Voluntary Administration and COVID-19

If your company is struggling to stay financially viable, or you may suspect that it is insolvent, you may be considering voluntary administration. Voluntary administration is an insolvency process where an external administrator manages your company’s assets while it restructures. Businesses complete this process in aims to hopefully avoid liquidation. This article explains how voluntary administration works, including:

• how it differs from liquidation;
• the processes involved; 
• the effect on creditors; and
• whether to utilise this restructuring technique amongst the COVID-19 pandemic.

What Is Voluntary Administration? 

Voluntary administration is a restructuring process which provides a mechanism to maximise the chances of your company continuing. At the very least, voluntary administration provides a better return to your company’s creditors.

Unlike liquidation, where the company’s affairs are brought to an end, voluntary administration allows your company to continue to trade while an administrator assesses its viability. Whilst the administrator takes over your company’s management as it continues to trade, the company’s directors remain performing their usual duties. 

An administrator, under powers from legislation, has around 15 to 20 business days to investigate your company’s viability and propose a way forward for creditors.

What Is Involved in Voluntary Administration?

The voluntary administration process has four phases which aim to be:

• quick;
• cost-effective;
• flexible; and 
• capable of transitioning into liquidation.

1. Administrator is Appointed

The first step of voluntary administration is the appointment of an administrator. This can occur in writing if your company’s directors view that the company is, or may become, insolvent, It could also occur by a secured creditor if they have a security interest over the whole, or most, of your company’s property. 

2. Creditors Meeting

The administrator will then call an initial meeting of the companies’ creditors within eight days of their appointment. The administrator will then proceed to further investigate the company’s affairs to make an informed decision on which of the following options is in the best interest of the companies’ creditors:

1. a deed of company arrangement (DOCA); 
2. the company be sent into liquidation, by way of a creditors’ voluntary liquidation; or
3. the company is placed back into the hands of its directors (which is quite rare). 

3. Second Creditors Meeting

The second meeting of your company’s creditors will occur once the administrator has decided how they believe the company should proceed. This meeting will generally occur within 20 business days of the administrator’s appointment. Here, the administrator will provide: 

• a report on the company;
• their assessments; and 
• the details to any DOCA (if necessary). 

The creditors must then vote on which options they want the company to implement.

4. Putting the Plan Into Action

After the vote, the administrator will then proceed with following the plan for whichever option the creditors choose.

Creditors

Upon the appointment of an administrator, unsecured creditors’ accounts are frozen, and their contracts with your company usually remain in place. 

The appointment of an administrator may override a secured creditors’ rights, and they may not be able to enforce their secured interest throughout the administration period. This is unless their security is over most, if not all, of your company’s property. If that is the case, the secured creditor has 13 business days to decide whether or not they want to enforce their security.

Voluntary Administration During the COVID-19 Pandemic

As the period of time for which a voluntary administration is to occur is relatively quick, it can be concerning that an administrator only has a short period of time to properly assess your company’s viability. This may be especially concerning if your company has been affected by COVID-19. In these circumstances, you can apply for additional time.

A court recently granted an administrator additional time to allow them to perform the tasks necessary to explore a company’s viability. This was due to restrictions from COVID-19 limiting the administrator’s ability to conduct their investigations.

Is Voluntary Administration My Only Option?

Voluntary administration will not necessarily be your only option. Seeking the assistance of an insolvency lawyer will allow you to help determine your company’s viability. You should explore this process prior to placing your company into voluntary administration or liquidation.

Placing your company straight in the hands of a liquidator by way of a member’s voluntary liquidation is one option. This process involves:

• the company being wound up;
• its assets accounted for; and 
• distributed amongst creditors

However, given the current COVID-19 situation, there are options available to directors who wish to avoid voluntary administration or liquidation. You can only take these steps if they are reasonably likely to lead to a better outcome for the company. These changes are currently set to expire on 25 September 2020. If you want to explore what options are available to you, speak with an insolvency lawyer.

Key Takeaways

If your company is struggling during the COVID-19 pandemic, you may need to consider voluntary administration. This is a restructuring strategy that may provide your business with the best chance of survival. During these unique circumstances, there are concessions which may extend the time taken for an administrator to undertake the voluntary administration process. If you have any questions about voluntary administration, contact LegalVision’s COVID-19 legal team on 1300 544 755 or fill out the form on this page.