A company may appoint a voluntary administrator with a view to the directors putting forward a proposal to creditors for a Deed of Company Arrangement (“DOCA“) to settle debts and return control of the company to the directors.
In some circumstances a voluntary administration can be an effective way of a company dealing with financial problems resulting in the company being able to continue trading profitably in the future.
However, there are a number of possible issues or problems associated with the appointment of an administrator to a company which a company’s directors need to consider, or at least be aware of.
A company’s existing clients will be notified, or become aware of, the appointment of an administrator and this 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. In respect of existing clients, an administrator may be an event of default under contracts meaning that certain of a company’s existing contracts may be terminated.
In a similar manner the appointment of an administrator may impact on the company’s relationships with suppliers and other creditors as often these parties will be owed significant amounts by the company in administration and they will not receive full payment of amounts owed under any DOCA proposal with any payment being unlikely to be made in the short term.
There can also be significant costs associated with the appointment of an administrator which can impact on the company’s ability to continue to trade and limit the funds available to put forward a proposal for a DOCA. Additionally, 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. Often there are insufficient funds available to meet the administrator’s costs and ongoing debts incurred by the company (for which the administrator is liable) meaning the administrator will have no alternative but to cease trading the company’s business either upon appointment or at some stage during the administration period.
Lastly the appointment of an administrator does not release personal guarantee or other personal claims against a company’s directors or other parties, such as guarantees to suppliers, landlords or banks or director penalty liabilities to the ATO. This means that while the administration and DOCA process may be successful the appointment may ultimately result in adverse financial consequences for the company’s directors.