What is Voluntary Administration?
Voluntary administration refers to a formal insolvency process designed to assist financially distressed companies in evaluating their options and potentially restoring their viability. It provides a company with a temporary respite from legal actions by creditors while an independent and qualified administrator takes control of the company's affairs.
Causes of Voluntary Administration
Companies may find themselves in voluntary administration due to various factors such as cash flow issues, mounting debts, significant loss of customers, economic downturns, or poor management decisions. By initiating voluntary administration, a company aims to regain financial stability and prevent the business from winding up (also known as liquidation).
Overview of the Voluntary Administration Process
Duration: The voluntary administration process generally lasts around 20 to 30 business days. However, extensions can be granted by the court or with the approval of creditors. The main steps in the voluntary administration process are as follows.
1. Appointment of Voluntary Administrator: The shareholders or directors resolve to appoint an administrator at a meeting of the directors or shareholders.
2. DOCA Proposal: a party interest in proposing a DOCA (most likely a director) will put forward a DOCA proposal that outlines key terms on which they are willing to compromise the Company's debts or sell the business. A DOCA is a binding agreement between the company and its creditors that outlines how the company's affairs will be dealt with. It may propose a restructure, repayment plan, or even the sale of the business. Creditors vote on the DOCA, and if approved, it binds all parties.
3. First Creditor's meeting: the first creditor's meeting is held within 8 business days of the administrator's appointment. This meeting is usually general in nature and provides an overview of the Company's financial position.
4. Second Creditor's meeting: At the second creditor's meeting the creditors will vote as to whether:
- the Company should enter into a DOCA based on a DOCA Proposal;
- whether the company should be placed into liquidation to be wound up; or
- if control of the company should be given back to the directors.
5. Liquidation, DOCA or control reverts to directors: Dependant upon the outcome of the Second Meeting of Creditor's, the relevant steps will be implmeneted. If a DOCA is to be entered into then the administrator and Company have 15 business days to enter into the DOCA. if the DOCA is not entered into by this time, the Company will automatically be placed into liquidation.
Roles of Creditors
Creditors have an active role in the voluntary administration process. They are informed about the company's financial situation, attend meetings, and have the power to vote on the DOCA or choose to liquidate the company.
Roles of the Administrator
The administrator is an independent professional appointed to manage the company's affairs during voluntary administration. They assess the company's financial position, investigate its affairs, and provide recommendations to creditors regarding the best course of action.
Outcomes of Voluntary Administration
The outcomes of voluntary administration can vary depending on the circumstances. Potential outcomes include:
Company Restructure: A successful voluntary administration may result in a restructured company, enabling it to continue operating with reduced debts and a viable business plan.
Sale of Business: In some cases, the administrator may facilitate the sale of the business as a going concern, ensuring the continuation of operations and preserving jobs.
Liquidation: If restructuring or sale options are not feasible, the company may proceed to liquidation, where its assets are sold, and creditors are repaid according to the established priority.
Benefits:
Voluntary administration offers several advantages, including:
Breathing Space: The process provides a moratorium on legal actions by creditors, giving the company time to evaluate its options without the immediate threat of liquidation.
Expert Guidance: Administrators bring expertise and experience to assess the company's financial position objectively and provide guidance on potential strategies for recovery.
Creditor Involvement: Creditors have the opportunity to be actively involved in the decision-making process, ensuring transparency and fairness.
Alternative Options
Alternatives to the voluntary administration process are Liquidation or the Small Business Restructure Process.