Voluntary Administration and Deed of Company Arrangement

What is Voluntary Administration?

Voluntary administration is an alternative to liquidation for dealing with an insolvent company’s financial difficulties. It’s a process that provides an opportunity for a company’s business, property and affairs to be administered in a way that:

  • Maximises the chances of a company and/or its business continuing, or if this is not possible;
  • Results in a better return for the company’s creditors than would result from the immediate winding up of the company.

If you want to rescue your company, then Voluntary Administration may be the most appropriate option for you.

When should I appoint an Administrator?

As a company director you have a duty to act in the best interests of your company at all times. If you believe or suspect that your company is insolvent and do not take proactive steps to ensure your company does not incur any further debts, you may be held personally liable for the damage caused to the company as a result of insolvent trading.

If you suspect that your company may be insolvent, you should seek advice immediately. Various options are available for dealing with your company’s financial difficulties. We can discuss your company’s circumstances and help you decide the best option to deal with your company’s difficulties.

How do I know my company is insolvent? 

Your company is considered insolvent if it is unable to pay its debts as and when they fall due. This generally means that if your company is behind in supplier payments, has outstanding and overdue ATO or superannuation debts or owes other amounts it cannot pay, it may be insolvent.

We’ve provided a full list of indicators of insolvency at the following link.

What are the main steps in the Voluntary Administration process?

The administration process usually lasting between 25 and 30 business days and involves the following main steps:

  •  Appointment of Administrator’s, generally by the company’s directors.
  • Notification to all creditors of the Administrator’s appointment
  • First meeting of creditors held within 8 business days of the Administrator’s appointment.
  • Directors formulate and submit a proposal for a deed of company arrangement (“DOCA”) to Administrators if intended.
  • Administrators conduct thorough investigation into company’s affairs, potential realisations and recoveries available in liquidation and a comparison and opinion of the proposal for a DOCA as an alternative to liquidation.
  • Second meeting of creditors held within 25 business days of the Administrator’s appointment for creditors to vote on whether to accept the directors’ proposal for a DOCA.
  • Company executes DOCA within 21 days or is placed in liquidation from that date. The Administrators generally become the DOCA Administrators or the Liquidators.

How do I appoint an Administrator?

If the directors believe their company is insolvent, or will become insolvent, they may appoint an Administrator to their company.

An Administrator may also be appointed by a secured creditor who holds security over most of the company’s property, or by a liquidator or provisional liquidator previously appointed to the company.

How much does it cost to put my company into voluntary administration?

An Administrator is personally liable for any costs he incurs during the period of his appointment. Accordingly, he needs to be confident he will hold sufficient funds to cover these costs and also his professional fees for acting as Administrator.

If your company has sufficient funds and other assets that can be sold to cover the expected administration costs, then it is likely that there will be no up-front costs to the directors or shareholders to appoint an Administrator to the company.

If your company has little or no assets, then an Administrator will generally require that funds be made available to pay his costs of acting as Administrator of the company.

What will happen if I appoint an Administrator to my company?

When an Administrator is appointed to the company:

  • The Administrator will take control of the company’s assets and affairs.
  • Creditors are prevented from taking action to recover the company’s debts during administration.
  • The directors’ powers are suspended, however they have ongoing duties to their company and the Administrator.
  • If the company is operating, the Administrator will decide whether to continue trading the company’s business.
  • Stakeholders will be notified of the Administrator’s appointment.
  • The company’s affairs will be investigated to determine what assets it has and what potential recoveries may be available if a liquidator is appointed.
  • The Administrator will liaise with the directors regarding the proposal for a DOCA.
  • Two creditors’ meetings are held. At the second meeting creditors vote to decide whether the company will execute the DOCA proposed by the directors, or be placed in liquidation.
  • If the DOCA proposal is accepted, control of the company is returned to the directors, the company is required to comply with the terms of the DOCA and the funds received in the DOCA are distributed to creditors by the DOCA Administrator.

What are the benefits of appointing an Administrator to my company?

The benefits for a company entering administration are:

  • Maximise the chances of the company continuing in existence, possibly through a proposal for a Deed of Company Arrangement.
  • Provide for a better return to creditors than liquidation.
  • Limit or reduce the directors’ liability for insolvent trading.
  • Be a way in which a director may avoid personal liability under a Director Penalty Notice issued by the ATO.
  • Creditors are prevented from taking action to recover the company’s debts during administration.
  • An independent person is appointed to take control and review the company’s affairs to provide information to assist creditors determine the future of the company.

What are the main terms of a Deed of Company Arrangement?

A proposal for a Deed of Company Arrangement will generally seek to provide for a better return to creditors than would be available if the company is placed in liquidation through:

  • Voluntary contributions to the company by its directors, members or other parties; and/or
  • The sale of some or all of the company’s assets; and/or
  • Contributions to pay creditors from the company’s future trading profits; and/or
  • Certain creditors agreeing not to claim in the Deed of Company Arrangement e.g. related party creditors.

What happens if creditors accept my proposal for a Deed of Company Arrangement?

A proposal for a Deed of Company Arrangement is accepted if a majority in number and value of creditors vote for it at the second meeting of creditors in the administration. If the proposal is accepted:

  • It is binding on all of the company’s unsecured creditors, however secured creditors such as banks and financiers are not bound unless they agree to be.
  • Control of the company is returned to the directors and it may continue trading without the Administrator’s involvement.
  • The company is required to comply with the terms of the deed of company arrangement which are primarily to make the proposed payments.

Is administration right for my company?

Before appointing an Administrator, you should consider the various alternatives available to best deal with your company’s financial difficulties which may include:

  • Doing nothing
  • Refinancing by directors or external parties
  • Turnaround or restructuring strategies
  • Sale of business and/or assets for fair value
  • Liquidation
  • Voluntary administration and deed of company arrangement

Often directors would like to keep operating the company or its business, or continue using its assets. Or perhaps they are concerned about their personal exposure in the case of an insolvency event impact. We can guide you through the options available to assist you to determine the right course of action for your company.

Failing to take appropriate action may result in directors being exposed to liabilities or committing serious offences. If you’re company is experiencing financial difficulties or you are concerned that it may be insolvent, contact us for a free and confidential discussion to assist you decide whether voluntary administration or another of the above options are right for your company. The key to the best outcomes is acting early.