Is voluntary administration the silver bullet some practitioners would have you believe?
The crisis brought on by COVID-19 has seen our community fundamentally impacted at all levels, none more so than the business community.
In the early days of the pandemic we saw Virgin Airlines, for example, appoint Voluntary Administrators in seeking to re-work a business model that would, in the words of then-CEO Paul Scurrah, make the airline ‘leaner, stronger and fitter’.
There is a saying in politics that you should never let a good crisis go to waste. The same might be said for at least a number of practitioners in the insolvency / restructuring area.
In particular, it is apparent that a number of players have sought to promote the apparent “silver bullet” to a business’s woes in the form of the promotion of the formal Voluntary Administration (VA) process set down in the Corporations Act 2001 (Cth).
This Guide is not intended or given as legal advice but is solely to provide general information that will hopefully enable you to make informed decisions before and during a potential voluntary administration
From this Guide you should understand:
1.What voluntary administration is…and isn’t
The differences between voluntary administration and other formal restructuring processes, and the role of the appointed Administrator.
2. The role of the appointed administrator
Directors can appoint an accountant practicing in the area of insolvency and restructuring who has been formally registered by ASIC.
3. The voluntary administration process
The highly regulated process and associated time limits.
4. Potential outcomes from voluntary administration
What the research suggests is the most likely outcome for businesses that enter voluntary administration.
5. Alternatives to voluntary administration
New ‘safe harbor’ provisions, liquidation and informal arrangements.
6. Useful sources of information
Supporting information from ASIC and the Australian Restructuring Insolvency Turnaround Association (ARITA).
7. How Ezra Legal can help
We have a team of commercial lawyers who can assist with all aspects of your business restructuring and the insolvency regime.
What is voluntary administration(VA)?
No doubt many business owners will be aware of (if not the detail) the essential concept and (intended) purpose of a VA. That is, a process designed to give a company ‘breathing space’ from its normal operations. When a company is experiencing financial difficulty and cannot pay its debts, the company directors can appoint someone called an administrator. The administrator will then attempt to save the company by organising its assets and liabilities.
It is important to understand the distinction between Voluntary Administration and other formal processes available when a Company is failing or heading that way, in particular:
A secured creditor (normally a Bank or other finance provider or sometimes the court) appoints an independent person to take control of a company’s assets. The appointed receiver sells enough of the company’s assets under his or her control (by reference to the security document or mortgage). Importantly the company continues – although in reality receivers are closely followed by VA’s or Liquidators.
The winding up of a company and appointment of a Liquidator where the business usually ceases to trade immediately and an investigation into the company occurs and assets are ultimately distributed to creditors.
It is important to be aware that ‘Bankruptcy’ is a process where individuals (rather than companies) have an independent person appointed to assess debts and assets and distribute the proceeds of those assets to creditors.
The role of the Administrator
A board of directors – or sole director in such circumstances – is entitled to appoint a nominated VA, an accountant practicing in the area of insolvency and restructuring who has been formally registered by ASIC.
The VA process is different to appointing a Liquidator. Normally the appointment of a Liquidator stops the business in its tracks. It ceases trading and the Liquidator has the job of selling the assets, firing the employees and taking any recovery action against directors. The VA process in theory tries to avoid this.
The Administrator, as they are usually referred to, upon consenting to be appointed, and a resolution of directors being passed, effectively takes over the running of the business for a period of time.
Importantly, the Administrator will likely only accept an appointment if he or she is comfortable that their fees and costs will be covered – either through the cash and assets which the business has at the time of the appointment or on the provision of a nominated sum by the business or a director of the business, to cover those fees and costs.
Of course, what that nominated sum might be is very much dependent on what work the Administrator believes will be required to complete the job, including potentially:
- complying with some very stringent legislative bookkeeping and reporting obligations;
- the costs of running the business and what revenue might be generated;
- an assessment of future cashflow;
- what investigations might be required including the need to understand the history of the business;
- identify assets which can be utilised or recovered; and
- the need to formally investigate individuals involved with the affairs of the Company and consider possible recovery action against individuals in certain scenarios – particularly where the VA process will likely be replaced by a liquidation process
A fail-safe respite?
A business owner might reasonably believe that the appointment of an Administrator is a fail-safe way of simply ensuring he or she is protected (from possible action by unpaid creditors) and a VA will allow an opportunity for the business to essentially “take a breath”, ride the current crisis, stave-off creditors, keep employees and, once trading normalises, the Administrator will take their reasonable share and hand the business back to the director, who will continue to run it in the successful fashion which was the case prior to the current crisis.
Of course, as with most things in life, the reality is not so simple. Indeed, in the case of the VA process, the statistics belie the giddy intentions of the legislation.
For the purpose of this Guide we are focused on Small and Medium size Enterprises (SMEs) – not the likes of Virgin Airlines with its 16,000 employees and the government looking over your shoulder for a resolution.
