COVID-19 has been in Australia for two years, and although a series of subsidy measures have been implemented, the pandemic has still brought difficulties that many businesses find hard to overcome.

If your company is struggling to stay afloat, or it may already be insolvent, you could consider voluntary administration.

Voluntary administration is an insolvency procedure in which an external party manages the company’s assets while the company is being restructured. Businesses choose this process in the hope of avoiding liquidation. Today we’ll look at how voluntary administration works.

What is voluntary administration?

Voluntary administration is a restructuring process that maximises the possibility of a struggling company continuing to exist. At the very least, voluntary administration can provide a better return to the company’s creditors.

Unlike liquidation, where the company’s business ends, voluntary administration allows your company to continue trading while the administrators assess whether it can survive. While the administrators take over the management of the company, the company’s directors continue to perform their day-to-day duties.

Under the powers conferred by law, administrators have approximately 15 to 20 business days to investigate the company’s viability and put forward a solution for creditors.

What does voluntary administration involve?

The voluntary administration process is divided into four stages:

1. Appointment of administrators

The first step in voluntary administration is appointing administrators. If your company’s directors consider that the company is, or may become, insolvent, they will make a proposal in writing. This may also occur where a secured creditor holds a security interest over all or substantially all of your company’s property.

2. Creditors’ meeting

The administrators will convene the first meeting of the company’s creditors within 8 days of being appointed. The administrators will further investigate the company’s affairs in order to make an informed decision on which of the following options is in the best interests of the company’s creditors:

a Deed of Company Arrangement (DOCA);

placing the company into liquidation by way of creditors’ voluntary liquidation; or

returning the company to the directors (which is quite rare).

3. Second creditors’ meeting

Once the administrators have decided how they believe the company should proceed, a second meeting of the company’s creditors will be held. This meeting will generally be held within 20 business days of the administrators’ appointment. At this meeting, the administrators will provide:

a company report;

their assessment;

details of the DOCA (if necessary)

The creditors must then vote to decide which option they wish the company to implement.

4. Putting the plan into action

After the vote, the administrators will proceed with the option chosen by the creditors.

Creditors

After the administrators are appointed, the accounts of unsecured creditors will be frozen, and their contracts with the company generally remain in force.

The appointment of administrators may conflict with the interests of secured creditors, meaning they are unable to enforce their security interests throughout the administration period. If their security interest does not cover the whole of the company, they need to hold a substantial part of it to have 13 business days to decide whether they wish to enforce their security.

Voluntary administration during the COVID-19 pandemic

Because voluntary administration moves quickly, it must be borne in mind that administrators have only a short time to properly assess a company’s viability — and the situation may be even more difficult if your company has been affected by COVID-19. In such circumstances, you can apply for an extension of time.

A court recently approved additional time for administrators, allowing them to carry out the tasks necessary to investigate a company’s viability. This was because COVID-19 limited the administrators’ ability to conduct their investigations.

Is voluntary administration the only option?

Voluntary administration is not necessarily your only option.

Seeking help from an insolvency lawyer can also help you determine your company’s viability.

This approach can be taken before your company enters voluntary administration or liquidation.

Handing the company directly to a liquidator through members’ voluntary liquidation is also an option. This process involves:

the company being wound up;

the assets being taken into account;

a specific distribution plan for creditors

Conclusion

If your company is struggling during COVID-19, you may need to consider voluntary administration. It is a restructuring strategy that can give your business the best chance of survival. In the current exceptional circumstances, certain situations may extend the time administrators spend carrying out a voluntary administration. If you have any questions about voluntary administration, please contact us.