A voluntary administrator can be appointed by a company’s board (i.e. its directors), secured creditor or liquidator. If a company’s board of directors determine that a company is insolvent, i.e. it is unable to pay its debts when they become due and payable, one of the tools to deal with chronic insolvency is to place the company into voluntary administration. In a voluntary administration a registered liquidator takes control of the company with the task of either restructuring or ultimately liquidating the company if a restructuring is rejected by creditors. An administrator has all the powers of the directors of a company which includes the ability to, among other things, sell a company’s business, sell assets and dismiss employees. Voluntary administrator has a duty at the end of the voluntary administration to either:
- Hand the company back over to the directors;
- Enter into a deed of company arrangement; or
- Place the company into liquidation.
If the company is not restructured through a deed of company arrangement, it is the goal of an administrator to oversee the affairs of a company in a way that results in a better return for creditors than they would have received had the company instead been placed straight into liquidation.
There are 3 types of appointment, the most common being the appointment by directors and less frequently by a secured creditor or liquidator. Secured creditors don’t usually like to appoint a voluntary administrator when a privately appointed receivership will be suitable for the recovery of the debt owed.
Pursuant to the Corporations Act 2001 (Cth), a voluntary administrator will be 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 administrator should be appointed (s 436A). It is important for directors to be aware of the solvency of their company for if the company trades whilst it is insolvent, the directors of a company may be liable for a claim for insolvent trading under the Corporations Act 2001 (Cth) s 588G.
If a company is placed into liquidation and the registered liquidator that is believes that a company’s creditors are more likely to benefit from voluntary administration rather than being wound up, the liquidator has the power to appoint an administrator. This means that a liquidator would like to trade the business rather than terminate operations. Pursuant to the Corporations Act 2001 (Cth) s 436B(1) a liquidator or provisional liquidator of a company may, with leave of the Court, appoint an administrator if they are of the opinion that the company is or likely is to become insolvent. The Corporations Act 2001 (Cth) prevents the liquidator, in the absence of the creditor’s consent or leave of the Court, from appointing themselves or another person holding a key position within a business, to the position of administrator (s 436B(2) outlines the specific people who are unable to be appointed by a liquidator).
Secured creditor appointment
A creditor who has a security interest may appoint a voluntary administrator. Pursuant to the Corporations Act 2001 (Cth), a person who is entitled to enforce a perfected security interest in the whole or substantially the whole of a company’s property may in writing appoint an administrator. 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 if there is a reason why a private receivership isn’t feasible, an administration appointment is an alternative to overcome an obstacle to asset recovery through a receivership.
Takeaway for directors
The takeaway for directors is that they have the option to place a company into voluntary administration in an attempt to salvage a business if it becomes insolvent. However, if they do so, they will lose all control of business affairs for the period of the voluntary administration. Despite this loss of control, voluntary administration protects directors from the civil penalty provisions relating to insolvent trading under the Corporations Act 2001 (Cth).