Voluntary Administration (VA) provides a statutory framework for company directors to reorganise, restructure and rehabilitate a distressed business.
The objective of the VA process is to enable an insolvent company, or a company that may become insolvent, to be administered in a way to maximise the opportunity for the business to continue or where the business cannot continue, results in a better return to stakeholders than an immediate liquidation.
Businesses regularly restructure through the VA process, by way of a third party, often the directors or a major shareholder, proposing a Deed of Company Arrangement (DOCA) to creditors to compromise their debts and restructure the balance sheet to enable the company to continue to trade. A DOCA is a binding agreement between the company and its creditors (financiers, suppliers, landlords, ATO, employees) usually by an upfront and deferred DOCA contribution to compromise creditor claims.
What are the key advantages of a VA?
- Provides a legal framework to provide a company with an immediate moratorium against legal action
- Landlord/lessors cannot take possession of property/leased equipment
- Provides an opportunity for a restructuring plan to be proposed and considered to maximise the return for stakeholders
- Personal guarantee (temporarily) protected
- The company cannot be wound up
- Limit exposure to insolvent trading / personal liability
Who is VA relevant for?
- An insolvent entity with a viable business that needs saving
- A business affected by onerous obligations (i.e. unprofitable contracts, lease agreements)
- Events outside of a company’s control (i.e. COVID-19), resulting in unsustainable build-up of legacy creditors (i.e. ATO)
- Breathing space required for a financial restructure to be undertaken in a structured and stable environment
- Revenue not returning to pre COVID-19 levels, resulting in temporary insolvency
Who can appoint a Voluntary Administrator?
- Generally, appointments are made by the directors The board resolves in writing that, the company is insolvent or is likely to become insolvent, and that the voluntary administrator should be appointed.
- Protects directors from civil penalty provisions relating to insolvent trading.
- May also be appointed by a secured creditor with a security interest in all or substantially all of the company’s property.
- The security interest must have become and remain enforceable,
- Usually a secured creditor would appoint a Receiver and Manager to enforce their security, however in some cases this might not be preferred by the secured creditor.
- It is possible for the Liquidator to appoint themselves. This option may be pursued where the Liquidators consider that a DOCA, would provide a better return for creditors than proceeding with a winding up.
Who is the right Voluntary Administrator for you?
- A Voluntary Administrator needs to make commercial decisions including trading on the business, make quick judgement calls and deal with surprises.
- A key part of the VA is to assist the directors formulate a DOCA which will be voted on.
- A Voluntary Administrator needs to be front and center, always available and deal with difficult and uneasy situations.
- Choose someone who you feel can build rapport quickly, hard working, ethical and independent.
- Choose someone able to slot into any situation (i.e. construction site, hostile situation, board room) etc.
|Relationships with financiers
- If there is a secured creditor, choose a Voluntary Administrator who has strong existing relationships with that lender.
- If there is no relationship, there is a risk the secured creditor appoints a Receiver over the top.
- Separately, the secured creditor has the ability to provide interim funding to the Voluntary Administrator to continue trading the business.
What does the VA timeline look like?
- The Administrator takes control of the company, the director’s powers are suspended and there is a moratorium in place.
- This provides breathing space for the company to prepare a restructuring proposal.
- The Administrator becomes responsible for the company’s affairs.
|1st meeting of creditors
- Creditors vote on whether to replace the Administrator and/or form a committee of inspection.
- Secured creditors retain their rights to formally appoint a Receiver during the first 13 business days.
|VA report and investigations
- The Administrator is required to undertake preliminary investigations, prepare a report and recommendation to creditors which compares the likely outcome of the DOCA proposal versus a liquidation scenario.
- This allows creditors to make an informed decision on the future of the company at the second meeting of creditor.
|2nd meeting of creditors
- Meeting to vote on the future of the company, which requires a majority in number and value to pass the required resolution.
- The meeting can be adjourned by creditors up to a maximum of 45days or via a court application if necessary to give the company and Administrator more time to develop DOCA.
|DOCA, Liquidation or end VA
- The DOCA is binding on all creditors, including those who voted against it (except for secured creditors). The DOCA would then be implemented by the Deed Administrator.
- If rejected, the creditors will generally vote to place the company into liquidation.
The three key elements of a successful VA
|DOCA being approved
- The DOCA is a formal ‘binding’ agreement between the company and all its creditors to restructure the business, usually by repaying outstanding debts at a lower amount via instalments over time.
- The DOCA contribution is usually via external sources or from future profits generated.
- There are no restrictions on a DOCA proposal which allows for maximum flexibility.
|Goodwill and jobs saved
- A DOCA approved by creditors avoids liquidation and usually allows the business to continue, maintain goodwill and save jobs.
- If the company is wound up, usually the company ceases to trade, employees terminated, and assets are sold for liquidation value.
- Liquidation has flow-on effects on suppliers who are owed money and need to find new trading partners and sudden loss of income.
|Unsecured debts compromised
- The payment of unsecured creditor claims is a critical element of a successful VA.
- Unsecured creditors receive more under the DOCA than if the company is wound up (i.e. a DOCA that delivers a dividend to creditors of 10c in the dollar for their debts would be preferable to receiving no return in a liquidation scenario).
Further information on our credentials and experience please visit our website www.wexted.com or contact one of the following staff members as detailed below:
Please feel free to get in contact with either Joe Hayes, Andrew McCabe or Raj Goyal on (02) 9210 1700.
Click here to download our VA – an effective restructuring tool brochure.