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1. What is voluntary administration?

Voluntary administration is a type of insolvency process for struggling businesses. It starts when an external administrator is appointed to take control over a company and investigate its affairs. Voluntary administration offers a chance for a company to hit pause and have a temporary break from most types of creditor actions. It's also a way for directors to avoid insolvent trading without putting the company into liquidation right away.

The administrator will identify the best course of action for the company, ideally to save the company. If the company can't saved, then the administrator will recommend the best course of action for creditors than if the company were placed directly into liquidation. The creditors then vote on the administrator's recommendation.

The three possible outcomes of voluntary administration are returning the company to the control of the directors, entering into a deed of company arrangement, or liquidation. Typically voluntary administrators are appointed by company directors when they're concerned the company is likely to become insolvent or is already insolvent.

2. What does voluntary administration mean for employees?

During voluntary administration, the administrator takes charge of the business, including its employment contracts. Voluntary administration doesn't mean automatic termination of employees. The administrator could continue trading the business, which means they need to pay (out of the assets available) ongoing wages to employees. As an employee, you can vote at the creditors' meetings designed to resolve the company's future direction.

If you have unpaid wages, entitlements, and benefits arising from before voluntary administration, the voluntary administration process itself usually won't resolve these. That depends on what's decided at the creditors meeting. If a deed of company arrangement (DOCA) is executed, how you'll be paid depends on the DOCA's terms. If the company is returned to the control of the directors, the directors are responsible for paying you. If it's liquidated, you'll be treated as a special class of unsecured creditors. This means you'll take priority after secured creditors and before unsecured creditors. Also, you might be eligible for compensation through the government's Fair Entitlements Guarantee if the outcome is liquidation.

3. What is a voluntary administrator?

The voluntary administrator is an external expert brought in to manage the voluntary administration process. The voluntary administrator must be a registered liquidator with ASIC in order to be eligible for appointment. His/her duties include taking control over the company, investigating the company's finances and operations, and recommendations, which may include a plan to help save the company or for the best outcome for creditors.

The administrator will hold creditors' meetings to keep them informed and allow them to vote on recommendations, provide reports on his/her investigations, and carry out the decision from the creditors' vote. This could be returning control to the company's directors (rare), executing a deed of company arrangement, or liquidation.

Voluntary administrators can be appointed by directors, creditors, or a court. He/she has all the powers of the company's directors, including the power to sell assets in the lead-up to the vote by creditors. Also, the administrator might report to ASIC on any evidence of fraud or offences by people involved in the company.

To speak with the expert administrators a TPH Advisory, contact us today.

4. Is a liquidator a voluntary administrator?

While voluntary administrators must be registered liquidators with ASIC, the role of the liquidator is different to the role of a voluntary administrator. The liquidator's key focus is realising the company's assets, pay the proceeds to creditors, and winding down the company. In contrast, the voluntary administrator is charged with finding the best possible option forward for saving the company and failing that, the best outcome for creditors.

If the creditors vote for the company to go into liquidation at the end of the voluntary administration process, a liquidator will then be appointed.

5. How is a voluntary administrator chosen?

By law, voluntary administrators must be on ASIC's register of liquidators. Voluntary administrators are usually appointed by a company's directors after the directors agree the company's at risk of becoming insolvent or is already insolvent. Sometimes, though less commonly, voluntary administrators are appointed by a liquidator or provisional liquidator (who thinks the company has a chance of survival and can be saved), a secured creditor, or court.

The voluntary administrator must be independent. They need to disclose any relevant relationships they might have to the creditors. To be independent means not to be biased to any person or group or have close personal or business relationships with anyone involved in the insolvency. It also includes things like conflict between personal or business circumstances with duties as external administrator.

Also, the party appointing the creditor might look for highly experienced administrators with professional memberships like Chartered Accountants Australia.

6. Do employees get paid when a company goes into administration?

If you're an employee, you might be paid your outstanding wages, super, leave entitlements, and other benefits after the voluntary administration process is complete. How and when you'll be paid will depend on the outcome of voluntary administration. Outstanding means wages and benefits incurred before the voluntary administration process started. As for during the voluntary administration process, the administrator is responsible for paying your wages if the company keeps trading in the interim.

