Voluntary administration: what directors and creditors should expect
Overview
Voluntary administration is a formal process for determining the future of a company that is insolvent or likely to become insolvent.
It is not simply a pause on creditor action, nor does the appointment of an administrator guarantee that the company or its business will survive. Once appointed, the voluntary administrator takes control of the company, investigates its affairs and reports to creditors.
Creditors will 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.
The voluntary administration process is intended to maximise the chances of the company, or as much as possible of its business, continuing in existence.
Where that is not achievable, the process may still produce a better return for the company’s creditors and members than an immediate winding up.
When might voluntary administration be appropriate?
Voluntary administration is generally considered where a company cannot meet its debts, or is likely to become unable to do so, but there is still something worth preserving.
That may be an operating business, valuable contracts, licences, employees, intellectual property, customer relationships or a sale opportunity that could be lost through an immediate shutdown.
Common circumstances include:
- significant tax debt or creditor arrears;
- threatened legal or enforcement action;
- disputes between directors or shareholders that have contributed to the company’s financial difficulties;
- a short-term funding failure;
- the loss of a major customer;
- a dispute that has placed pressure on cash flow;
- an unsuccessful expansion or acquisition;
- a viable business burdened by historical liabilities;
- the need to complete a sale or refinancing; or
- a proposal by directors, shareholders or another party to fund a compromise with creditors.
The existence of an operating business is an important consideration, but voluntary administration will not be suitable in every case.
Its prospects are generally stronger where there is a clear commercial objective, sufficient funding for the administration and a realistic pathway to a sale, recapitalisation or DOCA.
Where those elements are uncertain, the directors and their advisers should carefully assess whether voluntary administration is likely to preserve value or whether another option may produce a better outcome.
The decision to appoint an administrator
Most voluntary administrators are appointed by the company’s directors.
For a director-initiated appointment, 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
- an administrator should be appointed.
The appointment is made in writing after the proposed administrator, who must be a registered liquidator, has consented to act.
An administrator may also be appointed by:
- a liquidator; or
- a secured party entitled to enforce a security interest over the whole, or substantially the whole, of the company’s property.
A secured party appointment involves more than establishing that the company has breached a loan agreement.
The secured party must hold the required security interest and must be presently entitled to enforce it.
Where the security interest is governed by the Personal Property Securities Act, issues including attachment, enforceability, perfection, priority and possible vesting must also be considered.
Directors considering voluntary administration should obtain advice before the company reaches the point where it has no cash, no staff support and no ability to continue trading.
The options available to an administrator are generally better where the business still has some stability and value.
Control of the company changes immediately
The directors remain in office after the appointment, but their powers are substantially suspended.
They cannot exercise a function or power as an officer of the company without the administrator’s written approval.
The administrator assumes control of the company’s business, property and financial affairs.
Depending on the circumstances, the administrator may:
- continue trading the business;
- cease trading immediately;
- retain or terminate employees;
- negotiate with suppliers and customers;
- deal with landlords and financiers;
- collect debts;
- sell assets, subject to statutory restrictions and third-party rights;
- conduct a sale of the business;
- obtain funding; or
- preserve the company while a DOCA proposal is developed.
The directors cannot continue operating the company independently of the administrator.
They are required to assist the administrator, provide information and deliver the company’s books and records.
Directors must also provide the administrator with a Report on Company Activities and Property, generally within five business days after the administration begins, unless the administrator allows a longer period.
The administrator will usually require immediate access to the company’s records.
Poor records do not prevent an appointment, but they may increase the cost and make it more difficult to determine whether a DOCA proposal would produce a better outcome than liquidation.
Will the business continue trading?
There is no automatic requirement for an administrator to continue trading the company’s business.
That decision is made after considering matters such as:
- whether the business is generating or losing cash;
- the availability of working capital;
- employee wages and entitlements;
- insurance coverage;
- supplier support;
- customer commitments;
- the administrator’s potential personal liabilities;
- the prospects of a business sale; and
- whether continued trading is likely to improve the outcome for creditors.
An administrator may continue trading where doing so preserves goodwill, maintains contracts or allows a more valuable sale.
Conversely, the administrator may close the business where continued trading would create further losses without producing a corresponding benefit.
Directors who expect the administrator to continue trading should be prepared to explain:
- where the working capital will come from;
- how ongoing expenses will be paid;
- whether key suppliers and customers will continue to support the business; and
- why continued operations are commercially justified.
An administrator is generally personally liable for debts they incur in carrying on the business, including debts for services, goods, leased or hired property and borrowings.
