Recession looming – is voluntary administration an option for my business?

If your business is struggling to pay its creditors, a question that frequently arises whether there are options to save your business.

Recession looming – is voluntary administration an option for my business?

Whether your business is struggling to pay its creditors due to the impacts of COVID-19 or for any other reasons, a looming question arises as to whether there are any options that can be undertaken to save your business. One such option worth exploring is a process called Voluntary Administration (“VA”).

 

What is VA?

VA is a regime introduced into the Corporations Act 2001 (Cth) by the Corporate Law Reform Act 1992 (Cth). It is a process whereby your company is placed in the hands of an independent administrator who seeks to maximize the chance of your company surviving. However, if your company does not survive, the administrator will seek to maximize your company’s capacity to pay off its debts.

 

Why should you consider adopting VA?

If your company is failing to pay its creditors, VA is an option worth considering because it offers an opportunity for you to save your business. It does this by providing your company with a variety of benefits.

 

Benefit 1 – Freezes claims on company assets

Firstly, a moratorium on claims is automatically established once VA begins. This freezes claims on your company’s assets meaning that creditors cannot enforce their debts on your business’ assets during VA. If VA was not entered into, your company will likely be wound up in order to meet these debts.

 

Benefit 2 – Removes the risk of insolvent trading

Secondly, VA removes the risk of directors incurring liabilities under the insolvent trading provisions of the Corporations Act 2001 (Cth). Under the Act, directors can be held personally liable for debts incurred in circumstances where they should have known, or did know that the company is insolvent or – as a result of the debt – would be insolvent. In such circumstances, directors are generally prohibited from incurring further debt – through loans for example – thereby limiting the options available to save the company.

However, if the company is handed over to the administrator, options – in order to save the company – can be pursued without incurring liability under insolvent trading provisions. Alternatively, if a Deed of Company Arrangement (“DOCA”) is entered into, directors can avoid any claims on insolvent trading.

 

Benefit 3 – Continued trading

Lastly, VA also allows for your company to continue trading in accordance with the administrator’s directions or under the terms of the DOCA.

 

What are the potential outcomes of VA?

There are several potential outcomes of VA for your company.

 

Outcome 1 – Hand company back to directors

Firstly, your company may be directly handed back to its directors. This occurs after all the company’s debt has been repaid.

 

Outcome 2 – Deed of Company Arrangement (‘DOCA’)

Secondly, your company may enter into a DOCA – which is a contract between the company and its creditors that sets out the conditions in which the company will operate henceforth. A DOCA deals with the manner in which the business is to be handed back to the directors, how the company will operate, what assets are to be sold or retained, and when and how much the creditors will be paid.

This arrangement is usually monitored by the ‘deed administrator’ – who is usually the voluntary administrator.

This arrangement is binding on all creditors of the company along with its officers, members, and administrators.

 

Outcome 3 – Liquidation

Thirdly, your company may enter liquidation. This occurs under 3 circumstances:

  • Where – during VA – the company’s creditors resolve for the company to be wound up;

  • Where the company fails to execute the DOCA approved by the creditors; or

  • Where the company’s creditors pass a resolution to terminate the DOCA and resolve that the company be wound up.

 

How can we help your business?

If your business is suffering from financial hardship, VA is certainly an option that should be considered to save your business. If your business wishes to enter VA, it is important to seek legal and financial advice prior to doing so.

Corney & Lind can offer you tailored, timely advice to help you assess all your options – including VA – when navigating challenging financial circumstances.

This article was written by Barry Klopper and Ervin Hii (student placement)