What is Voluntary Administration?
The voluntary administration laws have been in place since 1993. They are designed to assist a company to survive where it might otherwise fail. Or, if business failure cannot be avoided, to improve the dividend to unsecured creditors over what is forecast to occur from liquidation.
The voluntary administrator is a registered liquidator who owes his or her duties to the general body of creditors of the company. The administrator carefully reviews the medium-term history of the company, its trading performance, current financial position and causes of its difficulties. Where a DOCA is proposed for the company, the administrator performs an assessment of the comparative returns forecast to flow to creditors from the DOCA, versus the alternative return that may occur in a winding up. A recommendation is made to creditors by the administrator, based on the administrator’s independent investigations of the company’s affairs, as to whether the proposed DOCA is in creditors’ best interests, or whether creditors would be best served if the company was wound up.
As independence is the cornerstone of the insolvency profession, creditors can rely on the administrator’s independence in forming their own judgement about the DOCA proposal. In other words, creditors can be confident that the appointed administrator is not acting for the company’s directors or seeking an outcome beneficial to them.
A company does not need to actually be insolvent when the directors decide to appoint an administrator. There need only be an apprehension of future insolvency.
Voluntary administration is usually entered into when the directors have an intention to propose a DOCA. But on occasion there may be other commercial advantages in appointing an administrator even where there is no intention to propose a DOCA. Administrators enjoy a range of protections from creditor action during the administration period. These assist the administrator to manage the company’s affairs and formulate a proposal for its future without the constant threat of litigation or other recovery proceedings by creditors hampering the administrator’s work.
Sometimes directors use the voluntary administration process as an alternative path to liquidation, when for example, the directors are of one mind (that the company should be liquidated) but shareholders do not hold the same view. In small companies, two directors who are also shareholders may have a falling out, with one resigning as a director, leaving the other person in place as the sole remaining director. If the two people cannot agree or are not on speaking terms, it is unlikely they will cooperate in their capacity as shareholders, to voluntarily appoint a liquidator.
However, because an administrator is appointed by a majority vote of the board of directors (rather than the shareholders), the sole remaining director in this example can appoint an administrator without the consent of the former (resigned) director. If no DOCA is proposed, the company would most likely proceed to liquidation at the end of the voluntary administration process (generally 4 or 5 weeks).