Voluntary administration may sound scary, as it is defined as handing over control of a business to someone else. However, the objective of this process is to assist you successfully running your business. In this article, Legal Kitz will discuss the intricacies of voluntary administration and what is involved when a company goes into ‘voluntary administration’.
What is Voluntary Administration?
Voluntary administration is a process whereby a company (the directors of the company) appoints an independent administrator in order to settle the company’s debts. The company then takes a break from regular activities and focuses on sorting out its debts so it can return to normal operations. Generally this means that legal proceedings involving the company halt until the company releases itself from voluntary administration. When the company owes money to other entities (called creditors), the entities cannot claim their debt immediately in the circumstances of voluntary administration, unlike when the company is operating normally. When a creditor comes to the company in search of their owed debt, the creditor may submit a proof of debt form and the administrator will decide whether this discharge of funds is worth it to the company whilst in voluntary administration. The role of the administrator as stated before, is to get the company back to a place where it can resume operations, however if this is not possible, it will attempt to provide the creditors with the best return for payment from the company.
There is a timeline which applies to companies where they have to achieve certain milestones in the process of being in voluntary administration. These can be found here on the ASIC website.
What happens during voluntary administration if you are an unsecured creditor?
If you are an unsecured creditor, you will be likely to recoup money owed to you; however, there is a risk here since your debt is unsecured and if the company does not return to normal operations, you may lose your claim. Additionally, you will be paid out after secured creditors are paid, so this may influence the timing and chance of recoupment. Employees that sit in this category however, are paid out first rather than secured creditors.
What happens during voluntary administration if you are a secured creditor?
If you are a secured creditor however, you sit in a favourable position in terms of recouping the company’s debt. Since your security interest has been registered in the Personal Properties Securities Register (the difference between being secured and unsecured), your claim will take priority over other creditors with a less valid claim than yours. As such, if the company goes into liquidation, your claim will fall second behind other debts the company may owe such as unpaid wages.
What happens if you hold a guarantee?
Uniquely, as one who holds a guarantee, even if the company goes into liquidation, you will be able to claim your guarantee (subject to your arrangement), as this arrangement sits outside the system of secured interests.
When can I enforce my claim as a creditors against a company that has gone into voluntary administration?
It must be said that both secured and unsecured creditors will not be able to enforce their claims against the company until the company goes into liquidation. Additionally, parties who own property used by the company cannot recover their property while the company is in administration.
What is a voluntary administrator?
A voluntary administrator is a registered, independent person who is appointed by the directors of a company to assist with a business’ goals, including:
- Determining probable solutions to a company’s current issues
- Assessing any probable proposals to put forward in the future
- Comparing the likely outcomes and investigating how to move forward, which includes liquidation as a viable solution.
It is key to note that the administrator does not answer to the company nor the directors, but instead to the creditors as their primary stakeholder.
What are the options that an administrator has regarding the company they are assisting?
The administrator will report on the viability of the following three options to the creditors:
- End the voluntary administration and return to normal operations
- Approve a Deed of Company Arrangement through which the company pays all or part of the debts
- Wind up the company and appoint the liquidator
During voluntary administration, the administrator holds the power of the company and may make decisions with the aims of completing one of the three objectives listed above.
The administrator also acts as an investigator during the administration, searching for breaches by individuals involved with the company such as employees, contractors or directors. At the end of the administration, the administrator must lodge a detailed account of receipts and payments with the Australian Securities Investment Commission. It is important to note that the administrator must act fairly and impartially.
Fun facts
The company is liable for any purchase or hiring of items used during the administration under their authority. However if there are any insufficient funds, the administrator is personally liable to pay for these services.
Any administrator is entitled to be paid for the work they perform for the company which is to be paid out of the available assets of the company before any payments are made to any creditors. The risk here is that if there are no or limited assets, the administrator may not be paid.
When the administrator takes over the company, the directors of said company lose their powers within the company and are required to hand over any documents relevant to the administrators role.
What is liquidation?
Should a company and its creditors decide to go into liquidation, the administrator becomes the liquidator unless the creditors elect otherwise. The liquidator winds up the affairs of the company in order to fairly benefit the creditors. The liquidator will also collect and sell of the companies assets and report back to the creditors regarding any company activities such as unfair preferences, commercial transactions, possible claims against the company’s officers and creditor-defeating dispositions which may be recovered. The liquidator is also required to inquire about the failure of the company and report any offences involved with the company to the ASIC. Finally, liquidators distribute any money collected from the sale of assets after payment of the costs of liquidation. These funds will first go to employees, followed by priority creditors and then unsecured creditors.
Legal Advice
Voluntary administration is there to help your business take stock of where it is at at the moment and investigate whether, and how the company can get back on track. If you have any questions on this topic or are in a situation involving a voluntary administration of a company, don’t hesitate to call Legal Kitz! We provide a FREE 30 Minute consultation where we can point you in the right direction!