A Guide to Voluntary Administration
Businesses operating under a company structure have a few different options when it comes to insolvency and business turnaround processes, and – if your business is in financial strife – voluntary administration may be one of the options you’re considering.
So, what is voluntary administration, and why would a company choose to enter it? In this detailed guide, we take you through everything you need to know about the voluntary administration process. We explain its implications for creditors and employees, and the outcomes you can expect from voluntary administration.
In addition, we’ve taken a look at some of the high profile voluntary administrations in the past decade.
What is voluntary administration?
Voluntary administration is an insolvency procedure – like receivership or liquidation – for businesses operating under a company structure, and it is a formalised, legal process regulated by the Corporations Act 2001 (Cth).
Voluntary administration is designed to resolve the company’s future direction as quickly as possible. An external administrator – he/she must be a registered liquidator – is appointed. The company directors pass control over to the administrator, who is then responsible for reviewing the company’s operations and finances in order to make recommendations about the best course of action.
Why would a business choose to go into voluntary administration?
A business might choose to enter voluntary administration for a few different reasons.
Voluntary administration could give a company the best chance of survival by bringing in a qualified expert (the administrator) who explores different plans of action and recommends the optimal path forward.
Company directors have a duty to prevent insolvent trading. If a director suspects the company is insolvent or close to insolvency, he/she could opt for voluntary administration as a way to ensure the company doesn’t trade whilst insolvent. By doing so, the director can minimise the risk of personal financial risk as well as penalties and fines relating to insolvent trading.
Voluntary administration offers companies in financial distress a ‘breather’ or time-out from most creditor demands. This time-out, and the expert input from an administrator, can be critical for giving a company the best chance of returning to profitable trading, and/or giving creditors and company members the best possible outcome. It can also give otherwise-viable businesses time to consider restructuring or turnaround strategies, including ways to reduce debts, lower costs, and restore sales and profits.
The voluntary administration process could end up giving creditors and members better returns than if the company had gone immediately into liquidation. This could be in the form of a mutually agreeable compromise between the company and its creditors.
Generally, voluntary administration is designed to explore the possibility of saving the company, whereas in a process like liquidation the company proceeds immediately to winding up.
Note: in some cases a company can be forced to enter voluntary administration as opposed to choosing to go into the process. For example, a secured creditor who is entitled to enforce a security interest over the company’s property can appoint a voluntary administrator. The creditor then has the benefit of an independent, objective review of the business from the administrator.
What Is The Voluntary Administration Process?
Voluntary administration can be started in a few different ways. It can be commenced via a resolution by a majority of the company’s directors, through a decision by a liquidator, or by a secured creditor as mentioned above.
The voluntary administration process is designed to be relatively quick and as easy as possible. It starts with the appointment of an external administrator and typically lasts for 25 to 30 days.
Once the administrator is appointed, he/she takes control over from the directors and is responsible for securing and protecting the company’s assets. Within eight business days of his/her appointment, the voluntary administrator must hold the first meeting of creditors, at which the creditors can vote to replace the administrator and/or create a committee of inspection.
Then the administrator will proceed to investigate the company’s affairs and report back to the creditors on recommendations and alternatives for the company’s future. In other words, the administrator has to give an opinion on each of the three possible outcomes – a deed of company arrangement, liquidation, or return to trading under control of directors – and recommend the best course of action in the interests of the creditors.
Within 25 days of appointment (or 30 days if it’s during Christmas or Easter), the voluntary administrator must hold the second creditors’ meeting. At this meeting, the creditors vote to decide whether the company returns to the directors’ control, enters a deed of company arrangement, or is put into liquidation.
What does voluntary administration mean for creditors?
Creditors play a central role during voluntary administration. Voluntary administration means creditors have an opportunity to vote on the future direction of the company. At the first creditors’ meeting, you can vote on decisions like replacing the administrator. At the second meeting, you vote on whether to put the company into liquidation, execute a deed of company arrangement, or return it to the control of the directors. This happens after you have a chance to review the administrator’s report and recommendations.
Additionally, for most creditors, voluntary administration places a moratorium on any actions to recover debt or possess assets. Hence, if a company indebted to you is put into voluntary administration, your debt will be frozen until the process is over. This applies until assets are sold or realised or until a deed of company arrangement is executed, or unless the creditor has permission from the administrator or a court. For example, if you’re a creditor landlord, you can’t start action to evict until the voluntary administration is over. Suppliers, banks, and most other creditors will typically also be unable to commence recovery action.
What does voluntary administration mean for employees?
An employee owed money for unpaid wages, superannuation, annual leave, sick leave, long service leave, retrenchment pay, or other benefits is a creditor and is entitled to vote at creditors’ meetings if their employer company is placed into voluntary administration. If this applies to you, you need to lodge details of your claim with the voluntary administrator before the creditors’ meeting so you can vote.
The voluntary administration won’t automatically terminate your employment. Bear in mind the voluntary administrator has the discretion to sell or close down the company’s business in the lead up to the creditors’ decision on the company’s future. He/she can choose to continue trading the process during the process, and if so, he/she must pay you ongoing wages. However, any entitlements from before the administration usually won’t be paid during the process.
The outcome of the voluntary administration will have different implications for employees. If the company returns to trading – and this occurs very rarely – the directors are responsible for paying employee entitlements. If a deed of company arrangement is approved, how and when entitlements are paid will depend on the terms of the deed.
If the company goes into liquidation, you might get paid some of all of your entitlements depending on how much funds are realised from the business assets. In this case, you’ll be paid in priority to other unsecured creditors. You can also get financial help from the government through the Fair Entitlements Guarantee if your employer company is liquidated.
