- Voluntary administrators may be appointed by company directors;
- Liquidators may also appoint voluntary administrators, but generally cannot appoint themselves as a voluntary administrator;
- Secured creditors may appoint a voluntary administrator, but are more likely to appoint a receiver instead;
- Before appointing a voluntary administrator, the appointer should carefully consider whether they have satisfied the legal requirements to do so and whether there are other options which may provide better outcomes for the business and/or creditors.
Estimated reading time: 9 minutes
Voluntary administration involves an insolvency practitioner (a voluntary administrator) taking control of a company with the task of either restructuring or ultimately liquidating the company if a restructuring proposal is rejected by creditors. A Voluntary Administrator (VA) has all the powers of the directors of a company, including the ability to sell a company’s business, sell assets and dismiss employees.
The voluntary administration regime was introduced into the Corporations Law in 1993 to provide an alternative to liquidation and the immediate closure of insolvent businesses, and remains largely unchanged since establishment. The intention was to protect the going-concern value of insolvent businesses by creating a flexible process of implementing a compromise with creditors with minimal Court involvement. Many consider that it has failed in achieving this outcome. In fact, it seems as though voluntary administration is often used improperly by directors in order to avoid employee claims, creditor claims and tax debts.
In this article we set out the process for appointment of a VA by directors, liquidators and secured creditors, including examples where that appointment has been rejected by the Courts.
Appointment by directors
Under section 436A of the Corporations Act 2001 , a VA is validly appointed by directors if the board resolves in writing that, in the opinion of the directors, the company is insolvent or is likely to become insolvent, and that the VA should be appointed.
The appointment of a VA protects directors from civil penalty provisions relating to insolvent trading under the Corporations Act 2001. Unless the directors have a safe harbour arrangement (e.g. a turnaround plan) the prospective insolvency practitioner will advise the directors they must appoint them because they are in breach of their director’s duties.
As the question of insolvency is central to whether a business can continue to operate, it is crucial for directors to be aware of the solvency of their company as it trades in order to avoid a claim for insolvent trading under the Corporations Act 2001 (see 588G of that Act). This way, directors will be aware if it comes time for a VA or a liquidator to be appointed. On the other hand, it is important that a VA be appointed only where there is a ‘proper motive’ and where there are valid grounds for appointment.
One situation where it is improper for directors to appoint a VA, is where directors do not possess good evidence to assert that the company is or is likely to become insolvent. The Victorian Supreme Court in ASIC v Planet Platinum and anor  VSC 120 confirmed that it is not sufficient for there simply to be no evidence presented that the company is solvent (see paragraph 46 of the judgment). In that case a VA was appointed in spite of there being positive evidence of solvency. The Court found that this appointment was invalid.
In addition, in that case, the Court found that the purpose of appointment was improper as the aim of the appointment was to halt the appointment of a provisional liquidator and to proceed with company privatisation. That case also provided a lesson for VAs as the Court also found that the VA failed to take reasonable steps to confirm the validity of his appointment.
In Condor Blanco Mines the New South Wales Supreme Court pursued this line of reasoning further, holding that VAs need to be aware of matters that may call into question the appropriateness of their appointment.
Directors might also consider the wisdom or otherwise of appointing a VA at the ‘11th hour’, that is, where the winding up petition is already before the courts but a liquidator is yet to be appointed. Through this mechanism, directors can delay a liquidation which would otherwise result in the termination of their trading activities. While a liquidation spells the end of a company, a successful Deed of Company Arrangement (DOCA) arising from a voluntary administration would allow directors to return to trade and control.
Once appointed, the court will consider whether it is in the best interests of creditors to continue with the voluntary administration or to liquidate. You can read more about this option at Will a Court appoint a liquidator over the top of an 11th hour voluntary administrator?
Section 448C of the Corporations Act 2001 sets out the qualification requirements to be appointed as a VA. In order to be validly appointed, the VA must give their explicit written consent to being appointed. Only registered liquidators are permitted to provide that consent. In addition, insolvent individuals are prohibited from being appointed as a VA. Directors should be aware that VAs will often expect security to be put in place to protect their fees and expenses. An example of this would bee the payment into a trust account but there have also been examples where company properly, presumably to be sold by the VA, is agreed to be left behind.
Creditors may prefer to install (or attempt to do so via the directors), someone they trust as the VA to act as a sort of ‘Investigating Accountant’ on their behalf. This is often preferred by financiers as a step before the appointment of a VA. However, all appointers must be aware that a VA has an overall obligation of independence which means that certain people are disqualified from becoming a VA, while in other cases they have an obligation to declare relationships with the company and creditors. As a general rule, anyone who is in close contact with the company including directors and creditors owed more than $5,000 are disqualified from being a VA. There is a prohibition on financial inducements to favoured individuals to become VAs.
