Voluntary Administration

Part 5.A of the Corporations Act 2001 encourages directors to take the initiative in resolving the insolvency problems of their company. This is done by making a proposal to corporate creditors under an appointed insolvency practitioner (the administrator).

In summary, a Voluntary Administration:

• is an easy process which is quickly initiated by company officers;
• provides a minimum statutory 28 day moratorium against creditors claims;
• provides an opportunity to assess the company’s affairs;
• provides a legal framework to put in place an arrangement to improve the company and assets its survival;
• provides a legal framework to put in place an arrangement to improve the company and assist its survival;
• provides a mechanism to negotiate with creditors and customers;
• helps save jobs and facilitate ongoing trade;
• alleviates those pressures associated with financial problems placed on the company, its officers and staff;
• is a flexible tool available to external advisers which can add value to their client’s business;
• provides quick access to the liquidation process, if needed.

Appointing an Administrator

The appointment of an Administrator is usually made by either the company’s directors or by a creditor with a mortgage over the assets of the company. The Administrator will take control of the company and continue to maintain the business, if that is the best option.

Staying in Business

A company can avoid liquidation if creditors resolve that a proposal will provide them with the best commercial return. If not, they may return the company to its directors or, more commonly, force the liquidation of the company without the need to hold further meetings or petition the court.

Voluntary Administration triggers a moratorium on any recover action by creditors. At the same time directors’ powers are suspended. It also provides a moratorium against the enforcement of guarantees against directors or their associates. The only exception is that a lender with a mortgage over all of the assets of the company may enforce its security (ie appoint a Receiver) within a ten business day ‘decision period’.

Generating Confidence

The essential first step in the process is securing the co-operation of any secured creditor, usually a bank. Lenders are more likely to support an Administrator with whom they are familiar, knowing they can have confidence in their advice.

Procedure

A proposal for the way forward can be accepted b a simple majority of creditors. Once accepted, it becomes formalised as a Deed of Company Arrangement which binds all unsecured creditors.

The power to coerce an unreasonable minority is one of the procedure’s strengths.

A Deed of Company Arrangement can be finalised within three months after the appointment of the Administrator. Alternatively, if appropriate, the terms of the Deed can last for several years.

If the company does not meet its obligations under the Deed, it can be terminated, varied or the company wound up; but this is not automatic.

Factors in Considering a Deed of Company Arrangement:

• Is the insolvency explainable and demonstrably soluble, such as large bad-debt write off?
• Can the company be restructured to hive off loss making activities?
• Is the underlying business profitable and does it have adequate systems and gross margin control?
• Is the company in the early stage of insolvency or has it been a chronic problem?
• Are the directors motives honest, will they co-operate with the administrator and do they have the support of creditors?
• What are the market and economic risks such as competitors, customer diversity, technical obsolescence, political and social change and economic cycle?
• Is the Deed viable after allowing for the professional costs of the administrator?

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Disclaimer:
The material contained in this publication is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this publication without taking appropriate professional advice.