What is the expected outcome of a voluntary administration?
Voluntary administration can have creditors voting to return the company to the control of the directors to resume normal trading, but this is rare. In most cases, creditors vote to liquidate the company. This usually happens if there’s no other viable option or if the deed of company arrangement is unlikely to provide a better return for creditors than liquidation.
In around a third of cases, a deed of company arrangement (DOCA) is approved. The DOCA’s approval binds all creditors and it effectively means the company is restructured in a way that maximises the chances of continued trading. Generally creditors will vote for this if the DOCA offers a path forward that’s likely to achieve a better outcome for them than if it was placed into liquidation right away.
DOCAs can be understood as a compromise on the company’s debts, and they typically have the company return to trading under specific conditions, with specific payment arrangements put into place. This could involve lump-sum payments, instalments, and sales of assets to pay creditors from the proceeds.
Additionally, voluntary administration could include other outcomes and implications. For example, it could negatively impact directors’ credit ratings and could involve the voluntary administrator uncovering and reporting possible offences to ASIC.
Examples of high profile voluntary administrations in the last decade
Exploring some high-profile case studies on voluntary administration could provide further insights into what the process involves and the kinds of outcomes it can achieve.
TV broadcaster Channel 10 was placed into voluntary administration in mid-2017 after shareholders withdrew their guarantees on the business’s key loan, which was worth $250 million. Rather than running the risk of insolvent trading, Channel 10 chose to appoint a voluntary administrator.
Founded in the 1960s, the broadcaster’s financial difficulties were highlighted by some as an example of why Australia needed reform to protect media diversity in the internet age. Two DOCAs were proposed during the administration process, and ultimately the creditors approved the so-called CBS DOCA. The eventual outcome saw the American broadcaster CBS acquire the business and assets of Channel 10, saving it from liquidation.
Department store Harris Scarfe was placed into voluntary administration in late 2019, not long after its purchase by Sydney private equity firm Allegro Funds. The $380 million retail chain had more than 1,800 employees across 66 stores, and it was the latest example of a business struggling in the volatile retail sector.
Harris Scarfe occupied a middle ground between budget retailers like Kmart and higher end department stores like Myer and David Jones. The appointed administrators committed to trading as normal over the 2019 Christmas period and continuing to paying employees as it sought to sell the business.
Chocolate chain Max Brenner had 600 staff and 37 stores across Australia before entering voluntary administration in October 2018. The company noted high costs combined with poor sales were behind the business’s financial challenges, and reports suggested the chain owed its local lenders around $50 million. The company had planned to trade as normal after the administrator was appointed, but 20 stores were shut down only days after it entered into administration. By November 2018, the remaining 17 stores had been purchased by Australian cinema owner and singer Roy Mustaca.
Women’s fast-fashion chain Bardot became one of the latest casualties in the retail sector when it entered voluntary administration in November 2019. With around 800 employees across 72 stores in Australia, the retailer cited competition and the challenging local discount-driven market as factors behind its financial woes. Its chief executive, Basil Artemides, suggested the business’s structure couldn’t have been maintained if the business continued to operate a national retail network. Bardot’s administrators suggested it would be leading a company-wide restructure.
Electronics goods chain Dick Smith was placed into voluntary administration in early 2016. The process saw the retailer immediate enter a share trading halt as its administrator sought to restructure operations and sell off the business as a going concern. Trading across its 393 stores continued and its 3,300 employees were paid as the administration proceeded.
Dick Smith’s struggles had some of its roots in cash-flow constraints as well as a focus on rebates, and as the company entered administration, it announced gift vouchers and deposits paid for goods would not be honoured. Eventually its administrator failed to secure a buyer for the stores and all Dick Smith stores were closed, with the company entering liquidation in July 2016. Online retailer Kogan.com later acquired the Dick Smith brand, trademarks, intellectual property, and online business in Australia and New Zealand.
Established in 1990, kids’ fashion label Pumpkin Patch was once described as a $790 million runaway success. However, by late 2016, the retailer had posted a loss of $15.5 million, owed $76 million, and was placed into administration. Driving factors behind Pumpkin Patch’s demise could have been its too-rapid international expansion, over-reliance on debt, strong competition in the segment, and neglect of its Australian and New Zealand operations.
With hundreds of stores and 1,600 employees, Pumpkin Patch struggled to find a buyer as a going concern and was eventually put into liquidation. Catch Group acquired the brand and intellectual property and relaunched the brand as an online store before selling it to Alceon Group in 2018.
Is voluntary administration right for your business?
Voluntary administration is a formalised insolvency process established under Australian corporations law, and so its timelines and procedures follow strict requirements. Voluntary administration is designed to give companies a time-out from creditor actions as well as a chance to receive input from an objective, independent administrator on the best course of action for the business’s creditors. For directors, it can be a way to avoid breaching their duty to prevent insolvent trading, along with the personal liability as well as the criminal and civil penalties breaching this duty can attract.
The process also gives creditors ultimate decision-making power as creditors will vote on whether to liquidate, return the company to normal trading, or to enter a deed of company arrangement. In most cases voluntary administration results in liquidation, though around one-third lead to the execution of a deed of company arrangement.
TPH Advisory are specialists in voluntary administration, debt management and turnaround for distressed businesses. We help struggling businesses across a range of industries with innovative approaches to resolving their financial challenges. Our experts can assist you with deciding on the best insolvency process for your business.
For more information on whether voluntary administration is right for your business, contact us now for a free, confidential discussion.