The VA, on appointment, must give “a declaration of relevant relationships” as well as “a declaration of indemnities” as soon as possible (see section 436DA of the Corporations Act). The creditors will then be informed of this when they receive notice of the first meeting of creditors, and the declarations tabled at that meeting.
Is it a good idea to appoint a voluntary administrator?
Before appointing a VA, it is important for directors to be aware of the shortfalls of voluntary administration and other options that may be available to them. The key advantage of voluntary administration, for directors, is to give them ‘breathing space’ to work on a restructure. During that period there is a moratorium on creditor action against the company meaning:
- The company cannot be wound up;
- Securities cannot be enforced (with some exceptions);
- An owner or lessor cannot recover property used by the company (with some exceptions);
- Legal proceedings cannot be commenced against the company (with some exceptions);
- A company director’s guarantee cannot be enforced.
However, the time period available to a VA is not very long: there is six weeks to approve the restructure which can be contrasted, say, with the Chapter 11 process in the United States where a formal restructure has, on average, 180 days to be put together. At the end of the process, creditors need to make a decision whether to:
- accept the director’s compromise proposal and formalise it through a DOCA;
- reject the compromise and put the company into liquidation; or
- stop the process completely and give the company back to directors (an extremely unlikely outcome in the writer’s view).
To read more about this process see When shouldn’t you appoint a voluntary administrator?
Ultimately, the most important consideration for directors in deciding whether or not to appoint a VA should be whether that appointment has a decent chance of restructuring the business and shedding suffocating debt. There is ample reason to think that appointing a VA would not give directors decent prospects of a second chance. Unfortunately we would estimate that less than 1 per cent of voluntary administrations end up in successful restructure of businesses. Only a very small proportion of companies are continuing to substantially trade after voluntary administration and the average proceeds available for creditors are meagre. While it is possible to argue that many of these businesses would have been wound up anyway, and the distributions to creditors may have been less than from a straightforward liquidation, the continued decline in popularity of voluntary administrations suggests that companies themselves are seeing it as less desirable than other insolvency options.
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.
For more information see What are the success rates of voluntary administration? link
Appointment by liquidators/provisional liquidators
It is also possible for the liquidator/provisional liquidator to appoint a VA themselves under section 436B of the Corporations Act 2001. As with directors, liquidators or provisional liquidators may only pursue this option if they are of the view that the company is or is likely to become insolvent.
This option may be pursued where the liquidators consider that a DOCA, a potential outcome only achievable by voluntary administration, would provide a better return for creditors that proceeding with a winding up. If a VA appointment is made, the winding up will be suspended for the period of the voluntary administration. Note, however, that the liquidator will still need to deal with liquidation (e.g. applying to court to stop winding-up) at completion of a DOCA.
Overall, it is very rare that a liquidator/provisional liquidator would appoint a VA. The purpose of voluntary administration is to preserve the goodwill value of a business. If the company were already in liquidation or provisional liquidation it would be likely that the brand, goodwill and trading prospects would already be irreparably damaged.
Note also that the liquidator is not allowed to appoint themselves as VA as well as other certain restricted persons (see section 436(2)(b) of the Corporations Act). However, there are exceptions to this under section 436B of the Corporations Act 2001, where at a meeting of company’s creditors this is approved or the court gives leave for a former liquidator to be appointed.
Appointment by secured creditor
Under section 436C of the Corporations Act 2001 a VA may also be appointed by a secured creditor. The security interest must have become and remain enforceable at the time of the appointment. Usually a secured creditor would appoint a receiver and manager to enforce their security, however in some cases this might not be desired by the secured creditor. For example, the secured creditor may be aware that a voluntary administrator is likely to be appointed anyway and be worried that the fees and expenses of both the receiver and a voluntary administrator would deplete the company’s asset pool to their disadvantage.
Note that voluntary administration can occur at the same time as receivership. Note also that the voluntary administrator may review receiver remuneration. It is more likely that a secured creditor would appoint a receiver rather than a VA as:
- the compliance obligations of a receiver are far less onerous than those of a VA;
- the receiver principally has obligations to the secured creditor, rather than all creditors.
It may happen that both a receiver and voluntary administrator are appointed at same time (e.g. if directors or the liquidator appoint a VA). This may result in a significant duplication of fees and conflicts between the receiver and VA who have obligations to different parties. For more information read How do you appoint a receiver?
The process is similar for the appointment of a VA, whether it is directors, liquidator or secured creditor initiate the appointment. In each case, the appointer and the VA must be attentive to the legal requirements for appointment. Given their low success rate, it may be worth all would-be appointers of VAs considering whether other options would result in a better outcome for all parties.