Aussie companies are navigating an uncertain economic landscape, with challenges like dwindling consumer spending, rising supply costs, and labour shortages. These days, many company directors are confronted with an option for mitigating their debt – Voluntary Administration.
While undergoing voluntary administration may seem daunting, it offers a structured mechanism for distressed businesses to assess their financial position, explore restructuring options, and potentially bounce back from debt.
This article discusses how voluntary administration can sometimes be the best option for directors facing financial distress.
What is voluntary administration?
Voluntary administration is a structured legal framework for insolvent companies. In this process, an independent administrator is appointed to evaluate the company’s financial position while proposing options for its future.
The independent administrator will determine if the company is still viable to trade, prepare a plan to pay its creditors, and decide if it needs to be liquidated to settle its debts. Voluntary administration is on the rise, as research by CreditorWatch indicates that external administrator appointments by Australian businesses were at a record high in March 2024—up by 22.1% year-on-year.
Companies that go under administration primarily to prevent liquidation, as it offers a reprieve from creditor action while the independent administrator reviews the company’s debt.
Voluntary Administration vs Informal Restructure
Informal restructuring is another way for businesses to mitigate debt, and we’ve seen the rise in informal restructuring solutions such as Safe Harbour Provisions and Small Business Restructuring. Similar to voluntary administration, this turnaround framework helps businesses with financial difficulties to informally enter a restructuring plan with creditors to manage their debts.
In voluntary administration, the administrator resumes control of the business during the process. This differs from informal restructuring, where the company director remains in control and can continue trading as the practitioner develops a restructuring plan.
Informal restructures are preferred because they are flexible, cost-effective, and don’t involve external administrators. Additionally, the process is private, allowing companies to manage their debt without damaging their brand value.
However, qualifying for Small Business Restructuring and Safe Harbour can be challenging, as the eligibility criteria are stricter. For example, the Small Business Restructuring program is only applicable to businesses with less than $1 million in total liabilities.
A restructuring practitioner typically specialises in both informal restructuring and voluntary administration and will be able to provide an accurate assessment of a viable path for business. Businesses in distress should consult practitioners early in navigating their debt and transforming their business.
When voluntary administration should be considered
Though an informal restructuring may seem better, there are times when voluntary administration is the only viable path. Here are some case scenarios that highlight when voluntary administration is necessary.
- Failed to restructure informally: When a business has been unsuccessful in restructuring its debt through informal means and is still struggling to meet financial obligations.
- Stakeholder pressure: When creditors refuse to compromise on payment terms, demand immediate action, or threaten legal proceedings, an administrator can help halt any legal action and negotiate with stakeholders.
- Lack of available funding or cash flow: When a company is struggling to get funding from investors and is facing cash flow issues – such as paying employees or suppliers.
- DPN issued: If the company director receives a Director Penalty Notice (DPN) and the only way to “remit” it is to appoint an administrator or liquidator.
- DOCA: When a Deed of Company Arrangement is necessary to formally and legally propose a debt restructuring plan – with payment terms and time frames for these payments.
What is the process of voluntary administration?
In the event of insolvency, companies must appoint an administrator to conduct a thorough assessment of the business and devise a strategy moving forward. The process is as follows:
Step 1: Appointment
Directors appoint an independent voluntary administrator, who will begin filing the necessary documents with the Australia Securities and Investment Commission (ASIC).
Step 2: Assessment
The administrator investigates the company’s financial position and turnaround viability and presents the findings to creditors. During this process, unsecured creditors are prevented from making further claims against the company.
Step 3: DOCA Development
If the administrator deems the company as viable for turnaround, a Deed of Company Arrangement (DOCA) is developed in consultation with creditors. The DOCA is a legally binding document that outlines how the company will repay its debts and continue operating.
Step 4: Implementation
If creditors approve a DOCA, the company operates under its terms, aiming for a turnaround or restructuring. However, if the DOCA is not approved, the company may have to liquidate its assets to pay creditors.
Key takeaway
By acting early, voluntary administration offers struggling businesses a chance to recover and follow a structured path amidst uncertainty. It also allows companies to seek guidance from an independent administrator to navigate the complexities of insolvency.
Voluntary administration is a solution for businesses to mitigate their debt and possibly emerge stronger.
