You may have already heard the terms liquidation and voluntary administration. After all, they are thrown around quite often. But what exactly do they mean? Liquidation is where a company’s assets are liquidated to pay creditors.
Voluntary Administration is where a company is experiencing solvency problems. Companies in distress commonly enter Voluntary Administration to give themselves some breathing space – usually a one month period where an independent administrator takes the reins of the Company.
So, What Breathing Space Do You Get?
Entering Voluntary Administration does not extinguish your debts. What it does in reality is provide a moratorium period barring creditors, landlords, stock suppliers, personal guarantee holders and most other stakeholders from taking action against the company. This gives creditors, administrators and stakeholders time to consider the company’s future.
What Does This Mean in Reality?
Any proceedings on foot against the company, including debt recovery, are frozen pending the resolution the of the Voluntary Administration. Unless you had commenced the action prior, you could not evict the company’s administrator during the Voluntary Administration. Banks also cannot exercise their rights under their security.
What is the Aim of the VA Process?
In short, the aim of Voluntary Administration is to allow companies to obtain breathing space from creditors, restructure and return to health without needing to go through a painful liquidation process.
What Assistance Can an Administrator Provide?
During the Voluntary Administration process, an administration:
- Assesses the business;
- Secures and protects the businesses assets; and
- Provides recommendations to creditors as ultimately, they decide the company’s future.
What options do creditors have (i.e., what is an administrator likely to recommend):
- Liquidation: Unfortunately, administrators cannot revive all businesses entering voluntary administration. If the company is insolvent, there may be no other option other than to liquidate the company.
- Enter a Deed of Company Arrangement (DOCA): A DOCA is a relatively flexible document that can be tailored to suit each company and their creditors. It is binding on all creditors if supported by a majority. This means smaller creditors cannot derail the DOCA to suit their interests.
- Returning the company back the directors: This rarely happens and mainly occurs where the company is solvent. Administrators and creditors will not return a company on the verge of insolvency back to directors who were in charge of a financially distressed company.
What is the Actual VA Procedure?
The Corporations Act sets out the Voluntary Administration process. It begins with the company director, liquidator or a secured creditor (e.g. a mortgagor) appointing the administrator. An administrator must within eight days of his or her appointment convene a meeting of the creditors (the first meeting). Following this, the administrator will investigate the company’s affairs.
The administrator then prepares a report for the company covering:
- The background of the company;
- The company’s current financial position;
- Why the administrator believes the company is in financial distress;
Any potential offences that the directors have committed; and
Proposals available and the likely return to creditors.
- Within 20 days of his or her appointment, the administrator convenes a further meeting (the decision meeting) whereby the creditors will vote. The outcomes they will vote on are set out above.
If your company is in distress, and you would like to discuss your options, LegalVision’s experienced insolvency lawyers can assist.
Questions? Get in touch on 1300 544 755.