Administration can result in three possible outcomes. First, if the company returns to trading under control of the directors, the company directors will be responsible for paying your wages. Second, under a deed of company arrangement how your entitlements are paid could vary depending on the terms of the deed.

Third, if the company goes into liquidation, you might get paid some of all of your wages and benefits depending on how much funds are available. In a liquidation, employees rank as priority creditors. Also, you could get some compensation through the government’s Fair Entitlements Guarantee.

7. How long does a company stay in administration?

The administrator works to strict time frames for certain milestones and a voluntary administration will typically last for around six to eight weeks. For example, once he/she is appointed, the administrator needs to call the first creditors' meeting within eight business days and the second creditors' meeting within 25 or 30 business days of appointment. That second meeting can be adjourned to extend the timeframe of the Voluntary Administration.

Once the creditors' vote (for liquidation, deed of company arrangement, or control to revert back to the company directors) and the chosen option is finalised, the voluntary administration effectively comes to an end. Certain things - like the company having up to 15 days to sign a contract for a deed of company arrangement – can shorten or lengthen the administration process by days or weeks.

8. What is the difference between voluntary and involuntary administration?

Voluntary administration usually starts internally when the company's directors initiates administration through board resolutions. External or "involuntary" administration (technically still voluntary administration), on the other hand, is typically commended externally, by a court or secured creditor seeking to recover money owed by the company. Sometimes directors appoint a voluntary administrator as a result of a wind-up application to avoid liquidation which causes shutdown of the business’ assets and recover the proceeds.

In both cases the parties seeking voluntary administration are usually doing so because the company's insolvent or likely to be insolvent. Both types of administration sees an external administrator appointed to make recommendations. Either type of administration could result in three possible outcomes as voted on by the creditors: a deed of company arrangement, liquidation, or more rarely, return to trading to company directors.

9. What is the difference between voluntary administration and liquidation?

Voluntary administration and liquidation are both insolvency procedures that could or will result in a winding-up, but they're completely different processes. Voluntary administration gives companies a chance to rehabilitate while liquidation in most cases represents the end for companies through winding up and eventual deregistration.

With voluntary administration, an external administrator is appointed, and he/she will investigate the company to make a recommendation as to the best option. Whether that's a deed of company arrangement, liquidation, or resuming trading under the control of the company directors, the creditors will vote before the voluntary administration ends. Liquidation also is technically an external administration but it usually means the company is already committed to a winding-up.

So the key difference between the two is liquidation typically means it's the end for the company while with voluntary administration a company avoids liquidating right away and still has a chance at rehabilitating, though liquidation itself is one of the three possible outcomes.

10. Why would a company go into voluntary administration?

Companies could choose to go into voluntary administration or be forced to enter this particular type of insolvency process. Whether the voluntary administration starts with the directors passing a board resolution, through a court order or, by the actions of secured creditors, it offers specific advantages for different stakeholders.

For company directors of financially distressed companies, it can be a way to avoid insolvent trading risks. It allows the company to have some time off with an external expert (the administrator) recommending the best future direction, including the prospect of continuing trading during voluntary administration if the administrator thinks it best or a return to profitable trading after the administration process. The company get a chance to do this in a temporary, postponement period suspending action from most creditors, landlords, suppliers, personal guarantee holders, and other parties.

For creditors, it offers a way to have the business be investigated by an administrator and vote on a solution that could give them the best chance to recover their money, whether that's through a formal agreement in the form of a deed of company arrangement, liquidation, or a return to the directors.

11. What's the voluntary administration process?

Voluntary administration can start with company directors, secured creditors, a liquidator or provisional liquidator, or a court initiating the process. Once the voluntary administrator has been appointed, he/she takes control of the business: its operations, finances, and assets. The first creditors' meeting takes place within eight business days of appointment. At the meeting, the creditors (and employees), can vote to replace the administrator and/or to create a committee of inspection to oversee the administration process.

