When a company is unable to pay its debts timely, directors often have at their disposal a legal solution that protects the company while a turnaround plan is developed. In Australia, with voluntary administration, a third-party independent administrator steps in to take control of the company, looks into the company’s finance structure, and plays a role in the determination of what is in the best interest of creditors. The aim is either to save the business or to get a better return for creditors than what would be achieved through immediate liquidation.
For directors, creditors, employees, and suppliers, the important issue is what happens next. In this article, the process explains the full process, key legal steps, and results that play out when a company goes into administration in Australia.
A useful deeper legal resource taking place this topic is understanding voluntary administration in Australia, which provides added insight into the lawful framework.
What Is Voluntary Administration in Australia?
In Australia there is the practice of voluntary administration, which is a formal insolvency process mainly covered by Part 5.3A of the Corporations Act 2001 (Cth). It is a way for troubled companies to get a reprieve in which, at that time, an independent administrator determines if the company can be saved.
Directors usually go ahead with the process when they determine that the company is either already broken or will soon be.
Common warning signs include:
- Ongoing cash flow shortages
- Unpaid supplier invoices
- Loan defaults
- Tax debts building up
- Employee wages becoming difficult to meet
- Pressure from creditors or legal claims
Rather, at the first sign of trouble, directors may turn to an administrator, which in turn may preserve options and reduce the risk of insolvent trading.
What Happens Immediately After Appointment?
Control Shifts to the Administrator
At the start of administration, the control of the company passes to the voluntary administrator.
The administrator now controls:
- business operations
- company assets
- bank accounts
- legal affairs
- negotiations with creditors
Directors’ roles are put on hold during this time.
This independent oversight, in turn, sees to it that decisions are made for the better good of all creditors.
A Moratorium Protects the Business
In Australia, with voluntary administration comes a legal standstill, which affects most creditor actions.
This usually stops:
- lawsuits from continuing
- debt recovery actions
- asset repossession
- enforcement of unsecured claims
- landlord recovery actions in many cases
This moratorium allows the company time to restructure away from the issue of constant legal action.
The Administrator’s Investigation Phase
Upon appointment, the administrator does a quick yet in-depth review of the company.
This includes examining the following:
- balance sheets and liabilities
- cash flow forecasts
- secured and unsecured debts
- employee entitlements
- contracts and leases
- asset values
- possible sale opportunities
The goal is to see if the business is still going.
The administrator will also look at what it takes to keep the business trading for a while, which in turn will preserve value. In many cases the business will continue to operate under the administrator’s care.
For instance, staff will continue to work, customer orders will still be filled in, and suppliers will provide essential services.
Creditor Meetings in Voluntary Administration Australia
First Creditors’ Meeting
The first meeting is to take place within 8 business days of appointment.
This meeting is mainly procedural.
Creditors may:
- Confirm or replace the administrator.
- Form a committee of inspection.
- Get an early look at the company’s situation.
At present that is not what has been decided.
Second Creditors’ Meeting
The second meeting, which is the key decision point, takes place at around 25 business days from the date of the first, subject to court extension.
At this time of the meeting, the administrator presents a report that
- What caused the financial distress?
- estimated creditor returns
- restructuring possibilities
- recommended outcome
Creditors go to the polls on the company’s issue.
Possible Outcomes After Voluntary Administration
Deed of Company Arrangement (DOCA)
DOC is a very common rescue option.
This is a formal agreement between the company and creditors that details how debts will be paid or written off.
It may involve:
- reduced debt settlements
- extended repayment periods
- business restructuring
- asset sales
- third-party funding
A DOCA enables a business to continue operation at the same time as it addresses its liabilities.
Return to Directors
If a company is determined to be in good financial health or is able to survive without formal restructuring, they may put an end to the administration.
Control then returns to the directors.
This is an atypical result, which does happen.
Liquidation
If rescue is out of the question, creditors may go for liquidation.
At that point:
- The company is wound up.
- assets are sold
- Proceeds are doled out by law, which says so.
- The business usually stops trading.
This is the case when debts outstrip asset value.
What It Means for Employees and Suppliers
Employees are at the top of the stakeholder list.
During administration:
- Wages for work done post-appointment are given priority.
- Out-of-work benefits and claims are reviewed.
- Staff may also continue to work if the business does.
Suppliers may face:
- delayed payments
- renegotiated trading terms
- proof-of-debt requirements
- Partial results based on final outcomes.
The administrator’s report is the best source for that information.
Why Early Action Matters
A great benefit of voluntary administration in Australia is timing.
The sooner directors act, the more it is seen that:
- The business can be restructured.
- Jobs can be preserved.
- goodwill remains intact
- creditor returns improve.
- Directors reduce personal liability risk.
Waiting too soon, which in turn removes options and forces the company into liquidation.
Conclusion
When a company goes into voluntary administration in Australia, it is not a given that the business is over. What happens instead is a structured legal process that is put in place to support the company, to put a stop to creditor action, and to determine the best way forward.
In many instances a company may come out of DOCA, return to director control, or go into liquidation based on creditor decisions and financial health. It is seen that early intervention greatly improves results and creditor outcomes.
For directors, creditors, and stakeholders looking for in-depth legal details out of voluntary administration in Australia It is a great resource to look at that in more detail.
