It is essential that directors pick a voluntary administrator who is hard working, ethical, and experienced. For the voluntary administration to be successful through a compromise, you’ll need a lot of skill and a little luck. The first step before appointing a voluntary administrator is for company directors to define what they want the process to deliver. This will likely be a downsized business with substantially less debt.
Why does it matter to pick the right voluntary administrator?
The objective of voluntary administration is to save as much of the business as possible and if directors can define their objective, the right insolvency practitioner can assist them to achieve a formal restructure.
It is essential as a director to pick the right voluntary administrator because:
- Directors cannot replace the voluntary administrator if they are unhappy with them
- Creditors can replace the voluntary administrator at the first meeting of creditors if they are unhappy with them
- The voluntary administrator must express an opinion to creditors about whether they accept the director’s compromise proposal
- The voluntary administrator can’t be a book worm, because they’ll need to talk to creditors and suppliers to get them on board
- They’re likely to be very expensive
- The voluntary administration process is a one-shot opportunity – if you miss your chance for getting the creditors to approve a compromise, the company assets will be sold via a fire sale liquidation
What is voluntary administration and when do you appoint a voluntary administrator?
- The voluntary administration process is the principal formal restructuring method in Australia for insolvent small-to-medium-sized businesses (SMEs)
- Voluntary administrators are predominantly appointed by the insolvent company’s directors
- A voluntary administrator is appointed when a company is insolvent or about to become so
For more information about insolvency read our blog post: What is the legal meaning of insolvency?
For more information about voluntary administrators read our blog post: Who appoints a voluntary administrator?
For more information about when you shouldn’t appoint a voluntary administrator read our blog post: When shouldn’t you appoint a voluntary administrator?
For more information about the limitations of voluntary administration read our blog post: What are the shortcomings of voluntary administration? La La Land meets Suicide Squad
Directors are usually confused about what a voluntary administration will actually mean
The key disadvantage of engaging an insolvency practitioner pre-appointment is that they are not under any legal obligation to make full disclosure about the actual effects of voluntary administration to the company’s directors. Insolvency practitioners do not owe a fiduciary duty to the directors because after they are appointed their legal duties are owed to creditors and the company itself. This is a recipe for disaster if directors are looking to obtain dependable and conflict-free advice from an insolvency practitioner.
Voluntary administrations are usually the most profitable of all jobs for insolvency practitioners. This means that an insolvency practitioner will have a bias towards voluntary administration as opposed to liquidation or informal restructure through the safe harbour. Voluntary administrations are profitable because they are usually a short but intense period of trading and compliance work that results in full billing utilisation for the insolvency practitioner’s firm. The voluntary administrator’s entire team can work for the period of the voluntary administration full-time with full billing recovery rates expected. It is not uncommon for an insolvency firm to bill over $100,000 each week of a voluntary administration.
The voluntary administration process is technical and the chances of a successful outcome are slim. There is no empirical research that thoroughly explores the success rates of voluntary administration but this writer estimates it to be in the order of 5% or less. The peak insolvency body, ARITA, doesn’t systematically collect empirical evidence about their member’s successes and nor does the ASIC. It is likely, however, that systematically obtained empirical evidence about voluntary administration would give the analyst a particularly dim view about its success rates.
Take-away for directors: Talk to a lawyer first before considering voluntary administration.
Beware of referrals in the insolvency industry
The process of referrals in the insolvency industry usually stinks to high heaven. The value of good referrals to insolvency practitioners is quite high so they usually offer the following incentives:
- To lawyers: Legal work in the future
- To accountants: Invitations to events and accounting work on jobs
- To consultants: Direct payments and work ins with jobs
If you are referred to an insolvency practitioner you should carefully consider why this person was considered optimal to your situation and compare them to alternative providers. The usual referral process, where the referral is not optimal, may result in higher costs and poorer outcomes.
Take-away for directors: Carefully assess any referral before taking it up.
First step before approaching a voluntary administrator is to define your objectives
The purpose of voluntary administration is to salvage as much of an insolvent business as possible. The scope of what this means should be defined by the directors and it will usually involve downsizing and trying to persuade creditors to accept a compromise in consideration for instalment payments.
There are a few legal limits on the offer of compromise that can be put through the deed of company arrangement process. The key hurdle director’s face is whether creditors who are “out of the money” decide to exercise votes against the offer. A creditor is “out of the money” when they cannot expect any return either in a liquidation scenario or a DOCA scenario.
The obvious objective of directors should be to save the rump of their business and disclaim an interest in unprofitable projects, contracts, employees, customers and suppliers. This is a matter of careful consideration before a voluntary administrator is appointed because the directors could also pursue an informal restructure through the new safe harbour from insolvent trading (listen to our podcast on safe harbour from insolvent trading or watch our interview on the safe harbour from insolvent trading).
Take-away for directors: First, define your objective.