The administrator ordinarily has rights of indemnity against the company’s property, but the potential personal liability is an important consideration when deciding whether continued trading is appropriate.
The temporary restriction on creditor action
One of the immediate effects of voluntary administration is a statutory moratorium.
Subject to statutory exceptions, a proceeding in a court against the company or in relation to its property cannot generally be begun or continued without:
- the administrator’s written consent; or
- leave of the Court.
Separately, an enforcement process in relation to the company’s property, such as the execution of a judgment, cannot generally be begun or continued without leave of the Court.
Secured parties, owners and lessors are subject to separate provisions dealing with their rights during the administration.
The purpose of the moratorium is to provide a limited period in which the administrator can investigate the company and assess its future without individual creditors dismantling the company’s assets or operations.
Subject to statutory exclusions, certain contractual rights also cannot be enforced merely because the company has entered voluntary administration or because of its financial position while it is under administration.
Secured creditors retain important rights
Voluntary administration does not cancel a creditor’s security.
A secured creditor with security over the whole, or substantially the whole, of the company’s property generally has 13 business days to decide whether to enforce its security.
To preserve its principal right to continue enforcement despite the administration, the secured creditor must generally enforce its security in relation to all the company property subject to that security before or during the decision period. This may include appointing a receiver.
Different rules may apply where enforcement commenced before the administration or another statutory exception applies.
If the secured creditor does not enforce within the decision period, it will generally be subject to the administration moratorium unless the administrator consents, the Court grants leave or another exception applies.
The administrator will review the company’s finance arrangements and PPSR registrations early in the appointment. The validity and priority of security interests can affect whether the business can continue trading, be sold or be restructured.
Leased premises, equipment and other property
Landlords and owners of property used or occupied by, or in the possession of, the company are also generally restricted from taking possession of or otherwise recovering their property during the administration without:
- the administrator’s written consent; or
- leave of the Court.
This may apply to:
- leased business premises;
- rented plant and equipment;
- motor vehicles;
- goods supplied on retention-of-title terms; and
- other property in the company’s possession.
The administrator has a short period in which to determine whether the property is required for the administration.
Where the company continues to use or occupy, or remains in possession of, property under an agreement entered into before the administration, the administrator may become personally liable for rent or other amounts attributable to the period beginning more than five business days after the administration commenced.
The liability generally continues while:
- the company uses, occupies or possesses the property; and
- the administration remains in progress.
Within the initial five-business-day period, or a longer period allowed by the Court, the administrator may give notice that the company does not propose to exercise rights in relation to the property.
That notice can relieve the administrator from personal liability for later periods.
It does not extinguish or otherwise affect the company’s liability under the relevant lease or agreement.
Guarantees are not automatically released
Many company debts are supported by personal guarantees from directors or related parties.
Voluntary administration does not extinguish those guarantees.
During the administration, there is generally a temporary restriction on enforcing a guarantee of the company’s liability against:
- an individual who is a director of the company;
- the spouse of a director; or
- a relative of a director.
Enforcement against those persons generally requires leave of the Court while the administration continues.
That protection is temporary and does not extend to every guarantor.
For example, a related company that has provided a guarantee does not generally receive the same statutory protection.
When the administration ends, a creditor may generally pursue a guarantor in accordance with the terms of the guarantee, subject to any separate settlement, release or defence available to the guarantor.
A compromise or release of the company’s liability under a DOCA does not, by itself, release a director or another guarantor.
A separate release or agreement from the creditor will ordinarily be required.
Director penalty notices also need to be considered as part of the process. Depending on the timing of the appointment and the company’s lodgment history, appointing a voluntary administrator will not necessarily resolve a director’s exposure.
Directors should therefore consider their personal exposure separately from the company’s DOCA proposal.
What the administrator investigates
The administrator is required to investigate the company’s business, property, affairs and financial circumstances.
The purpose of the investigation is to determine which available outcome is likely to be in creditors’ interests.
The investigation may include:
- the events leading to the company’s insolvency;
- the company’s assets and liabilities;
- its trading performance and cash flow;
- the date insolvency may have commenced;
- transactions involving directors or related entities;
- payments made shortly before the appointment;
- asset sales and transfers;
- director loan accounts;
- security interests and ownership disputes;
- possible insolvent trading;
- creditor-defeating dispositions;
- possible breaches of directors’ duties; and
- potential voidable transactions.
The administrator conducts this work within a short statutory period.
The investigation is therefore usually focused on matters that are material to the recommendation being made to creditors.
It is not necessarily as extensive as the investigation that may later be undertaken by a liquidator.
