Navigating financial distress is a daunting challenge for any business, but voluntary administration offers a potential lifeline. This process provides struggling companies with temporary protection from creditors, enabling an independent administrator to assess the company’s financial position and explore recovery options. By pausing immediate creditor claims, businesses gain crucial breathing room to consider paths that could preserve their operations and protect stakeholder interests.
One key outcome of voluntary administration is the possibility of implementing a Deed of Company Arrangement (DOCA). This tailored agreement allows a company to restructure its debts and operations while continuing to trade. A DOCA benefits creditors by often offering better returns than liquidation while giving the business a chance to recover. Together, voluntary administration and DOCAs provide a structured way for businesses to address financial difficulties while pursuing long-term viability.
What is Voluntary Administration?
Voluntary administration is a process that helps struggling businesses by providing a short-term respite from creditors under a specially-appointed administrator. The administrator’s primary role is to assess the company’s financial position and determine whether the business can be saved, or whether liquidation is the only viable option.
In many cases, the administrator will investigate restructuring opportunities, which may include negotiating with creditors or finding new investors. Voluntary administration provides a protective shield from legal actions, allowing the business to focus on turning around its situation without the immediate pressure of creditor claims.
What is a DOCA?
A Deed of Company Arrangement (DOCA) is an accord between a company and its creditors, to outline how the business will continue trading while settling debts. If the administrator believes the company can be saved through restructuring, they will propose a DOCA. This arrangement often involves:
- Reduced payments to creditors (i.e., settling debts for less than what is owed)
- An extended period to pay off debts
- New management structures or operational changes
- Ongoing support from shareholders or investors
DOCA vs. Liquidation
While liquidation is often seen as the final step for a company facing financial trouble, it’s not the only option. Voluntary administration gives companies the opportunity to avoid liquidation and work towards a solution that benefits both the business and its creditors. Here are some of the key reasons why a DOCA may be preferred over liquidation:
Preserved Operations
Unlike liquidation, DOCAs allow the company to continue operations, preserving jobs and protecting the company’s brand. This is particularly important for businesses that have a loyal customer base or a unique offering that could succeed with the right restructuring.
Maximising Creditors’ Returns
Creditors can receive a higher return on their debts compared to liquidation, where they might just receive only a fraction of what they are owed. With a DOCA, the company has the opportunity to generate revenue, which can be used to pay creditors over time.
Flexibility for Creditors
A DOCA allows creditors to negotiate terms that may be more favourable to them than the forced liquidation process. This gives them a chance to recover a portion of the owed amount while helping the business restructure for long-term sustainability.
Debt Restructuring
The DOCA helps the company negotiate with creditors to ease the debt burden, such as partial debt forgiveness or extended payment terms.
Avoiding Asset Liquidation
In cases where the company holds valuable assets, such as intellectual property or a well-established brand, a DOCA allows the business to retain instead of selling these assets.
Billson’s Brewery: A Case Study in Voluntary Administration and DOCA
One of the most notable recent cases in Australia involves Billson’s Brewery, located in Beechworth, Victoria. In July 2024, Billson’s Brewery entered voluntary administration under McGrath Nicol due to financial difficulties exacerbated by COVID-19 impacts, operational challenges, and increasing costs. This historic brewery, which dates back to the 1860s, has been a well-known part of the Beechworth community.
However, like many small businesses, it faced difficulties in managing its cash flow and debt obligations despite generating $105m in earnings for FY23. It had over 200 staff at the start of the year and was targeting $150m in FY24 revenues but started cutting back the team to under 100 halfway through Q1 2024. The McGrath Nicol administration team said strong competition, excess inventory, and production problems complicated matters, even additional funding from NAB was not enough to turn things around.
In discussing a solution, McGrath Nicol proposed for Billson’s to be either liquidated, end the administration period, or to set up a DOCA. In the end, creditors voted for the latter option with consent from Billson’s Holdings. By that time, Billson’s Brewery had been entertaining seven non-binding offers and an unknown bidder expressed interest.
Under a proposed DOCA, Billson’s Holdings and brewery managers Cowan Pty Ltd, owned by the couple team of Nathan and Felicity Cowan, will hold a going concern sale for Billson’s Brewery’s premixed alcoholic drink business and certain intangible assets in January 2025. Billson’s Holdings owns those assets and selling them will finance the DOCA. The DOCA, will in turn, help recapitalise Billson’s Beverages and operate as a new brand using assets not covered in the going concern sale.
The final terms of the DOCA are being assembled under another creditors meeting slated for early December 2024.
Why Billson’s Brewery Landed a DOCA
Billson’s Brewery’s successful attempt to avert liquidation is a direct result of the opportunities provided by voluntary administration and the DOCA process. The brewery’s ability to turn around its situation hinged on several factors:
Strong Brand and Market Presence
Billson’s Brewery had a loyal customer base and a long-standing reputation in the local community, with the main facility offering guided tours. This made it an attractive business for investors, who saw potential in preserving the brand and reviving its operations.
Management’s Willingness to Restructure
The brewery’s management was proactive in working with the administrators to develop a comprehensive plan for restructuring the business.
Support from Creditors
Creditors were open to negotiations and recognised that a DOCA would provide them with a better return compared to liquidation. They were willing to support the company’s efforts to restructure and pay off the debts over time. They are expected to have ample returns – McGrath Nicol stated that priority creditors including NAB will be fully paid off but unsecured creditors’ returns will range between $0.074 and $0.096 per dollar. Observers noted that NAB was owed $12 million.
Conclusion
Voluntary administration and DOCAs provide businesses in financial distress with an opportunity to regroup and rebuild, offering alternatives to the finality of liquidation. By allowing companies to explore restructuring strategies, negotiate with creditors, and preserve valuable assets, these mechanisms can create pathways for recovery that benefit all stakeholders. The case of Billson’s Brewery demonstrates the potential of this process, highlighting how a well-crafted DOCA can help businesses retain operations, protect their brand, and work toward financial stability. While not every company can avoid liquidation, voluntary administration remains a powerful tool for those seeking a second chance.
DISCLAIMER: This article is for informational purposes only and reflects the latest information available at time of writing. AVANTE PARTNERS has no financial interests in the companies mentioned and does not endorse any of their products.
