What is Voluntary Administration?
Within Australia Voluntary Administration is a process whereby an insolvent company is placed in the hands of an independent person known as a Voluntary Administrator whose role is to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a Deed of Company Arrangement, Liquidation or be returned to the directors.
How is a Voluntary Administration different to a liquidation?
Voluntary Administration is different to a Liquidation in that the primary objective of a Voluntary Administration is to investigate options available to allow a better return to the creditors and to save the business whereas the objective of a Liquidation is to wind up the affairs of the company and bring it to an end.
What are the main benefits of Voluntary Administration?
In Australia Voluntary Administration provides a company with a viable opportunity to put a proposal to creditors and avoid Liquidation, thus preserving the company’s structure and its business. The main benefits of a Voluntary Administration include:
- Company creditor claims are frozen giving the company breathing space to assess its future and financial position.
- Enables the company to continue to trade whilst its future is being assessed.
- Is inexpensive to initiate.
- Provides creditors with an independent review of the company and its business viability.
- Provides a mechanism to compromise debts with creditors of the company.
What is the process and timing of a Voluntary Administration in Australia?
The Voluntary Administration process is designed to be an expedient process to allow for an independent assessment of the business viability. The Voluntary Administration process typically takes approximately one month from start to finish. The Administrator must convene a meeting of creditors within eight business days after the appointment to enable creditors to appoint a different Administrator and/or form a Committee of Creditors. The Administrator must convene a further meeting of creditors within 20 business days of the appointment (25 days if at Christmas or Easter) and provide a report at that time to creditors outlining his investigations conducted into the affairs of the company and his opinion and recommendation as to the future of the company. At the second meeting creditors must vote to:
- Wind up the company
- Accept the proposed Deed of Company Arrangement if applicable
- To end the administration and return control of the company back to the directors
Who votes on and approves a Deed of Company Arrangement?
At the second meeting of creditors, creditors in attendance will vote on the Deed of Company Arrangement if proposed. In Australia in order for the Deed of Company Arrangement to be approved the meeting must pass a resolution meaning the majority of creditors in attendance at the meeting must vote in favour of the resolution, or; if a poll is subsequently demanded, 50% of creditors in attendance and 50% of creditors in value must pass the resolution.
Does a Deed of Company Arrangement bind all creditors?
Although the Deed of Company Arrangement is a flexible agreement and can exclude certain creditor claims (i.e. related party claims), it typically binds all unsecured creditors irrespective of whether those creditors voted in favour of the Deed of Company Arrangement or not.
Once a Deed of Company Arrangement is executed, the Deed does not prevent a creditor who holds a Personal Guarantee from pursuing the Guarantor under that Agreement.
Personal Guarantees and the Voluntary Administration process
In Australia, a creditor cannot enforce a Personal Guarantee whilst a company is subject to the Voluntary Administration process. This means that creditors who hold Personal Guarantee will have to wait until the outcome of the second meeting of creditors prior to enforcing any action to recover the Guarantees.