Then the administrator will investigate the company's affairs and finances, seeking help from directors as necessary. He/she will report to the creditors on alternatives before the second creditors' meeting, which is held within 15 or 25 business days of the administrator's appointment. At this meeting, the creditors vote on the administrator's recommendations, which could be returning the company to the control of directors, entering a deed of company arrangement (DOCA), or liquidation. Creditors can adjourn the second meeting and voting for up to 45 days for further investigations or for DOCA amendments.

12. How does voluntary administration help businesses’ finances?

Financially challenged businesses can use voluntary administration to get breathing space from most creditor actions. Instead of going straight to liquidation, you have the chance to have an independent expert to come in to explore different options. Ultimately, companies can use the inherently collaborative mechanism of voluntary administration to decide on the company's future direction.

For example, entering a deed of company arrangement (DOCA) could help return the company to profitable trading eventually, especially if the DOCA includes terms for reduced or deferred debt. At the same time, however, the risk for creditors voting for liquidation is real, while the third and final possibility of returning to control of the directors occurs rarely.

Voluntary administration can protect company directors from the personal liability for insolvent trading as well as civil and criminal penalties associated with their duty to prevent insolvent trading. By hitting pause and allowing the administrator to take over, directors of troubled companies are no longer responsible for further debt accumulated after voluntary administration starts.

13. Can directors escape liability through voluntary administration?

Starting voluntary administration can limit personal liability and the risk of civil and criminal penalties for insolvent trading for directors. However, it doesn't protect directors for debt incurred from insolvent trading prior to voluntary administration commencing and the company is ultimately liquidated.

As for personal liability for tax debts relating to pay as you go (PAYG) withholding and the superannuation guarantee charge (SGC), voluntary administration only suspends some of the ATO's recovery actions (in the case of non-lockdown director penalty notices). When the voluntary administration process is over, the director may continue to face recovery actions. And for PAYG and SGC liabilities that are unreported and unpaid(where "lockdown" director penalty notices apply) the ATO can continue recovery action personally against directors even during voluntary administration.

When it comes to personal guarantees for company debt, enforcement or recovery action against directors can be suspended during voluntary administration but can resume when voluntary administration comes to an end, including if the company goes into liquidation.

14. What is a creditor?

A company's creditor is anyone the company owes money to because goods or services or were provided and/or loans were given to the company. For example, your company might have received goods from a supplier whose invoice you haven’t yet paid. A customer might have paid for goods or services in advance but you haven’t delivered them yet. Your employees might have outstanding wages, salaries, or other benefits and entitlements. Someone who successfully sues a company can be a creditor – a contingent creditor – if their settlement remains unpaid.

Note your creditors can be secured or unsecured. Secured creditors are those who hold assets in your company over the amount you borrowed from them, while unsecured creditors have no security interest in your assets.

15. What are creditor meetings?

The voluntary administration process includes two creditor meetings where the creditors come together and meet with the administrator to make decisions about the administrator, the administration process, and the company's future direction.

The voluntary administrator is responsible for calling the two meetings, and the first one must be held within eight business days of his/her appointment. The second meeting takes place within 15 or 25 business days after appointment. At the second meeting, the creditors decide the company's future by voting on the administrator's recommendations.

16. What happens at the first two creditor meetings?

The first creditors' meeting is about informing the creditors and giving them a chance to vote on changes. Creditors can vote on whether they want to replace the voluntary administrator and who they want as the replacement. They'll vote on whether they want a committee of inspection to assist the administrator and if yes, who should be on the committee.

At the second creditors' meeting, the administrator will present his/her recommendations for the company's future direction via a previously written report. The creditors will then vote on the recommendation, whether it's liquidation, a deed of company arrangement (DOCA), or return to control of the company directors.

Creditors will get a detailed report on the administrator's findings before the second meeting. The report will cover other things like any offences uncovered and the appropriateness of different options. Note the creditors don't have to decide at the second meeting but can choose to adjourn for up to 45 days to allow for, say, further investigations or amendments to a DOCA.

