration is not the appropriate process for every company experiencing financial difficulty.
Small Business Restructuring
For an eligible company with a viable underlying business that may be able to propose a simpler formal compromise to creditors while the directors remain in control.
Small Business Restructuring →Creditors’ Voluntary Liquidation
Where the company is insolvent and there is no realistic restructuring, refinancing or sale outcome available.
Creditors’ Voluntary Liquidation →Safe harbour, refinancing, recapitalisation, a business sale or a properly structured informal arrangement may also be relevant depending on the company’s circumstances.
Voluntary administration FAQs
How is a voluntary administrator appointed, and can the directors choose the administrator?
Most voluntary administrators are appointed by the company’s directors. The board must resolve that, in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time and that an administrator should be appointed.
The proposed administrator must be a registered liquidator and consent in writing before the appointment. The directors can therefore select the administrator they propose to appoint, while creditors retain the right to consider replacing the administrator at the first creditors’ meeting.
What happens when the administrator is appointed, and will the business continue trading?
Control of the company passes to the administrator immediately. The directors remain in office but cannot exercise their powers without the administrator’s written approval.
There is no automatic requirement for the business to continue trading. The decision depends on available working capital, current profitability, employee costs, insurance, supplier and customer support, the prospects of a sale and whether continued trading is likely to preserve value or improve the outcome for creditors.
Does voluntary administration stop creditor action?
A statutory moratorium generally restricts court proceedings and enforcement action against the company or its property while the administration continues. The moratorium is not absolute.
A secured creditor with security over the whole, or substantially the whole, of the company’s property generally has a 13-business-day decision period in which to decide whether to enforce. Landlords and other property owners also have separate rights and restrictions.
What happens to personal guarantees and Director Penalty Notices?
Voluntary administration does not extinguish personal guarantees. There is generally a temporary restriction on enforcing a company guarantee against an individual director, the director’s spouse or a relative while the administration continues, but that protection is temporary and does not apply to every guarantor.
A DOCA does not automatically release a guarantor. Director Penalty Notices also need to be considered separately and promptly.
What is a DOCA, and who decides whether it is accepted?
A DOCA is a flexible statutory compromise between the company and its creditors. It may involve a lump-sum contribution, payments over time, asset sales, director or shareholder contributions, continued trading, a business sale, recapitalisation or a combination of arrangements.
The administrator assesses the proposal and compares it with the likely liquidation outcome. The administrator gives creditors a recommendation, but creditors make the final decision at the second meeting.
What information and funding are needed before the appointment?
A short summary is enough for the initial discussion. Where available, useful information includes current management accounts, cash-flow forecasts, creditor and debtor listings, employee entitlements, the company’s tax position, secured debts, major leases and contracts, related-party loan accounts, details of any court action or DPN and information about any proposed sale, refinancing or restructuring funding.
Where the business is expected to continue trading, the source of funding for wages, suppliers, rent and other ongoing expenses is particularly important. You should not delay making contact because every document is not yet available.
Need to discuss a matter with me?
If you would like to discuss a voluntary administration, DOCA proposal or another company restructuring matter, use the Contact page to provide a short summary.
If there is an urgent deadline, winding-up application, secured creditor action or Director Penalty Notice, include that information when you contact me.