Directors can elect to place a debtor company into voluntary administration if they believe it is insolvent or about to become insolvent. Creditors do not receive any distribution of funds during the administration period. The purpose of placing a company into voluntary administration is to allow the company time to decide on its future while avoiding the involvement of the courts. Below, we take a look at the voluntary administration process and its effects.
The Voluntary Administration Process
The voluntary administration process is designed to achieve a quick resolution and generally involves the following steps:
- The decision is made to appoint an administrator in writing and by a Board resolution.
- The voluntary administrator is appointed, and voluntary administration begins.
- The first creditors meeting is held. The voluntary administrator is required to call this meeting within eight business days after the administration begins.
During this meeting, creditors can vote on whether to replace the voluntary administrator that the company has appointed with an administrator of their choosing. A creditor who wishes to replace the existing voluntary administrator must obtain the written consent of an alternate voluntary administrator preceding this meeting.
Also during this meeting, creditors can vote on whether they wish to form a committee of creditors. If formed, a committee of creditors will consult with the voluntary administrator, receive reports from the administrator and can also approve the administrator’s fees.
The voluntary administrator investigates the status of the company and provides a report to the creditors. This report will also include their recommendations on what they believe is in the creditors’ best interests. A second creditors meeting is held within five weeks after the administration commences to decide on the company’s future. Creditors can decide to either:
- Return the company to the control of the directors.
- Have the company enter into a Deed of Company Arrangement (DOCA) – a binding agreement between the debtor company and its creditors determining how to deal with the company’s affairs. The purpose of a DOCA is to increase the chances of the company continuing to trade and/or to provide a better return to creditors. If the creditors vote for the company to enter a DOCA, the company must do so within 15 business days, failing which, the company will automatically go into liquidation.
- Place the company into liquidation. Once a company is placed into liquidation, a liquidator is appointed who ‘liquidates’ the company’s assets and proceeds to wind up the company. At the end of the liquidation process, the company will be deregistered.
In complicated cases, it is not uncommon for this 5-week deadline to be extended.
Lodging a Proof of Debt
Creditors must complete a proof of debt form and provide the form to the voluntary administrator. The proof of debt form sets our all of the information necessary to notify the administrator of the creditor’s claim. Copies of any invoices and supporting documents should also be attached to the proof of debt form.
Right to Vote
Only creditors that have lodged their proof of debt with the administrator can vote at the creditors’ meeting. A creditor may attend the meeting in person or appoint a proxy to attend the meeting and vote on its behalf. The creditor can either specify how their proxy is required to vote or can allow the proxy to decide.
During the second creditors meeting, a creditor is not obligated to vote in accordance with the voluntary administrator’s recommendation. Creditors should consider their individual circumstances including which proposal they consider to be in their best interest and vote accordingly.
If a creditor does not believe that they have sufficient information to make their decision, particularly in relation to a proposed DOCA, they can request a resolution for an adjournment so they can obtain further information.
The Effect of Voluntary Administration
Voluntary administration provides the company with an opportunity to make the necessary decisions about its future, effectively preventing creditors from taking further action against the debtor company. For example:
- Unsecured creditors are prevented from either continuing, beginning or enforcing their debt recovery claim (without the consent of either the court or the administrator).
- Secured creditors are prevented from enforcing a charge (i.e. interest) of the debtor company’s property (except in limited circumstances).
- A creditor is unable to make an application to place the debtor company into liquidation.
- Creditors are prevented from calling on personal guarantees provided by the debtor company’s directors.
If your company is insolvent or you believe that it is about to become insolvent, you should obtain urgent financial advice. The voluntary administration process is swift, and in the majority of cases, will result in the debtor company entering into a DOCA or being placed into liquidation. If you have any questions about recovering a debt, get in touch with our disputes team on 1300 544 755.