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Voluntary Administrations

What is a voluntary administration?

Voluntary administration (VA) is a process under the Corporations Act, where a caretaker (the voluntary administrator) takes control of the company while it is given a chance to propose a resolution to its financial problems. The period of VA runs for about 4 to 6 weeks and results in a meeting of the company's creditors who decide on the future of the company.

Why appoint a voluntary administrator?

A company will appoint a voluntary administrator when it is insolvent, and where doing nothing else could result in the company being wound up, or the directors becoming personally liable for insolvent trading or taxation debts. The appointment is made to give the company some time to try to resolve its financial problems by proposing a deed of company arrangement (DOCA).

Will appointing an administrator stop a current winding up application?

No, but it will stop new applications being made. It will be up to the Court to decide whether a current application should be dismissed, adjourned or whether it should proceed. It is not uncommon for the Court to adjourn winding up applications until after the second meeting has been held, then dismiss the application if a deed of company arrangement is accepted or the company is wound up at the meeting.

Will the company keep trading during a VA?

The conduct of any business will be under the control of the administrator, who will decide whether the company keeps trading or not. Trading will continue if the business may be saved under a deed of company arrangement or may be sold as a going concern. The administrator has the power to cease trading if it is uncommercial to continue, there is no real chance of saving the company, or there is no chance of continued profitability or selling the business as a going concern.

Who controls the trading of the business?

Any trading of the business will be under the control of the administrator. The administrator may ask for the director's assistance and will normally retain staff to undertake the day-to-day activities. But authority to incur debt, enter into contracts and make payments rests solely with the administrator.

What meetings are held during the VA?

Two meeting are held during the VA period. The first meeting is held within 8 business days of the appointment and has two main purposes. They are to give an opportunity to the creditors to replace the administrator with someone else, and to decide whether a committee of creditors should be formed to assist the administrator. The second meeting is held about 4 to 6 weeks after the appointment to decide the future of the company.

Do creditors need to attend VA meetings?

No. Creditors can ignore the meeting process and still prove for a dividend. Creditors can appoint proxies to represent them if they do not want to attend meetings but want their voice heard. But creditors are bound by any resolution passed at a meeting (including the acceptance of a DOCA), whether they attend or not.

Do directors need to attend VA meetings?

No. Nothing in the Corporations Act obliges a director to attend a meetings of creditors. Directors are always made aware of the meetings and may attend if they wish. Sometimes it is beneficial to have directors attend a meeting, particularly if they are trying to have creditors accept a proposal for a DOCA. It is not uncommon for a director not to attend meetings if there is no proposal for a DOCA.

Will a VA stop Personal Guarantees being exercised?

Holders of personal guarantees will not be able to initiate collection proceedings against a guarantor that is associated with the company during the administration period. This restriction ceases at the end of the VA period regardless of whether a DOCA is accepted or the company is wound up.

What happens to leases during a VA?

Lease contracts in the name of the company come under the administrator's control. The administrator will have to decide whether the business requires the leased asset, or whether to hand it back to the leasing company. This decision will usually be made within 7 days of the appointment. If a deed is being proposed or there is continued trading, the leased assets may be kept for the administration period.

How does a VA end?

The usual ending is the holding of a second meeting of the company's creditors. The creditors will decide the future of the company at this meeting. There are three options:

(i) any proposed deed of company arrangement can be accepted (the administration will end with the signing of the deed);
(ii) the creditors can resolve that the company be wound up (the liquidation will commence at the conclusion of the meeting); or
(iii) the creditors can resolve that the administration end and the company be passed back to the directors.

Administrations can also end by:

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last updated: 17.1.2008