Potential recovery claims
The administrator may identify transactions or claims that could be investigated and pursued if the company enters liquidation.
These may include:
- unfair preferences;
- uncommercial transactions;
- unreasonable director-related transactions;
- unfair loans;
- creditor-defeating dispositions; and
- insolvent trading claims.
Many statutory recovery proceedings, including unfair preference and insolvent trading proceedings, are generally only available if the company later enters liquidation.
Potential claims are important because they form part of the estimated liquidation outcome.
A proposed DOCA should usually be compared against the amount creditors might receive if a liquidator were appointed and investigated and pursued those claims.
A proposal that ignores a significant potential recovery may not provide creditors with sufficient reason to accept it.
The first creditors’ meeting
The first creditors’ meeting is generally held within eight business days after the administration begins.
Its purpose is limited.
Creditors may decide:
- whether the existing administrator should be replaced; and
- whether a committee of inspection should be appointed.
Creditors do not decide the company’s ultimate future at the first meeting.
A committee of inspection may:
- consult with and assist the administrator;
- represent the interests of creditors;
- receive information concerning the administration; and
- approve certain matters where permitted by the legislation.
Whether a committee is useful will depend on the size and complexity of the appointment.
Before the first meeting, creditors will also receive information about the administrator’s relevant relationships, any indemnities provided and proposed remuneration. This information assists creditors in assessing the administrator’s independence and the likely costs of the process.
Developing a DOCA proposal
During the administration, the directors or another interested party may propose a deed of company arrangement, usually referred to as a DOCA.
A DOCA is a flexible statutory compromise between the company and its creditors.
The proposal might involve:
- an immediate lump-sum contribution;
- payments over time;
- the sale of assets;
- contributions from directors or shareholders;
- the continued operation of the business;
- a business sale or recapitalisation;
- the compromise of some debts;
- different treatment for particular creditor groups; or
- a combination of these arrangements.
The source of the proposed funds must be clear and credible.
A proposal based on future trading may require:
- detailed cash-flow forecasts;
- appropriate working capital;
- reporting obligations;
- protections against further losses; and
- safeguards if the forecast trading performance is not achieved.
A proposal funded by a third party should address:
- the amount of the contribution;
- when the funds will be paid;
- whether the contribution is secured or conditional; and
- what will happen if the contribution is not made.
The administrator must remain independent and assess the proposed DOCA against the available alternatives.
The directors and other parties proposing a DOCA should obtain their own legal, financial and taxation advice.
The administrator’s report to creditors
Before the second creditors’ meeting, the administrator provides creditors with a report about the company’s business, property, affairs and financial circumstances.
The report must also set out the administrator’s opinion on whether it would be in creditors’ interests for:
- the company to execute a DOCA;
- the administration to end; or
- the company to be wound up.
The administrator must explain the reasons for those opinions and provide other known information that will enable creditors to make an informed decision.
The statement must also indicate whether the administrator has identified any transactions that appear to be voidable transactions from which money, property or other benefits may be recoverable by a liquidator.
Where a DOCA is proposed, creditors must also be given details of the proposed deed.
The report will usually compare the likely outcomes under the proposed DOCA and liquidation, including the estimated return to creditors, the source and timing of the DOCA funding and any material potential recoveries.
The administrator’s recommendation assists creditors, but creditors make the final decision at the second meeting.
The second creditors’ meeting
The second creditors’ meeting is held within a statutory timetable.
Unless the Court extends the convening period, the meeting will generally be held within 25 business days after the administration begins.
A longer period generally applies where the administration begins during the relevant Christmas or Easter period, in which case the meeting may generally be held within 30 business days.
The Court may extend the convening period where additional time is required, including to:
- complete a sale process;
- investigate complex transactions;
- obtain further information;
- finalise a DOCA proposal; or
- resolve issues concerning funding, litigation or secured creditors.
If creditors do not believe they have enough information to make a decision, they may also resolve to adjourn the meeting for up to 45 business days and request further information before deciding the company’s future.
At the second meeting, creditors choose between three outcomes:
- the company executes a DOCA (if proposed);
- the administration ends and control returns to the directors; or
- the company is wound up.
A resolution may be decided on the voices or by a poll.
Where the vote is taken on the voices, the chairperson determines whether a majority of the creditors participating and entitled to vote have indicated their agreement.
A creditor participating in the meeting and entitled to vote may request a poll. The chairperson may also proceed to a poll where the result cannot properly be determined on the voices.
Where a poll is taken, the resolution generally passes only if it is supported by both:
- more than half of the creditors voting, by number; and
- creditors representing more than half of the value of the debts voted.
