Voluntary administration is a means of avoiding liquidation of a company.
The directors of a company which is insolvent, or is about to become insolvent, may appoint an administrator to the company. An administrator may also be appointed by a liquidator or provisional liquidator of the company or by a secured creditor who holds security over most of the company’s property (although such appointments are uncommon).
The objective of voluntary administration is generally to allow a company to continue trading and to enable its business, property and affairs to be administered in a way that maximises the chances of the company continuing in existence.
Administration is a temporary phase during which the administrator is in control of the company’s affairs. The administrator conducts investigations and issues a report to creditors regarding the options of placing the company in liquidation or accepting a proposal for a Deed of Company Arrangement (“DOCA“) to settle debts and return control of the company to the directors. A meeting of creditors is held within 25 business days (5 weeks) of the appointment at which creditors vote on whether to place the company in liquidation or accept a proposal for a DOCA (there is a third option to simply end the administration and return the company to the control of the directors but this is rare).
Proposal for a Deed of Company Arrangement
A proposal for a DOCA may include various terms, however, generally a proposal will seek to provide for a better return to creditors than that which will be available in the liquidation of the company through:
- Finance from a bank or lender;
- Voluntary contributions to the company by its directors, members or other parties;
- The sale of some or all of the company’s assets;
- Pursuit of some claim available to the company;
- Contributions to pay creditors from the company’s future trading profits; and/or
- Certain creditors agreeing not to claim in the DOCA (most commonly creditors who are related parties of the company).
If a proposal for a DOCA is accepted by a majority in number and value of creditors, at a meeting convened by the administrator to consider approving the proposal, it is binding on all of the company’s unsecured creditors and the company may be able to continue trading.
Benefits of the Voluntary Administration Process
There may be benefits in arranging for the appointment of an administrator to a company, including:
- A moratorium being placed on creditors pursuing claims against a company’s director under personal guarantees although the moratorium ends if the company enters into a DOCA or is placed in liquidation;
- Maximising the chances of the company continuing in existence;
- Providing for a better return to creditors than liquidation; and
- Limiting or avoiding personal liability of directors, such as liability under Director Penalty Notices or for insolvent trading.
Possible Issues or Problems Associated with the Voluntary Administration Process
There may also be possible issues or problems associated with the appointment of an administrator to a company, including:
- Existing clients (that is with respect to current projects) would be notified of the appointment of an administrator and it may impact on the company’s relationships with these clients. It is also likely that prospective clients will become aware of the appointment which may affect the company’s ability to win new work;
- The appointment of an administrator may impact on the company’s relationships with suppliers and other creditors;
- The appointment of an administrator may terminate or be an event of default under contracts;
- There can be significant costs associated with the administration appointment;
- The administrator is liable for all debts incurred by the company during the period of administration and so in order to continue trading the company’s business, the administrator would seek to ensure that sufficient funds are available at the outset of the appointment and throughout the administration period to meet all debts and costs involved;
- A company’s directors may only wish to appoint an administrator if viable proposal for a DOCA can be put forward which has reasonable prospects of being accepted by creditors;
- A DOCA releases creditors’ unsecured claims against the company but does not release personal guarantee or other personal claims against a company’s directors or other parties; and
- The appointment of an administrator may trigger a secured creditor appointing a Receiver to the company.