Voluntary Administration

Since its introduction in 1993, voluntary administration has become an important method of reorganising the affairs of an insolvent company.  Voluntary administration is an interim insolvency administration regime governed by the Corporations Act.

 

The statutory purpose of voluntary administration is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

• maximises the chances of the company, or as much as possible of its business, continuing in existence; or
• if it is not possible for the company, or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

Only a Registered Liquidator may be appointed as a Voluntary Administrator.

A Voluntary Administrator may be appointed by:

• the company itself;
• a person who is entitled to enforce a security interest over the whole, or substantially the whole of a company’s property; or,
• a Liquidator appointed to the company.  This occurs only rarely.

Most voluntary administrations result from a meeting of the company’s directors at which resolutions are passed that the company is insolvent, or likely to become insolvent, and that the company appoint a Voluntary Administrator.  Such meetings can usually be convened relatively quickly and cheaply.

The process of a typical voluntary administration is as follows:

• the first meeting of creditors is held within eight business days of the appointment.  At that meeting, creditors may resolve to appoint a Committee of Creditors and/or replace the Voluntary Administrator;
• the Voluntary Administrator will investigate the company’s business, property, affairs and financial circumstances;
• the Voluntary Administrator will prepare a report to creditors and set out the Voluntary Administrator’s opinion as to whether it is in the creditors’ interests for the company to:

– execute a Deed of Company Arrangement, if proposed; or,
– for the administration to end; or,
– for the company to be wound up (i.e. to go into liquidation);

• the Voluntary Administrator will then convene the second meeting of creditors.  Whist there is some flexibility in the statutory timetable, typically the second meeting of creditors is held within 20 business days after the voluntary administration begins.  At this meeting, creditors determine the future of the company;
• at the second meeting, creditors may also choose to appoint somebody other than the Voluntary Administrator to be the Liquidator or the Deed Administrator;
• A Committee of Inspection can also be appointed; and,
• the second meeting of creditors may be adjourned by up to 45 business days.

The advantages of a voluntary administration include:

• it can be effected relatively quickly and cheaply;
• following the appointment of a Voluntary Administrator, the control of the company is in the hands of an independent professional;
• there is an immediate moratorium on creditors. However, this moratorium does not apply to a secured creditor who may choose to enforce a security interest by appointing a Receiver;
• a winding up application against the company may proceed only by leave of the Court;
• the company and its directors are given time to formulate a proposal for a Deed of Company Arrangement, which may be in the interests of creditors;
• creditors, not the Court, determine the future of the company at the second meeting of creditors, following consideration of a detailed report into the company’s affairs, prepared by the Voluntary Administrator;
• landlords are unable to take possession of leased property used by the company during the voluntary administration; and,
• in most cases, the voluntary administration process is not a lengthy one, so creditors’ rights are not restricted for any substantial period.

Should the company and its directors formulate a proposal for Deed of Company Arrangement, which is accepted at the second meeting of creditors, then all creditors with provable debts are bound by the Deed of Company Arrangement.