Restructuring, Turnaround and Insolvency Specialists

Voluntary Administration – Why choose Voluntary Administration?

The voluntary administration process provides a flexible statutory framework to enable a company time to consider entering into an arrangement with its creditors to compromise its debts. Such an arrangement is structured to save the company, the business and jobs while maximising the return to creditors.

The administration process enables:

  • An independent party (being the appointed Voluntary Administrator) to:
    • take full control of company’s operations;
    • review the company’s affairs; and
    • deal with its creditors
  • Time to deal with creditors in an orderly manner and for the directors to prepare a proposal to give the best return to stakeholders
  • the company to stay out of liquidation whilst the creditors consider accepting the directors’ restructure proposal

If the voluntary administration attempt fails, the legislation provides for the winding-up of the company.

What is the Voluntary Administration process?

Insolvency_VoluntaryAdmin_Diagram

How are creditors impacted?

In order to give the company the breathing space it needs whilst its future is determined, the Corporations Act imposes a number of limitations upon the rights of creditors once the administration commences. During the period of administration:

  • unsecured creditors can’t begin, continue or enforce their claims against the company without the administrator’s consent or the court’s permission
  • owners of property (other than perishable property) used or occupied by the company, or people who lease such property to the company, can’t recover their property
  • except in limited circumstances, secured parties can’t enforce their security
  • a court application to put the company in liquidation can’t be commenced, and
  • a creditor holding a personal guarantee from the company’s director or other person is unable to enforce the guarantee without the court’s consent

What happens to the employees?

Employees are not automatically terminated upon the appointment of the voluntary administrator. Accordingly, unless the voluntary administrator adopts the employment contracts or enters into new contracts of employment with employees, they are not personally liable for any employee entitlements that arise during voluntary administration.

However, if the voluntary administrator continues to trade the business, they must pay ongoing wages for services provided and other employee entitlements that arise after the date of their appointment. These payments are treated as an expense of the voluntary administration.

Given the interim nature of the administration process, employee entitlements that arose prior to the appointment of the voluntary administrator are not usually paid during the administration period. The timing and quantum of payments to employees in respect of their pre-appointment entitlements depends on the option passed at the creditors’ meeting (i.e. company returned to directors, a deed of company arrangement, or liquidation).

The bank holds security over my company, what can they do?

Any secured party who holds a security interest over the majority (or all) of the assets of the company has 13 business days from the day of the voluntary administrator’s appointment to exercise their security.

Should this occur, it is often the case that a Receiver & Manager will be appointed who will then take control of the company’s affairs (rather than the Voluntary Administrator) in accordance with the security documentation and the Corporations Act.

If the secured party does not elect to exercise their security within this time they will be unable to do so until the administration period ends. However, the secured party may exercise their security outside of the 13 business day period with the consent of the voluntary administrator or with the leave of the Court.

Are the directors in control during the Voluntary Administration process?

The powers of a director are suspended on the appointment of a voluntary administrator and only the voluntary administrator is able to bind the company in any transaction. A director is required to assist the voluntary administrator in undertaking the administration and has an obligation to comply with any requests made by the administrator.

What information is provided to Creditors?

During the course of the voluntary administration, the administrator is required to issue the following reports and hold the following meetings:

Information Timing
First Report Within 3 business days after appointment
First Meeting 5 business days after First Report issued
Second Report (S439A report) Within 20 or 25* business days after the day of appointment
Second Meeting (Decision meeting) 5 business days after Second Report issued

*25 business days applies if the day after the administrator is appointed is in December or is less than 25 business days before Good Friday. At all other times 20 business days applies.

First Report & Meeting

The first report to creditors is to simply notify creditors of the administrator’s appointment and to call a meeting at which the following will be asked of creditors:

  • Whether they want to form a committee of creditors and if so who those committee members will be; and
  • Whether they want the existing voluntary administrator to be replaced by another administrator.

As this meeting occurs so soon after the appointment has commenced, the voluntary administrator often has limited information that they can share with creditors.

Second Report & Meeting

The second report to creditors is generally an expansive report which details the:

  • company’s assets and liabilities;
  • results of the administrator’s investigations into the company’s affairs; and
  • administrator’s opinion on the three options available to creditors. These options are:
    1. End the voluntary administration and return the company to the directors control; or
    2. Approve a Deed of Company Arrangement through which the company will pay all or part of its debts and then be free of those debts; or
    3. Wind up the company and appoint a liquidator.

The second report also contains a notice detailing when and where the second meeting of creditors will be held.

Depending upon the options selected by the company’s creditors at the second meeting, the administration ends either immediately (if options 1 or 3 are chosen) or upon the execution within 15 business days of the Deed of Company Arrangement.

In complex administrations the length of the administration can be extended to provide the administrators with extra time to report to creditors.

 

 

Liability limited by a scheme approved under Professional Standards Legislation