What is voluntary administration?
Voluntary administration is a process adopted to provide businesses or companies that are insolvent (or on the verge of insolvency) an administration that can resurrect the operations or continue the existing operations. Voluntary administration usually lasts for a period of 30 days.
Adopting voluntary administration provides the company a chance to restructure to avoid liquidation while it is undergoing cash flow and solvency issues. Voluntary administration provides a company an opportunity to maximise their probability of existence in the market. All aspects of voluntary administration are governed by the Corporation Act 2001 (Cth).
Voluntary administration is a process of 25-30 days when an administrator holds a meeting with the creditors to determine the distribution of the company’s assets. During this period, the company should advertise its status with (“Administrators appointed’) after the business name. Under voluntary administration, two meetings are conducted within eight days and two to three weeks after the appointment of the administrator. This period does not allow the directors to deal with the assets or to undertake managerial operations. It aims to provide time to the company to restructure without dealing with creditors, suppliers or landlords.
A company may require voluntary administration if it has overdue taxes, liquidity ratio below 1, is experiencing continuous losses and is unable to raise funds or to access alternate finance options. While a voluntary administrator works, the debt recovery and possession of assets cannot take place. Further, the voluntary administrator is required to pay dividends according to section 556 of the Corporations Act. The process of voluntary administration may affect the creditors, landlords, and employees in several ways. For instance, secured creditors have 13 days to exercise their security, otherwise, they are bound by a moratorium for the period of voluntary administration. For unsecured creditors, claims for charge can only be made with the consent of the administrator.
However, creditors may pass a resolution to either accept a proposal for a proposed Deed of Company Arrangement or end the voluntary administration to give the control back to the directors. Creditors may also choose to liquidate the company.
Landlords are not allowed to recover their property during voluntary administration, and they cannot evict the administrator if the process has commenced.
The administrator is required to pay out the assets to ongoing employee salaries. Further, a voluntary administrator must pay the employees according to their existing contract or enter a new contract.