If the resolution obtains only one of those majorities, the chairperson may, subject to statutory restrictions, exercise a casting vote.
The chairperson must explain the reasons for exercising, or declining to exercise, the casting vote.
If creditors accept the DOCA
If creditors approve the proposal, the company must generally execute the DOCA within 15 business days after the end of the meeting, unless the Court allows further time.
If the company does not execute the deed within the permitted period, it will generally proceed automatically into liquidation.
The DOCA will specify matters including:
- which debts and claims are covered;
- the property or money available;
- the timing and order of distributions;
- the extent of any compromise or release;
- the identity and powers of the deed administrator;
- reporting or trading obligations;
- default provisions; and
- the circumstances in which the deed will terminate.
Unless eligible employee creditors agree to the different treatment at a meeting convened for that purpose, or the Court approves it, the DOCA must preserve a priority for eligible employee creditors at least equal to the priority they would receive in a liquidation.
Unsecured creditors are generally bound in relation to claims covered by the DOCA, including creditors who:
- voted against the proposal;
- did not vote; or
- did not participate in the administration.
Secured creditors are treated differently.
A secured creditor is not generally prevented from realising or otherwise dealing with its security merely because a DOCA has been approved.
A secured creditor may be bound to the extent the DOCA applies to it where:
- it voted in favour of the resolution approving the DOCA; or
- the Court makes an order affecting its rights.
Similar provisions apply to owners and lessors of property used or occupied by, or in the possession of, the company.
A DOCA also does not automatically release directors, related parties or other guarantors from their separate liabilities.
If creditors choose liquidation
Where creditors resolve that the company be wound up, the company proceeds into creditors’ voluntary liquidation.
The administrator will ordinarily become the liquidator unless creditors appoint someone else.
The liquidator then:
- takes control of and realises the company’s assets;
- completes further investigations;
- considers recovery proceedings;
- reports suspected misconduct where required;
- adjudicates creditor claims; and
- distributes available funds according to the statutory priorities.
The liquidation is a separate phase.
Investigations and recoveries may continue well beyond the work completed during the administration.
Returning control to the directors
Creditors can resolve that the administration should end and control of the company should return to the directors.
This outcome is relatively uncommon where the company remains insolvent.
It may be appropriate where the company has:
- obtained refinancing;
- received a sufficient capital injection;
- resolved the issue that caused the appointment;
- settled or discharged significant liabilities; or
- demonstrated that it can continue meeting its debts as and when they fall due.
Ending the administration does not compromise creditor claims.
Unless another agreement has been reached, creditors regain their ordinary enforcement rights.
The directors also resume control of the company and responsibility for its future trading.
The importance of preparation
Although voluntary administration moves quickly, the company’s problems will rarely be simple.
Before an appointment, directors should ordinarily assemble:
- up-to-date management accounts;
- cash-flow forecasts;
- current creditor and debtor listings;
- employee entitlement information;
- taxation lodgement records;
- details of secured debts;
- copies of major leases and contracts;
- information about related-party accounts;
- asset ownership records; and
- details of the proposed source of restructuring funding.
Directors should also be prepared to explain:
- what caused the company’s financial distress;
- whether the underlying business is viable;
- what immediate funding is available;
- whether key employees, customers and suppliers will remain;
- whether there are potential sale or refinancing opportunities; and
- what proposal may be offered to creditors.
Preparation cannot guarantee a successful outcome, but it gives the administrator a better basis for deciding whether the business can continue and whether a DOCA proposal is commercially achievable.
Waiting until the company has exhausted its cash, lost essential employees or had key assets seized may significantly reduce the available options.
Voluntary administration is a process, not the solution itself
The appointment of an administrator creates a framework in which the company’s position can be investigated and creditors can make an informed decision.
The eventual solution may be:
- a DOCA;
- a sale of the business;
- a recapitalisation;
- a return of the company to the directors; or
- liquidation.
The suitability of voluntary administration depends on the company’s particular circumstances, including:
- the viability of its underlying business;
- the availability of funding;
- the quality of its financial records;
- its employee and taxation liabilities;
- the position of secured creditors;
- its leases, licences and key contracts; and
- the existence of a realistic DOCA proposal.
Directors facing financial distress should consider voluntary administration alongside other available options, including:
- safe harbour;
- small business restructuring;
- informal negotiations with creditors;
- refinancing or recapitalisation;
- a sale of the business or assets; and
- liquidation.
The earlier those options are considered, the greater the prospect of preserving value and avoiding decisions being dictated by creditor enforcement.
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