As a business owner, you may need to manage unpaid invoices or other debts from businesses that you work with from time to time. Less commonly, however, a business that owes you money may go into voluntary administration. Voluntary administration means that the company has appointed an independent administrator to help resolve its financial difficulties. This article sets out what you should know about voluntary administration and what it might mean for your unpaid debts.

What Is Voluntary Administration?

Voluntary administration is a process designed to give a company ‘breathing space’ from its normal operations. When a company is experiencing financial difficulty and cannot pay its debts, the company directors can appoint someone called an administrator. The administrator will then attempt to save the company by organising its assets and liabilities.

What Does This Mean for My Debt?

If the company owes you money, you are a creditor. As a creditor, there is little you can do to chase your debt once the company enters voluntary administration. The purpose of the process is to put the company in the best possible position to repay its creditors, including you. This means that all current legal proceedings involving the company come to a halt and no further proceedings can begin.

However, you can formally lodge the details of your claim with the administrator through a proof of debt form. The administrator will appoint a chairperson, who will assess the validity of your claim and entitlement to vote at subsequent creditor’s meetings. If the chairperson decides that you do not have a valid claim, you may not be able to vote. This does not necessarily affect your chances of receiving payment of your debt, but it does affect your ability to influence the outcome of creditor’s meetings.

If the chairperson approves your claim, you will be able to vote at both the first and second creditors meetings. Your vote in the first meeting will influence the process of administration while your vote at the second meeting will influence the outcome of the process. Although you will still need to wait for the process to play out, this means that you may be able to influence the outcome. 

What Is the Voluntary Administration Process?

1. The First Meeting of Creditors

Once the administrator has been appointed, all creditors to the company will receive notice of the first meeting. The meeting takes place within 8 days of the appointment of the administrator, and creditors can vote to:

  • replace the administrator (usually with another creditor); or
  • create a committee of creditors who work closely with the administrator.

As a debtor to a company, this is your opportunity to remain up-to-date with the process and how it will affect your debt. 

2. The Voluntary Administrator Investigates and Reports

After the first meeting, the administrator investigates the affairs of the company and reports the findings to the creditors.  The purpose of the investigation is to determine whether the company is able to pay its existing debts. The report will also recommend an outcome for the company. For example, it could recommend that the company: 

  • continue trading; or 
  • should be wound up. 

3. Second Meeting of Creditors

Following their investigation and report, the administrator must hold a second meeting to decide the company’s future. This takes place within 25-30 business days of the administrator’s appointment. As a creditor, you should be notified of the meeting at least 5 business days before it is held.

At this meeting, the creditors decide on an outcome for the company. The three options are:

Have the company enter into a Deed of Company Arrangement (DOCA)

This is a binding agreement between the company and its creditors, setting out the future of the company. It must contain the debts covered by the deed and the order in which creditors are to be paid.

Place the company into liquidation

In the event that the company is unable to pay its debts, the assets of the company will be collected and sold by a liquidator. Creditors are then paid in order of priority.

Return the company to the directors

In some circumstances, the company can be revived and returned to the directors with its debts accounted for.

What Is the Best Outcome for Me?

If You Are a Secured Creditor:

If you are a secured creditor, you will have a security interest in an asset or assets of the company. This provides you with greater protection, especially if you have registered the security interest on the Personal Property Securities Register (PPSR). While you will generally be unable to enforce your secured interest in the company’s assets during administration, you will take priority in the administration process. When the company is liquidated, enters into a DOCA or is returned to the directors, your secured interest will be second in line for payment behind unpaid wages and benefits for employees.  

If You Are an Unsecured Creditor:

As an unsecured creditor, your place in line depends upon the position of other creditors to the company. Other interests will be paid before you if you are chasing:

  • an unpaid invoice that is not covered by an agreement; or 
  • a loan without security.

You are likely to satisfy your debt if the company returns to the directors. 

If a DOCA is agreed to, your interest may be prioritised after other creditors. If the company enters liquidation, you may not receive payment for all or any of your unsecured debt. In this case, you may be left out of pocket.

If You Have a Personal Guarantee

A guarantee can be provided by an individual or a company. If you are a creditor to a small or medium business, it is likely that a guarantee will be provided by an individual. As a result of this guarantee, you may be able to pursue the guarantor personally if the company enters liquidation and is unable to pay its debts. Whether you are able to do so will be subject to the terms of the guarantee. 

Key Takeaways

Voluntary administration can help a company in financial trouble to accommodate the interests of creditors. By ceasing trading, taking stock of the company’s assets and liabilities and bringing together creditors of the company, voluntary administration puts the company in the best position possible to pay its debts. If a company that owes you money has entered voluntary administration, it is a good idea to actively participate in the process and to seek advice from a debt recovery expert about the options available to you. If you need help recovering a debt, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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