The Australian Bureau of Statistics (ABS) uses the following definition based on the number of persons employed in a business:
- a micro-business employs between 0-4 persons
- a small business, between 5-19 persons
- a medium business, between 20 and 199 persons; and
- a large business employing 200 or more persons 
The ATO defines an SME as one with a turnover of less than $10M p.a.
A highly regulated process
The VA process is highly regulated and the time limits are tight
A First Meeting of creditors is required within 8 business days of the appointment.
At the Second Meeting (generally 20 business days after appointment) a decision is required to be made in relation to 3 options:
- Give the business back to the directors;
- Enter into some arrangement with creditors through a deed of company arrangement (DOCA); or
- Put the company into liquidation.
It is extremely important that directors understand that Administrators are ultimately not there to help them – their primary obligation is to Creditors of the Company.
So often we have seen in our practice a disillusioned director who feels duped by the “bloke I gave the job to”.
Whilst to be clear it should be understood that the Administrator is bound by the legislation and the law generally to prioritise the interests of creditors, perhaps that point is sometimes not made so clear in that initial meeting with the practitioner prior to appointment – and many directors walk out wrongly believing that the Administrator is there to save their bacon – when, in fact, nothing could be further from the truth.
Trading the business
But there is almost certainly the most important decision of all which is to be made by the Administrator the moment he or she is appointed
– do I continue to trade the business?
So despite what the Administrator might have said at that pre-appointment meeting about wanting to make sure the business continues, wanting to keep the employees on board etc, once the resolution is passed by the directors the Administrator, who immediately becomes personally liable, will scour the books and if they detect anything from that point which might be at odds with the information provided prior to appointment, and which potentially puts them at risk of being liable for the debts incurred by the Company following appointment, including employee costs, they will pull the pin on the business at that moment.
Administrators will assess very quickly the cost and benefit of the various options available at the Second Meeting.
Be very clear – the business going back to the directors is far and away the least likely of those options.
Whilst the statistics for VA results are (for reasons unknown) not readily available there is recent research which makes for grim reading for any director expecting the VA process to be the silver bullet which saves them from bankruptcy.
A study in 2014 looked at a cross-section of arrangements arising out of voluntary administrations to assess the outcomes for companies and creditors:
- Creditors received, on average, 5-8 cents on the dollar;
- 72 per cent of arrangements were ‘compromises’ which might be thought of as ‘glorified liquidations’ where the business no longer trades
In 2015 the Productivity Commission reinforced this point showing that, on the basis of ASIC statistics:
- 37 per cent are deregistered within two years of the commencement of a voluntary administration;
- 57 percent are deregistered within three years;
- 70 per cent are deregistered within four years; and
- 78 per cent are deregistered within five years.
Alternatives to voluntary administration
The amendments made by the Federal Government (applying from 25 March 2020) to account for the collapse of the business environment during the height of the COVID-19 pandemic – including an extension of the statutory demand period from 21 days to 6 months and an increase in the minimum indebtedness form $2,000 to $20,000 – and the fact that creditors generally are less likely to initiate formal recovery action in such an environment – meant that some of the urgency usually associated with the appointment of an administrator to a Company was temporarily removed.
In September 2020, however, personal liability for directors for trading whilst insolvent resumed at the same time as Government relief measures fell away. So once again, Directors facing even a hint of uncertainty surrounding financial viability need to consider and plan for potential options should their organisations be facing financial challenges.
Insolvency is a stigmatised term but directors should not be afraid of restructuring techniques. If planned early and with good advice, many restructuring options allow businesses to keep trading and employees to keep their jobs. Done proactively, in a controlled process, the strategic use of restructuring tools can save companies from liquidation. Potential options include:
Safe Harbour provisions
New “safe harbour” provisions enacted in 2017 may in theory also provide assistance, although the reality for most small business owners is that they neither have the management capacity nor the financial support to implement the budget / cashflow / management reviews required to be undertaken by an independent expert at significant cost, and where the benefit both to the business and the exposure of the directors to personal liability remains very unclear.
In some cases liquidation is the best option – particularly for employees who will usually have resort to the government entitlements scheme to meet outstanding wages and some leave/super entitlements – although directors should seek advice on their exposure to personal liability in particular.
If a business can be saved – if it is just a matter of “holding down the fort” whilst this crisis passes, then informal arrangements might be the best way forward.
Useful sources of information
Other useful resources include:
- ASIC – INFO Sheet 74 – Voluntary Administration: A Guide for Creditors
- ASIC – INFO Sheet 39 – Insolvency information for directors, employees. creditors and shareholders
How can Ezra Legal help?
Our two senior practitioners, Michael Fabbro and Damian McGrath, have over 50 years combined experience in the area of business restructuring and the insolvency regime.
To find out how we can assist you with trading your business, contact Ezra Legal today.
Our services include:
- Initial assessment of your risks and options under the Corporations Act;
- Expertise across all jurisdictions;
- Accurate, up-to-date and timely support.
We have outstanding experience in bankruptcy, insolvency, and debt recovery.
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