Voluntary administration is a short, intensive process designed to determine the future of an insolvent—or likely to become insolvent—company.
An independent registered liquidator is appointed as voluntary administrator and takes control of the company. The administrator investigates the company’s affairs, protects and tests available value, assesses any proposal for its future and reports to creditors.
Who can make the appointment?
The most common appointment is made by the company’s directors after resolving that the company is insolvent or is likely to become insolvent. In particular circumstances, a liquidator or a secured creditor with an enforceable security interest over all or substantially all of the company’s property may also appoint an administrator.
The directors must first obtain the written consent of a registered liquidator who is able to act independently.
What happens to control?
Control passes from the directors to the voluntary administrator. The administrator decides whether the company should continue to trade, how employees and suppliers will be dealt with, whether assets or the business should be marketed, and what funding is required.
A statutory moratorium generally restricts unsecured creditor enforcement during the administration, subject to important exceptions. It creates a breathing space, but it does not create cash. Wages, rent, stock, insurance and professional costs incurred during continued trading must still be capable of being funded.
The first creditors’ meeting
The first meeting occurs early in the process. Creditors can decide whether to replace the administrator and whether to appoint a committee of inspection. It is primarily about the administration’s governance rather than the company’s ultimate future.
The administrator’s investigation and sale process
During the administration, the administrator obtains the books and records, reviews assets and liabilities, investigates the cause of failure and tests any restructuring or sale proposal.
Where the operating business has value, an expression-of-interest campaign may be used to test the market. This can involve continued trade, a data room, employee and landlord negotiations, stock verification, intellectual-property review and assessment of whether a purchaser wants assets, the business or control of the company through a deed structure.
The available time is short. Reliable information and early funding materially affect whether the administrator can preserve and test the business rather than being forced into an immediate shutdown.
The second creditors’ meeting and the three outcomes
The administrator reports to creditors and gives an opinion on three possible outcomes:
- the administration ends and control returns to the directors;
- the company enters into a deed of company arrangement; or
- the company is wound up.
The administrator must recommend which option is in creditors’ best interests. ASIC’s guide for creditors explains the administrator’s reporting role and the decisions available at the meeting.
What is a DOCA?
A deed of company arrangement—or DOCA—is a binding arrangement between the company and its creditors. Its terms are flexible. A proposal may involve a lump-sum contribution, trading profits, a sale, new investment, a debt-for-equity transaction or a combination of sources.
The administrator compares the proposed DOCA with the estimated outcome in liquidation. A DOCA may aim to preserve the company or its business, provide creditors with a better return than immediate liquidation, or do both. Creditors decide whether the proposal should be accepted.
When may voluntary administration fit?
- the business has value that needs immediate protection;
- a formal sale campaign needs to be run while the business continues trading;
- a third-party investor or purchaser requires a binding creditor compromise;
- the debt, structure or complexity falls outside SBR;
- secured-creditor, landlord, employee and supplier positions need to be dealt with together; or
- creditors require an independent assessment before deciding the company’s future.
Voluntary administration is not a promise that the company will survive. It is a structured process for testing whether preserving the company or its business is better than the available liquidation outcome.
This article is general information only. The appointment route, moratorium, personal guarantees, leases, security interests and funding position require matter-specific advice.