A Guide to Voluntary Administration

Voluntary administration is something that you often hear about in the media – there are regularly reports of well known companies entering into voluntary administration. 

But what exactly is voluntary administration?

It occurs where control of a company in financial distress is given to an independent person in order to generate the best outcome for the business. 

Voluntary administration will give a company in this situation some ‘breathing space’ 

Below we go through the process of voluntary administration, and how this could apply to your tech startup in the case that you face financial hardship. 

What are the purposes of voluntary administration? 

In general, the purposes of voluntary administration are either:

• Develop a plan to restructure and re-orgnanise the business with the company’s creditors – this will maximise the chances of the company being able to continue business. This is referred to as a deed of company arrangement (DoCA).
• If restructuring the company is not a possibility, the creditors can make a decision to place it into liquidation and in the meantime protect all remaining assets.

There are a number of variables which may affect the length of the voluntary administration, such as:

• The size of the company
• How complex the company is 
• Whether the company has their affairs in order 
• Whether the outcome (DoCA or liquidation) is clear from the beginning 

How is voluntary administration commenced? 

There are a number of ways in which a voluntary administrator can be appointed to a company:

• By the company itself – this is the most common method of appointment 
• By a secured creditor who has a security interest over the whole of substantially the whole of the company’s property
• By a liquidator of the company if they decide the company is or is likely to become insolvent 

Often there will be multiple administrators appointed to accelerate the process and for convenience.  

Appointment by the company 

Companies may appoint a voluntary administrator in writing if it is agreed upon by the board of directors that the company is insolvent or likely to become so, and if they agree that an administrator should be appointed.

Insolvent trading is a breach of the Corporations Act, therefore voluntary administration may need to be done urgently if the board agrees that the company is insolvent or likely to become insolvent. 

Appointment by a secured creditor 

For a creditor to appoint an administrator, they must hold a security interest over the whole or substantially the whole, of the company’s property.

The court will need to determine that the security interest is enforceable and meets the threshold required. 

A secured creditor has the option to call in an administrative receiver, in order to collect what is owed to the creditor. However, they may choose to appoint an administrator instead with the aim to collect better returns from the company. 

Appointment by a liquidator or provisional liquidator 

A liquidator or provisional liquidator also has the ability to commence voluntary administration of a company. This could occur where the liquidator establishes that the company is insolvent during a member’s voluntary winding up (where the company is solvent and the company is no longer required and serves no purpose), or a winding up ordered by the court, or where voluntary administration would achieve a better outcome for creditors than winding up. 

Eligibility for and validity of appointment 

Administrators must be registered liquidators and must meet the requirements for registration under ASIC, they must also provide written consent to act under the Corporations Act. 

Administrators must not:

• Be biased towards any stakeholder in the administration process 
• Have or had a business or personal relationship with a stakeholder in the administration 
• Be in a position where a conflict of interest could arise in relation to the administration 

Creditors must be provided with a declaration of independence, relevant relationships and indemnities (DIRRI) by the administrator. 

What happens immediately as a result of voluntary administration?

• The administrator acts as an agent for the company, and the company’s business - property and affairs become controlled by the administrator
• The directors of the company have no control over the business
• The business ceases operation
• The administrator must provide written approval if any directors or officers wish to exercise their powers – they however can stay in office
• Shareholders are not able to transfer any shares they have in the company
• Any secured creditors cannot enforce their interests in company property
• Unsecured creditors cannot enforce their interests either without consent from either the administrator or the court
• A PPSA security interest will vest in the company
• During the administration period, any lessors and anyone else who owns property in the possession of the company, is not able to retrieve that said property
• If there are any court proceedings against the company, these cannot continue or be commenced, unless written consent is obtained from the administrator
• There cannot be a voluntary wind up of the company
• Employees may be potentially retained during the administration process, and they can be paid out of the company’s assets
• Contracts are not automatically terminated
• If a creditor has been given a personal guarantee by the director of the company, they are not able to enforce this without leave from the court

What is the voluntary administration process?

Appointment 

• The voluntary administration process is commenced by either the company, a secured creditor or a liquidator 

Beginning of voluntary administration 

• The voluntary administrator is appointed 

Within 8 business days of appointment 

• First meeting of creditors 
• Administrator investigates the affairs of the company 

Within 5 business days before or after the end of the convening period

• Second meeting of creditors – the purpose of the meeting is to decide the company’s future

Outcome of meeting

Potential outcomes:

• The company is returned to the control of the original directors and administrations ends
• The creditors accept a deed of company arrangement 
• The company is put into liquidation and the administrator immediately becomes the liquidator

What are the duties of the administrator?

Some of the duties of the administrator include but are not limited to:

• Investigate the company’s business, property, affairs, and financial circumstances 
• Determine the best outcome for creditors (DoCA, liquidation, or returning to control of the directors)
• Provide to the creditors the recommended course of action 
• Keep books regarding the administration
• Provide information to creditors or members on request
• Consider directions given by creditors 

What are the powers of the administrator?

The directors are required by law to provide to the administrator:

• The company’s books 
• Access to company records
• General assistance if required
• A statement regarding the company’s business, property, affairs and financial circumstances 

The administrator has the power to:

• Sell company property
• Act in the company’s name
• Remove/appoint directors
• Deal with assets 
• Apply for exemption orders 

What is the administrator liable for? 

The administrator is liable for any debts incurred during the administration such as any goods bought, and property hired or leased. As well as this they are liable for the repayment of money borrowed and interest accumulated on the money.

What renumeration is the administrator entitled to?

The administrator is entitled to renumeration as determined either by an agreement between the administrator and a committee of creditors, resolution by the company’s creditors, or the court.

The administrator is permitted to be indemnified in respect of renumeration and expenses, and debts and liabilities acquired during the administration process. 

Is the administrator supervised? 

• Creditors are able to give directions to the appointed administrator, if they do not comply there must be a record of the reasoning 
• Reviewing liquidators may be assigned to review some of the administrator’s actions 
• Creditors may require information, documents or reports from the administrator
• In some circumstances, there administrator can be removed and a new one assigned

The court has supervisory powers in relation to voluntary administration and is able to declare a voluntary administration invalid, terminate the voluntary administration, remove administrators, and give directions, among other things. 

What is the end result of voluntary administration?

The outcome of the administration is determined by the creditors at the second meeting during the process. 

The possible outcomes are the execution of a DoCA, entry into liquidation, or returning the control of the company to the directs (however this option is uncommon).

Final note:

In case of the situation where your business or tech startup ends up in financial distress, it is important that you are aware of the process of voluntary administration and what this entails. 

Voluntary administration is most commonly commenced by the company itself, therefore it is essential that you as a tech startup understand where this process is needed, and the benefits it can provide to your business. 

Insolvent trading is also a breach of the Corporations Act and consequently you need to be aware of when to begin the voluntary administration process to avoid contraventions.

Interested in chatting with us?

Contact us here. Or shoot us an email at hello@biztechlawyers.com.au. And of course you can always pick up the phone +61 2 9043 1376.

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