What is Voluntary Administration?

Articles > Small Business

What is Voluntary Administration?

June 11, 2021         Kaitlyn Oliver

Voluntary Administration is a process whereby a company that has become insolvent is administered by an independent party who is placed with assessing all available options to produce an outcome to generate the best outcome for the business owner and those it owes debts to.

Voluntary administration can become necessary process for a company experiencing financial problems and unable to pay its debts. It requires the appointment of an independent registered liquidator, known as the voluntary administrator, who gains full control of the company. The administrator attempts to save the company by administering the company’s assets and liabilities. However, if the company cannot be saved, they aim to obtain a better return to creditors than if the company had closed down immediately. 

What is a creditor?

You are a creditor if the company owes you money. Once a company goes into voluntary administration, there is not much action you can take to obtain your debt. All current proceedings involving the company stop and no further proceedings can start.

Creditors can be secured or unsecured. Secured creditors hold a security interest in some or all of the company’s assets, such as a mortgage, to secure a debt owed by the company. They will be paid second if the company is liquidated, after the payment of unpaid wages and benefits to employees. Unsecured creditors do not hold a security interest in the company’s assets. Their interests will be prioritised after the interests of employees and secured creditors. 

What if I have a personal guarantee?

A person who holds a personal guarantee from the company’s director or the company itself can pursue the guarantor personally if the company enters liquidation and cannot pay its debt. 

Voting at Creditors’ Meetings

You may formally lodge details of your claim with the administrator through a proof of debt form.  A secured creditor may not need to lodge a proof of debt claim if they believe there will be sufficient assets in the liquidation to repay their secured debt. A chairperson, appointed by the administrator, will assess the validity of your claim and your right to vote at creditor’s meetings. However, even if the chairperson finds you do not have a valid claim and cannot vote, you may still receive payment of your debt.

If you are unable to attend a creditors’ meeting, you can appoint an individual to vote on your behalf. You nominate a person to serve as your proxy by filling out the proxy form sent with the notice of the meeting. 

The Process

  1. Appointment of voluntary administrator  

A voluntary administrator is usually appointed by a company’s director(s) after they determine the company is insolvent or likely to become insolvent. This will be done by resolution of the board and in writing. Although more rare, a liquidator, provisional liquidator, or secured creditor may also appoint a voluntary administrator. A secured creditor must have a security interest in all or substantially all of the company’s property to make the appointment. 

  1. First meeting of creditors 

The first meeting must be held by the voluntary administrator within eight business days of being appointed, except if an extension of time is permitted by the court. Creditors are to receive a minimum of five business days’ notice of the meeting. Creditors vote to: 

  • Replace the administrator; or 
  • Create a committee of creditors to work closely with the administrator. 

A committee of inspection’s purpose is to assist the administrator and monitor the process, including approving certain steps and giving directions to the administrator. While the voluntary administrator must have regard to directions, they are not required to comply with them. 

  1. Voluntary administrator’s investigation and report

The voluntary administrator will investigate and report to creditors regarding the company’s business, property, affairs and financial situation. The administrator will report on options for creditors (and employees) including: 

  • Ending the voluntary administration and returning the company to the directors’ control;
  • Approving a deed of company arrangement (DOCA) through which the company can pay all or part of its debts. A DOCA is a binding agreement between a company and its creditors that sets out how the company’s affairs will be administered. 
  • Winding up the company and appointing a liquidator. 

The administrator needs to recommend which option is in the best interests of creditors and then call a second creditors’ meeting. 

  1. Second creditors’ meeting

This meeting usually occurs five weeks after the company enters voluntary administration, although the court will grant an extension for complex voluntary administrations. It is held to decide the company’s future. The meeting must be advertised on ASIC’s Published Notices website.

At least five business days before the meeting, the voluntary administrator must provide creditors with: 

  • A notice of meeting; 
  • The voluntary administrator’s report; 
  • The voluntary administrator’s statement. 

Creditors can vote at this meeting to return the company to the directors’ control. If this occurs, the directors become responsible for ensuring the company pays its outstanding debts. 

Alternatively, creditors may agree to accept a DOCA (signed by the company within 15 business days after the meeting). A DOCA may end when:

  • Obligations under it have been fulfilled and creditors have been paid; 
  • The DOCA automatically terminates after certains conditions are met;
  • The deed administrator calls a meeting of creditors, and creditors vote to end the DOCA; 
  • The DOCA is terminated on application by a creditor, the company, ASIC or any other interested person to the court. 

Another option is for the creditors to decide that the company should go into liquidation. This occurs immediately and the administrator generally becomes the liquidator. 

Key Takeaways

The aim of voluntary administration is to manage a company’s financial affairs for the benefit of creditors. If you are owed money by a company, you may want to become involved in the process. This includes considering your entitlement to vote at meetings and determining your priority in receiving payment of your debt. 

If you have any questions regarding voluntary administration or any commercial legal need, get in touch with us by completing the contact form or by calling 1300 337 997.

About Kaitlyn Oliver

Kaitlyn is a paralegal with OpenLegal while she completes her law degree at UNSW. She has previously worked at Redfern Legal Centre, and the Australian Human Rights Institute.