Voluntary administration is Australia’s primary business rescue regime. This article is Part 1 of a two-part series. This article provides an introductory overview of voluntary administration in Australia, explaining what it is, why entities might enter it and its processes. It is not intended to be used as an exhaustive guide to Australia’s voluntary administration regime and its many nuances.
In Part 2, we consider the impact of voluntary administration on various stakeholders and the potential outcomes for a company in voluntary administration.
Which body of law primarily governs voluntary administration in Australia?
The laws relating to voluntary administration are primarily contained in Part 5.3A of the Corporations Act 2001 (Cth) (Act). The Insolvency Practice Schedule in Schedule 2 of the Act contains additional rules relating to voluntary administration.
In this common law jurisdiction, regard must also be had to judgments of Australia’s various courts concerning the application and interpretation of the Act and other relevant statutory laws and rules.
Overarching purpose of voluntary administration
The purpose of voluntary administration as outlined in s 435A of the Act is twofold:
- to maximise a company’s chances of continuing its business and existence; or
- where it is not possible for the business to continue, to result in a better return for the company’s creditors and members than would occur in an immediate winding up.
Who should consider voluntary administration?
Voluntary administration should be considered by the directors of any companies experiencing financial distress. Indicators of financial distress include (but are not limited to):
- reductions in profit and continuing losses;
- difficulty paying debts when they fall due and payable;
- constraints on borrowing further funds or generating capital;
- low liquidity ratios; and
- an inability to accurately record financial information.
While directors might be tempted to continue to trade the company in difficult times in the optimistic hope things will get better, holding-off entering voluntary administration until it is too late may:
- severely limit the options available to any eventual voluntary administrator to rescue the company;
- while debts continue to pile on, directors potentially open themselves up to insolvent trading liability;
- directors might lose control as to the choice of which insolvency practitioner is appointed administrator because, for example, a secured creditor might appoint a voluntary administrator to the company; and
- directors might no longer have the ability to place the company into voluntary administration if, for example, a creditor has a liquidator appointed to wind-up the company.
Even where a company’s board develops an internal restructuring plan or takes a course of action reasonably likely to lead to a better outcome for the company such as to facilitate a ‘safe harbour’ for directors from personal liability for insolvent trading, these strategies may not alter the underlying fact that a company is insolvent or nearing insolvency, nor prevent a creditor from issuing a winding-up petition or the appointment of a receiver or administrator by a secured creditor in the appropriate circumstances.
Seeking advice from a lawyer with insolvency and restructuring expertise or an insolvency practitioner at the earliest sign of financial distress is highly recommended.
Why is voluntary administration useful?
There are several reasons why voluntary administration is desirable (non-exhaustively):
- Voluntary administration imposes several moratoriums on creditor enforcement action and legal proceedings (discussed below). These moratoriums give companies breathing room to interrogate and reorganise their affairs at large, rather than having to prioritise debts that are due earliest or for which enforcement action is threatened.
- Except in limited circumstances, the company’s creditors will not be able to enforce personal guarantees provided by directors, their spouses, de facto spouses or their relatives.
- Voluntary administration often gives companies the best chance of survival, as it may result in debts being compromised or refinanced, or for onerous leases to be disclaimed.
- Voluntary administration temporarily puts management power in the hands of an administrator (who is an insolvency practitioner) who is experienced at navigating financial difficulty and identifying business strains, which is likely to significantly relieve stress from directors and bring cool-headed independent thinking.
- Electing to enter voluntary administration may provide a director protection from insolvent trading liability.
Commencing voluntary administration
Voluntary administration is commenced through the appointment of an administrator, which can occur in three ways:
- Most commonly, by a resolution of company directors under s 436A of the Act.
- A secured creditor who holds a perfected security interest over the whole, or substantially the whole of a company’s assets, may also appoint an administrator under s 436C of the Act where the right of enforcement has arisen. Such a creditor does not need to establish that the company is insolvent.
- More rarely, where a company is in liquidation, s 436B of the Act allows a liquidator to appoint an administrator if they believe the company is or is likely to become insolvent and that administration would be a better course of action than winding up. Creditors are entitled to challenge the appointment of an administrator by a liquidator under s 447C of the Act and s 90-15 of the Insolvency Practice Schedule (located in Schedule 2 of the Act).
What happens during voluntary administration?
Stays & moratoriums
Entering voluntary administration commences a series of moratoriums (or ‘stays’) on creditor enforcement action. Significantly, during voluntary administration:
- An unsecured creditor cannot enforce against a company’s property (s 440F of the Act).
- Legal proceedings against a company cannot commence or continue (s 440D of the Act).
- Lessors (landlords) and those with an interest in the property of the company in voluntary administration, generally cannot repossess property or equipment, terminate contracts, or collect distress for rent, unless they had taken steps to recover that property before the commencement of administration, or the property is perishable (s 440B of the Act).
- Personal guarantees of company debts provided by the directors, their spouses, de facto spouses or their relatives are unenforceable during the administration (s 440J of the Act).
The moratoriums do not apply:
- with leave (permission) of the court and in some instances with permission from the administrator;
- where a secured party who holds a security interest over the whole, or substantially the whole, of a company’s assets seeks to enforce their security, provided they do so within 13 business days of the commencement of administration under s 441A of the Act; and
- where enforcement action commenced prior to administration.
Meetings to determine a company’s future
Once a company has entered voluntary administration, two creditor meetings must be held. At the first meeting of creditors, an overview of voluntary administration is provided, and a ‘committee of inspection’ may be appointed to oversee the process and assist the administrator if deemed necessary. At the second meeting of creditors, the administrator reports to creditors on their opinion of the best course of action, though creditors are not bound by this when thereafter voting on the company’s ultimate future. The administrator must opine whether it would be in the best interests of creditors for:
- a deed of company arrangement (DOCA), which is similar to a ‘company voluntary arrangement’ in the UK, be executed;
- the administration to end, with the effect that the company be returned to the control of the directors; or
- the company be wound-up.
While the creditor meetings should be held within 8 and 25 days of the commencement of voluntary administration respectively, the court may extend the period under s 447A of the Act. Occasionally, an extension of the administration process can be achieved through the implementation of a ‘holding DOCA’.
For further information about DOCAs, see Part 2 of this article series.
Management & operational changes
While a company is in voluntary administration, the administrator takes over control of the company’s business, property, and affairs under s 437A of the Act. In this regard, Australia’s voluntary administration regime is different to:
- the United States’ Chapter 11 reorganisation process which is carried out by lawyers (not accountants) with significant judicial supervision and is based on a ‘debtor in possession’ model. In Australia, the company directors’ powers are suspended throughout the voluntary administration process, with the restructuring process being spearheaded by an independent insolvency practitioner.
- Singapore’s closest equivalent, ‘judicial management’, which involves significant court oversight through their imposition of a ‘judicial manager’ to serve as the administrator of the company.
In Australia, the administrator may terminate or dispose of company property as they see fit, and is empowered to perform any function, exercise, or power that an officer of the company was previously entitled to. During the administration, further to s 450E of the Act, the company must include the words “administrator appointed” on any public documents. Otherwise, business broadly carries on as normal, effectively under new management – however, an administrator who continues to trade the company will usually do so with the assistance and input of the existing board.
To consider the impact Australia’s voluntary administration regime has on key stakeholders and external parties, see Part 2 of this article series.