Before appointing a voluntary administrator, you should exhaust other options
A voluntary administration is a formal appointment and it has two key consequences:
- Directors lose control of their business (because their powers are taken over by the voluntary administrator); and
- All the suppliers, employees and customers of the business will know it is insolvent (and you should plan for catastrophic consequences from this news).
Directors should seriously consider whether an informal restructure would be more effective before they appoint a voluntary administrator. It would be a lot cheaper and if it doesn’t work, a formal appointment (voluntary administration or liquidation) could then be considered.
Two techniques (or processes) for informal restructures are:
- Safe harbour restructures; and
- Pre-pack insolvency arrangements.
For more information about the safe harbour from insolvent trading: listen to our podcast on safe harbour from insolvent trading or watch our interview on the safe harbour from insolvent trading.
For more information about pre-pack insolvency arrangements: read our pre-packs whitepaper.
Consideration 1: Having a commercial mindset
The voluntary administration process runs for a short period so the insolvency practitioner will need to make quick judgments. The most important judgment will be whether to continue to trade. The voluntary administrator will be very sensitive about the decision to keep trading because if there is a shortfall in receipts/payments then they will have to pay it from their own pocket (i.e. personal liability for trading debts). If they can’t grasp the essentials of the business that the directors are trying to save, they may exercise their discretion and stop trading. The result of ceasing to trade as a going concern would be catastrophic for the prospects of saving the business.
Take-away for directors: Find an insolvency practitioner who is commercially minded or you may lose the business.
Consideration 2: Having a hands-on approach
There is no training requirement that insolvency practitioners are actually able to manage people or understand the dynamics of a business.
Most insolvencies come from three industries:
- Building and construction;
- Retail; and
Each of these industries needs management that is direct and forthright. If a manager can’t stand up at a pub and get everyone’s attention they should probably find another industry. Insolvency practitioners are accountants and they usually have no skills in managing difficult industries but some of them are actually hands on and will give managing a turnaround a solid effort. Other insolvency practitioners would prefer to sit in the office and send emails – these practitioners should be avoided for a turnaround scenario.
Consideration 3: Being on financier panels
If there is a secured creditor, they may require that an insolvency practitioner be appointed from their panel of preferred voluntary administrators. There is nothing illegal about this but if directors don’t take into account the wishes of their voluntary administrator, they may find that a receiver and manager will be appointed over the top of their voluntary administrator. The result would be that the voluntary administration process is empty because the receiver would take control of the business assets.
Consideration 4: Ethical and hardworking insolvency practitioner
It is hard to emphasise how important it is to only engage hard working and ethical insolvency practitioners. The alternative is to engage “Sir Lunch-a-lot” types that are really only salespeople for their firms.
For more information, read our blog post: How do you choose the right liquidator?
Who to avoid? The corrupt and incompetent insolvency practitioners
The insolvency industry has a long history of corruption and incompetence. It may seem like a good idea to hire an incompetent liquidator but you are reliant on a voluntary administrator to persuade creditors that their review process has been thorough and that they should accept a meaningful compromise. If you pick a rotten apple you probably won’t get the outcome you’re looking for.
For more information, read our blog post: How do you pick the right liquidator?
Who to avoid? The old-school, do-nothing insolvency practitioners
Insolvency practice, as a profession, attracts the most intransigent characters. The reason is that resistant behaviour is rewarded and there is a lot of “noise” in a voluntary administration that should be ignored by the insolvency practitioner.
The insolvency practitioner of the past would often work on appointments only a couple of days a week and then spend the rest of the week at long lunches and bars around the city. This is the type of insolvency practitioner that should be avoided for a voluntary administration because they won’t be available to attend to the demands of a trading business whilst the voluntary administration is running.
Who to avoid? The too busy insolvency practitioner
The key limitation with a successful professional adviser is that they are limited by the number of hours in a day. This means that directors shouldn’t appoint a suitable insolvency practitioner if that practitioner has too many appointments. For example, an insolvency practitioner would probably be unable to properly service two voluntary administrations that are running concurrently.
Who to avoid? The phoenix operator
The phoenix operator has been fairly successful in Australia recently and the paucity of legislation and enforcement has guaranteed that this will be a growing industry. Phoenix operators have become key referrers to insolvency practitioners and they apply their knowledge of insolvency law to obfuscating the process to their benefit.
For more information about phoenix activity watch our interview: What is phoenix activity and how does the law (attempt to) regulate it?
How do you check that you’ve picked the right voluntary administrator?
If you’re satisfied that you have found an experienced, ethical, hardworking and appropriate voluntary administrator you should also conduct the following tests:
- Ask them to provide references from other directors who engaged them as a voluntary administrator
- Ask them for case studies of companies like yours that they have put through a deed of company arrangement
- Go through an experienced insolvency lawyer to know that they are genuine [Read our article: Insolvency lawyers, what do they do and how do you pick the right one?]