17. How does voluntary administration affect stakeholders?

Voluntary administration has a different impact on directors, creditors, employees, and other stakeholders. Company directors must give up control to the administrator once he/she is appointed. Voluntary administration could limit personal liability and the risk of civil and criminal penalties for directors by putting a stop to insolvent trading or the potential of it happening. Directors might be temporarily free from personal ATO actions to recover certain types of unpaid company debt.

Most secured and unsecured creditors won't be able to commence or continue with legal recovery action against the company whilst the voluntary administration is in process unless they have the administrator's or a court's permission. However, the VA gives them a chance to decide on the company's future direction and choose an option that gives them the best chance of recovering their money.

Employees won't necessarily lose their jobs when voluntary administration happens. They can vote at creditors' meetings like other creditors. Whether, how, and when they're paid for any outstanding wages and benefits from before the voluntary administration depends on the outcome of the voluntary administration.

Other stakeholders like landlords will also be subject to a moratorium when it comes to evicting the company and recovering their dues unless the action began before voluntary administration commenced.

18. How does a voluntary administration end?

Usually a voluntary administration ends when the decision is made to proceed with one of the three possible outcomes: give control back to the company directors to resume trading, execute a deed of company arrangement (DOCA), or liquidation.

However, voluntary administration could end in other ways. A court could order it to end or appoint a liquidator for the company to be wound up. Voluntary administration can also end when the second creditors' meeting isn't arranged within the mandated time frame or when the DOCA isn't signed within 21 days of the second creditors' meeting.

19. What are potential outcomes of voluntary administration?

When a company is put into voluntary administration, the goal is typically to explore its prospects for survival and resuming trade, with the administrator recommending an option and the creditors' voting on it. One of the three contemplated outcomes is returning the company to the directors' control and resuming trading, though this rarely happens. Another is executing a deed of company arrangement (DOCA) with specific repayment terms to creditors and possibly forgiving some of the debt. DOCAs involve a returning to trading and they might be the outcome for around a third of voluntary administrations. Third, the company could be put into liquidation.

In the best case scenario, a voluntary administration helps save or preserve the goodwill and value of the company. Ideally it should preserve employee jobs while paying a good portion of unsecured creditor debt. In reality, this might be harder to achieve than directors and other stakeholders expect.

20. What is a deed of company arrangement (DOCA)?

A deed of company arrangement (DOCA) is a binding agreement between a company and its creditors that allows the company a way to return to solvent trading while fulfilling its debt obligations to creditors. Its key purpose is to create better outcomes for the company, creditors, and other stakeholders than going directly to liquidation.

A DOCA could lay out new repayment timelines and terms, debt forgiveness, moratoriums on creditor actions, and how and when the DOCA will terminate. The DOCA will specify who acts as deed administrator (usually the voluntary administrator), the person responsible for ensuring the company carries through with the DOCA. A DOCA will detail things like assets and properties to be used to repay creditors, which debts will be cleared, and the order of repayments to different creditors.

DOCAs can end up giving companies a second chance at survival, or they could end up serving to delay eventual liquidation to allow the creditors maximise their returns. If a DOCA isn't signed (executed) by the company within 15 business days after the creditors vote for it, the company goes automatically into liquidation.

21. What happens with voting and passing resolutions at the creditors' meetings?

Creditors play a key role in the outcome of the voluntary administration process, and this happens largely at the creditors' meetings. At creditors' meetings, the chairperson (usually the administrator or a member of his/her team) can take a simple vote based on the voices or by a show of hands. If this gives an inconclusive result or if the creditors request it, the chairperson can put the vote to a poll.

The poll outcome is based on a majority in both numbers and value (value of debt). This means for a poll to pass a resolution, first, more than half the creditors have to vote for the resolution and, second, creditors who are owed more than half the total debt owed vote in favour of the resolution. If there's a tie, the resolution fails unless the administrator exercises his/her discretion to make a casting vote to determine the outcome.