How Does Voluntary Administration Work ?
A voluntary administration starts when it is resolved by the board of directors that the company is or is likely to become insolvent. Secured creditors or a liquidator in certain circumstances may also appoint a voluntary administrator.
At the first meeting of creditors which is held within 8 days after the administration begins, two issues are decided. These issues include discussing whether the administrator should be removed and another appointed along with whether the creditors want to form a committee as well as the members of any such committee.
After the administrator investigates the company’s affairs, the second creditors meeting will occur. This meeting is of vital importance as it effectively determines the company’s fate and it will occur from 15 – 25 business days after the administration began.
At this second meeting, the administrator must form an opinion based on their investigations and determine which of the following options are in the company’s best interests:
- The company execute a Deed of Company Arrangement (“DOCA”);
- The administration should end and the company put back into the hands of the directors; and
- The company be put into liquidation.
Should the creditors decide that the company needs to be would up in insolvency, then the liquidation is deemed to have started when the voluntary administration did.
How will voluntary administration affect me as a director?
If you are director of the company, be aware that by appointing a voluntary administrator your powers as director are suspended but not removed. Directors also have to assist the administrator’s investigations by delivering any relevant books and records, preparing a report of the companies affairs within 7 days of the administrator’s appointment as well as giving any other information reasonably required.
What is a deed of company arrangement and how does it work?
One of the options that creditor’s may choose at the second meeting of creditors is to execute a Deed of Company Arrangement (“DOCA”).
The DOCA constitutes an agreement between the company and its creditors and may allow for the company’s debts to be satisfied. The terms of the deed include what is agreed on and this will generally have the effect of allowing the company to continue operating and may maximize the returns for creditors.
During the DOCA a creditor is unable to apply or proceed with a winding up application against the company. However this will change should the deed be terminated.
The deed must be signed within 15 business days of the creditors voting for the DOCA.
The company must sign the deed within 15 days of the creditors voting for the proposal to enter a deed of company arrangement. Failure to comply within the time period will automatically place the company into liquidation.
Am I bound by the DOCA if I did not vote for it?
If you are an unsecured creditor, this will have the effect of binding you to a DOCA even if you did not vote for it. If you are a secured creditor or owner of property used by the company, you are only bound if you voted for the DOCA, unless the court orders otherwise or it is contrary to the terms of the DOCA.
What are my rights as an unsecured creditor?
If you are an unsecured creditor, you have the right to:
- lodge a proof of debt;
- attend creditors’ meetings;
- vote at creditors’ meetings (if a proof of debt form has been lodged);
What are my rights as a secured creditor?
If you are a secured creditor you have the right to:
- lodge a proof of debt;
- attend creditor’s meetings;
- exercise rights over your security within 13 business days; and
- vote at creditor’s meetings
What are the benefits of entering voluntary administration?
The benefits of voluntary administration include;
- Being able to avoid the harsh penalties of insolvent trading if you are a director;
- Being able to arrange an agreement with creditors in relation to the company’s debt;
- Allow the company ‘breathing room’, allowing it an opportunity to get back on its feet; and
- Maximizing creditor returns.
What is the criticism of voluntary administration?
As voluntary administration has been criticised as merely being the ‘scenic route’ to liquidation, before entering into Voluntary Administration we advise that you consider it seriously. However based on our experience and successful outcomes, we think this depends heavily on your circumstances and how soon you address the problem and receive expert advice from us. Should you need to proceed to a liquidation, our insolvency professionals are able to assist you.
While most of our clients are located in Brisbane, Sydney and Melbourne, we work with businesses all across Australia. Simply contact us now on 1300 793 226 for more information on voluntary administration, specific to your situation.
