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. You’ll need to be either brave or savvy before you appoint one.
You shouldn’t appoint a voluntary administrator when:
- When you don’t have any idea about how your key suppliers, employees and other stakeholders will react
- If you don’t already have a plan in place for a compromise to offer to creditors
- If a pre-pack insolvency arrangement hasn’t been looked into first
- If you haven’t first thought about the consequences of failure and the liquidation of the company
Background: The purpose of voluntary administration
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. 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. The process of voluntary administration is controlled by an independent insolvency practitioner who is appointed by the directors. If a compromise offered by the directors is not accepted by a vote of the creditors then the company goes into liquidation nevertheless.
Summary of voluntary administration
Initiation of voluntary administration: By directors of the insolvent company
Appointment criteria: Insolvency of company
Control: The voluntary administrator assumes control and the powers of directors are suspended
Timeline: Usually 6 weeks in total
Success: Occurs when the creditors vote in favour of a deed of company arrangement proposal and the business of the company survives
Failure: The creditors and the voluntary administrator oppose the compromise and the assets of the company are sold in a fire-sale after liquidation
Typical reactions of key suppliers, employees and other stakeholders
By industry: Some industries have stakeholders that react aggressively to the voluntary administration process, such as building and construction
Landlords: Rarely compromise on rent that is overdue and this may result in a lock-out from trading premises after a voluntary administration commences
Sub-contractors: Will not expect a return from a deed of company arrangement and will therefore be likely to react aggressively
Employees: It is a requirement that they are paid in full but they are unlikely to enjoy being managed by the voluntary administrator
Deed of company arrangement proposal terms
The terms of the director’s offer of compromise are put to creditors by the voluntary administrator in a report along with a recommendation. Whether the voluntary administrator recommends that creditors accept the proposal is a matter for their professional judgment. The vote requires both a majority in number and a majority in value of the creditors to support the proposal for it to succeed.
The proposal terms should be prepared in advance of the appointment and considered before a voluntary administrator is appointed. Can you afford it and are creditors likely to accept it?
Pre-pack insolvency arrangement
The key objective of a pre-pack insolvency arrangement is to ensure that the business of the company is preserved whilst the company itself goes into liquidation.
A pre-pack insolvency arrangement has the following elements:
- A company (Oldco) is insolvent;
- Oldco’s business is transferred for commercial consideration to a related entity (Newco); and
- The transaction between Oldco and Newco results an optimal outcome for stakeholders.
The two key characteristics of an insolvent company that may be suitable for a pre-pack insolvency arrangement are:
- That there is a serious risk the goodwill in a business will be damaged by a formal appointment scenario; and
- The costs of a voluntary administration are uncommercial.
Benefits of a pre-pack insolvency arrangement are that directors maintain control of the sale process and can forward plan costings before executing a plan. Australian insolvency law simply does not allow for directors to have control once an external administration is commenced and strict independence standards apply. Any pre-appointment sale of the business prior to the liquidation of the Oldco will, at law and practically, be subject of a review by the liquidator.
Consequences of failure and the liquidation of the company
If there is a vote by creditors against the deed of company arrangement proposed by the directors then the company will be placed in liquidation at the conclusion of the meeting. The liquidation will result in the fire sale of any assets of the company unless an offer is put to purchase the assets that is satisfactory to the liquidator.