The writer’s view is that 95% of voluntary administrations fail to meet the stated objective of the regime, being saving goodwill value of insolvent businesses, saving jobs and repaying a percentage of creditor claims (in double digits). Unfortunately, there is no empirical evidence to prove or disprove this proposition.
The key question that all directors ask is: how successful is the voluntary administration process?
The answer is that it is unlikely to be at all successful for directors or their company’s creditors.
The creditors can expect returns from a deed of company arrangement (DOCA) in the order of 5-7c in the dollar*. It isn’t very likely that directors should expect to trade through the voluntary administration and deed of company arrangement periods to have a company that is free and clear of legacy debt (10% chance or less). In the market, other businesses view voluntary administration as the equal of liquidation and it carries a stigma that results in the ultimate destruction of goodwill. The winners are the administrators with the average fees being in the order of $97,000* in small voluntary administration processes.
Why is there a dearth of empirical research on the topic?
There are very few empirical reports in Australia that can be drawn upon. In the United States of America, there is a wealth of research into Chapter 11 of the Bankruptcy Code generated through universities.
Australia is a much smaller market and unlike the United States, the historical focus of bankruptcy and insolvency law has been to punish debtors. The problem that Australia has is that without in-depth insolvency research we are “walking blind”. Insolvency in Australia is at risk of being hijacked by industry groups or fraudsters (i.e. phoenix operators) rather than goods policymakers. The motto for insolvency policy should be: If you can’t measure it you can’t manage it
Why appoint a voluntary administrator?
The objective of the regime is to give directors a process to protect the goodwill value in an insolvent business from winding up by creditors.
Other typical objectives behind directors appointing a voluntary administrator include:
- Delay creditors: Using the process to delay creditor action
- Litigation tactic: Staying winding up applications or other causes of action
- Director’s escape valve: Avoiding investigations that may follow a liquidation
- Control of the company: resolution of internal disputes
- Employees: Stifle enterprise bargaining
- Future complaints: Avoid compensating future claimants
- Relation-back period deferred for unfair preference claims
What is voluntary administration?
Voluntary administration is a process when a voluntary administrator is appointed to the insolvent company, generally by a company’s directors, after they decide that the company is insolvent or likely to become insolvent. The objective of the process is that creditor’s debts may be compromised to save the value of the insolvent business.
What is the typical outcome of a voluntary administration?
There is enough empirical evidence to support concern about the voluntary administration process. In its submissions to a parliamentary inquiry, the ASIC reported that between 1993 and 1997 of the 5760 companies that entered into voluntary administration, only 10% resumed “normal trading”. Source: Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: a stocktake June 2004
The typical outcome of a voluntary administration may be described as a “glorified liquidation”.* The voluntary administration process is subject to a vote of creditors at the second meeting of creditors that decides the fate of the company (i.e. liquidation or deed of company arrangement). Most voluntary administrations today result in a liquidation rather than a DOCA.
Further, of the companies that do enter into a DOCA the majority (49/72*) are non-trading and therefore the company that is subject to the DOCA becomes a shell. The purposes of this DOCA may be to stall litigation, resolve a directorship dispute, obtain breathing space from tax liabilities and/or discharge liability for unfair preference claims or director claw-back actions. One of the main benefits of a DOCA compared to a liquidation is that the directors are protected from claw-back actions because the company does not go into liquidation.
What would an exceptional outcome of a voluntary administration look like?
- Trading on the business through a DOCA and beyond
- Third party contribution to the DOCA fund
- Arrangements with continuing creditors to ensure ongoing support outside the DOCA
- Motivated management and staff (good culture)
- Some return for non-continuing creditors (e.g. 10c in a dollar)
*Wellard describes this as a “creative alternative DOCA” in comparison to the standard DOCA which is a “Quasi-liquidation DOCA”.
Other than the writer’s opinion parts of this blog post is based upon the empirical research carried out by Mark Wellard in the 19 May 2014 report:
*Wellard, Mark Norman (2014) A sample review of Deeds of Company Arrangement under Part 5.3A of the Corporations Act. ARITA Terry Taylor Scholarship. Australian Restructuring Insolvency and Turnaround Association https://eprints.qut.edu.au/74002/