This article explores what voluntary administration is and how it works.
When it comes to businesses, staying afloat isn’t always guaranteed. Financial storms can hit even the most well-established companies. If your business is facing dire financial straits, voluntary administration can be the lifeboat that helps you navigate these turbulent waters.
What is Voluntary Administration?
Voluntary administration is a legal process designed to provide a struggling company with a lifeline, preventing it from sinking into insolvency and potential liquidation.
In Australia, voluntary administration is governed by the Corporations Act 2001. It allows directors to take proactive steps when their company is at risk of insolvency, with the primary aim of maximising returns to creditors and potentially saving the business.
When to Consider Voluntary Administration
Pulling the trigger on voluntary administration is a critical decision. It’s not a sign of failure but rather a strategic move to protect the interests of creditors, employees, and the company itself.
The following are some situations when you should consider voluntary administration.
Mounting Financial Pressure
When your company is grappling with mounting debts, unpaid bills, or creditor demands that you can’t meet, it’s time to consider voluntary administration. Acting swiftly can help prevent the situation from worsening.
Inability to Pay Employees
If your company can’t pay its employees’ wages or superannuation, this is a clear sign of financial distress. Voluntary administration can help address this issue and provide a path forward.
Creditor Pressures
When creditors are threatening legal action, such as issuing statutory demands or winding-up petitions, voluntary administration can provide a temporary reprieve while a solution is sought.
Declining Business Performance
If your business is consistently losing money, and there’s no clear path to profitability, voluntary administration can help evaluate your options, which may include restructuring or selling the business.
Ongoing Losses and Insolvency
If your company is insolvent, meaning it cannot pay its debts as they fall due, voluntary administration is not just an option but a legal requirement for directors to fulfil their duties.
How It Works
Now that you understand when to consider voluntary administration, let’s dive into the mechanics of how it works in Australia:
Appointment of an Administrator
The process typically begins with the directors resolution to appoint a registered and independent voluntary administrator. This administrator takes over the management of the company from the directors and works to assess its financial position.
Moratorium on Creditor Actions
Once the administrator is appointed, a moratorium is placed on most legal actions by creditors. This means that creditors cannot take legal steps to recover their debts during the administration process, giving the company some breathing room to formulate a plan.
Review and Proposal
The administrator conducts a thorough review of the company’s financial position, operations, and prospects. Based on this assessment, they prepare a proposal for creditors.
The proposal can take various forms, including:
- Deed of Company Arrangement (DOCA). This is a legally binding agreement between the company and its creditors that outlines how the company’s affairs will be dealt with. It can involve a restructuring of debt, repayment plans, or the sale of the company.
- Liquidation. In some cases, if it is clear that the company cannot be saved, the administrator may recommend liquidation, which involves selling the company’s assets to pay off its debts.
- Return control to directors. If no proposal is viable, control of the company may be returned to the directors, and the company may be placed into liquidation.
Creditors’ Meeting
A meeting of creditors is held to vote on the proposal. Creditors can either accept, reject, or modify the proposal. For a DOCA to be approved, it must receive majority creditor support (in terms of both value and number of creditors).
Implementation of Proposal
If the proposal is approved, the administrator implements the agreed-upon terms. This may involve restructuring the business, selling assets, or making payment arrangements with creditors.
Exit from Administration
Once the terms of the proposal are fulfilled, the company exits voluntary administration. If a DOCA was approved, the company continues trading under the terms of the arrangement.
Example
Australia’s dynamic business climate has sadly resulted in some companies being forced to undergo voluntary administration. One recent case worth a look is the situation facing the ANZ arm of American health management brand Jenny Craig.
In early May 2023, the management of Jenny Craig ANZ brought together all employees for a townhall meeting and announced that the company will be under voluntary administration of FTI Consulting effective 9 May 2023.
The move was made after the company’s parent office in the US, Jenny Craig Inc, defaulted on a loan and is now filing for bankruptcy. While Jenny Craig ANZ is a separate arm of Jenny Craig Inc, it will restructure its operations and continue to pay wages under administrative supervision.
“Interest has already been received and we will be working with those parties and stakeholders of the business to secure the ongoing business and provide clarity to its loyal and committed staff and customers as soon as possible,” said FTI representative Vaughan Strawbridge.
Tips for a Smooth Voluntary Administration Process
Navigating voluntary administration can be challenging, but a well-managed process can increase your chances of business survival. These are some tips to ensure a smooth voluntary administration process.
Act Early
Don’t wait until your business is on the brink of insolvency. The earlier you seek help through voluntary administration, the more options you’ll have for restructuring or turning things around.
Seek Professional Advice
Engage experienced professionals, such as insolvency practitioners and lawyers, who specialise in voluntary administration. They have the capacity to lead you through the process and assist you in making well-informed choices.
Maintain Open Communication
Keep lines of communication open with employees, creditors, and other stakeholders. Transparency can foster goodwill and cooperation during the administration process.
Collaborate with the Administrator
Work closely with the appointed administrator to provide them with accurate and timely information. Their ability to assess your business’s viability depends on the quality of the data they receive.
Explore All Options
Consider all available options, including restructuring, DOCA, or liquidation. Your administrator can help you evaluate which path is most suitable for your circumstances.
Employee Entitlements
Ensure that unpaid employee entitlements, such as wages and superannuation, are given high priority in any proposal or arrangement.
Be Prepared for Challenges
Not all creditors may agree with the proposed solution. Be prepared for negotiations and compromises during the creditors’ meeting.
Monitor Progress
Stay involved and monitor the progress of the administration process. Regularly review the administrator’s actions and outcomes to ensure your interests are protected.
Plan for the Future
Use the administration period as an opportunity to reevaluate your business model, financial strategies, and market positioning. Implement changes that will increase your chances of long-term success.
Learn from the Experience
Regardless of the outcome, the voluntary administration process can provide valuable insights. Use these lessons to make your business more resilient and better prepared for future challenges.
DISCLAIMER: This article is for informational purposes only and is not meant to constitute official business advice. AVANTE PARTNERS has no relationships with any business administrator service or companies undergoing voluntary administration. Please consult a business coach or corporate solicitor.