Voluntary Administration may be the solution you need for your business facing insolvency with mounting debt issues.
Corson Fiske provides strategic solutions for company directors considering the VA process and we undertake a comprehensive investigation to understand the debt position of your business and if a VA will be beneficial to the company in the future.
What is voluntary administration?
The voluntary administration process is an insolvency procedure giving distressed companies breathing space from creditors and a chance to restructure.
During this period of approximately one month, an independent administrator takes control of the company. The administrator secures the assets and assesses the business to provide a recommendation to creditors on the best course of action. The creditors could choose between liquidating the company, executing a Deed of Company Arrangement (DOCA), or returning control to directors. However undertaking a VA can be a daunting process and things need to stack up.
Why would you enter voluntary administration?
To avoid trading while insolvent
Directors are legally required to take measures to avoid insolvent trading (severe consequences can result if they don’t), and voluntary administration is often used by troubled businesses to avoid insolvent trading. By initiating this process, the company and its directors can raise the defence that the directors took steps to avoid insolvent trading by appointing an administrator and avoiding incurring further debt.
To resolve creditor issues
Voluntary administration not only helps companies in strife hit the pause button on creditor demands. It also gives them a chance to bring in an independent expert – the administrator. The external administrator examines the company’s operations and assets to recommend the best step for resolving the situation in favour of creditors. The company can focus on resolving problems, including creditor issues, instead of constantly reacting to creditor actions, market conditions, and other factors.
Similarly, creditors will have a chance to review what’s happening in the business with the administrator’s reports. They’ll have a chance to find out the details and vote on the administrator’s recommendation, whether that’s a DOCA, liquidation, or returning to trading under the directors.
To attempt to enter a Deed of Company Arrangement
One aim of the voluntary administration regime was to allow otherwise viable businesses to have a chance to restructure and survive. Another is to administer the company’s affairs in a way that would lead to better outcomes for creditors than if the company had immediately entered liquidation. The short break from creditor demands and most actions to recover debt gives the company access to expert advice (from the administrator) and possibly enter a DOCA.
The DOCA is one of the three main possible outcomes of voluntary administration. It’s a highly flexible arrangement that’s effectively a compromise of the company’s debts. Through the DOCA, the company will pay all or part of its debts and then be free of these debts.
A DOCA can incorporate different arrangements, including payment of a lump sum to pay all debts due, instalment payments, and/or sale of assets and payment of proceeds. The DOCA could also include return to trading and paying instalments from profits or lump sum from final sale, or relisting the company on the ASX.
The DOCA binds all unsecured creditors even if they voted against it. However, it doesn’t prevent creditors with personal guarantees from the company’s director or another person taking action, in relation to the personal guarantee, to have their debt repaid.
To protect directors from a director penalty notice
Companies with cash flow and insolvency issues could be falling behind on their ATO-related compliance. For example, they could have outstanding PAYG tax and superannuation liabilities. In this case, the ATO has the discretion to pursue directors personally for this unpaid PAYG tax and superannuation through director penalty notices (DPN).
However, putting the company into voluntary administration would help if the DPN relates to sums reported but unpaid to the ATO within three months of the end of the reporting period. If the amounts owing are both unreported and unpaid for over three months, voluntary administration will not help the director reduce the risk of personal liability.
To prevent court appointed liquidation
Should your company face aggressive creditor action such as a winding up notice in the Federal Court placing your company into Voluntary Administration may be the last minute solution. The voluntary administration process gives the company a chance to assess whether other options could be viable before a court liquidation. However in such a situation administrators will need to go to court to argue that the administration process should continue as a better option for creditors when winding up proceedings have been initiated.
The goal of voluntary administration is to provide the best outcome for creditors, so a DOCA is more desirable than liquidation. The voluntary administration process gives the company an opportunity to avoid liquidation for now.
Things to consider if a VA is right for your business:
- What is the asset position v debt position of the company ?
- Will your creditors support a deed of company arrangement ?
- What personal guarantees have you provided to creditors ?
- Will your business be able to financially pay its contributions once the deed of company arrangement has been accepted.
These are just some of the important questions that Corson Fiske proposes to directors when considering the VA process.
Such questions need to be answered because if a company cannot get support from creditors the company will enter into liquidation and this means an end to the company and directors being subject to more investigative measures by the appointed liquidator.
Need advice ?
If you are considering undertaking a Voluntary Administration feel free to reach out to our insolvency and restructuring team. Corson Fiske can undertake a comprehensive review if a Voluntary Administration will be suitable as a mechanism to resolve your creditor issues.
Our advice is independent and we have the interests of directors and their company as our core focus.