The primary objective of a voluntary administration is to maximise the chances of a company being able to continue to trade. Read on for the ins and outs of how it works.

Restructuring your business using the voluntary administration process

Given the persistently high inflation, increasing costs, hikes in interest rates and overall deteriorating economy – a consequence of several years of COVID-19 induced conditions – many businesses are currently feeling the financial squeeze. This is not unique to any one industry and the effects are being felt across the globe. Over the past few months, many high-profile companies have failed (particularly in the construction, retail, manufacturing and start-up sectors) and unfortunately the trend looks to continue into the foreseeable future.

The craft brewing industry has seen Ballistic Beer go into voluntary administration this January and Easy Times Brewing coming out of administration late last year using the deed of company arrangement mechanism to restructure its business, compromise debts and is continuing to trade.

If your company is in financial difficulties, as a director you need to be aware of the options available to help your business and also understand your legal obligations. The voluntary administration process is a commonly used and effective procedure to restructure your business, compromise debts, retain your current company structure and mitigate your personal legal risks.

What is voluntary administration?

Voluntary administration is a formal insolvency process whereby an independent external expert is appointed as administrator of the company to help resolve its financial and operational difficulties. The voluntary administrator is usually appointed by the directors once they have concluded that the company is or likely to become insolvent, or by a secured creditor who has a charge over most of the assets of the company.

What are the objectives of voluntary administration?

The primary objective of a voluntary administration is to maximise the chances of a company (or its business) being able to continue to trade going forward. If that is not possible, then the secondary objective is to achieve a better return for creditors than would likely be achieved if the company had been immediately wound up.

What is the role of the voluntary administrator?

The voluntary administrator’s role (amongst other matters) is to investigate the company’s financial affairs and report back to creditors. Their objective is to ascertain whether to recommend to creditors that the company should enter into a deed of company arrangement, go into liquidation, or be returned back to the directors.

What are the benefits of voluntary administration?

Voluntary administration provides a company and its directors (or others) with a viable opportunity to put a proposal to creditors to avoid value destruction and liquidation, thus preserving the company’s structure and business going forward.

Some benefits include:

• Creditor claims are frozen giving the company breathing space to assess its future and financial position.
• Enables the company to continue to trade whilst its future is being independently assessed.
• Creditors are presented with an independent review of the company and potential viability of its business.
• Provides a mechanism to compromise debts of the company and restructure its business.

How is voluntary administration different from liquidation?

Voluntary administration is different from liquidation in that the primary objective of a voluntary administration is to investigate options available to save the business and/or allow for a better return to creditors, whereas the objective of liquidation is to wind up the affairs of the company and bring it to an end.

Reasons to use voluntary administration to restructure your business?

1.    Compromising debts of the company

One of the aims of the voluntary administration process is to enable an otherwise financially distressed company (but potentially viable business) to restructure and continue to trade going forward by utilising the deed of company arrangement (DOCA) mechanism. The DOCA is a highly flexible and effective arrangement to compromise debts of the company. Through the DOCA, the company could pay part of its debts and be free of those debts.

The DOCA can incorporate different arrangements, including payment of a lump sum to repay all debts due, make instalment payments and/or use proceeds from the sale of assets. The DOCA could also include continuing to trade the business and using profits to pay creditors. The DOCA binds all unsecured creditors of the company; however, it does not prevent creditors with personal guarantees from taking action to have their debt repaid by the guarantors.

2.    Preventing directors’ personal liability for insolvent trading

Directors are legally required to take measures to avoid trading a company whilst insolvent and severe personal consequences (both civil and criminal) can result if they do not. The voluntary administration process is often used by distressed businesses to mitigate the risk of insolvent trading. By initiating the voluntary administration process, the company and its directors can raise the defence that the directors took steps to avoid insolvent trading by appointing an administrator and thus avoided incurring further debts.

3.    Protecting directors from the ATO’s director penalty notices

Companies with cashflow and insolvency issues are likely to fall behind on their ATO-related compliance. For example, they could have outstanding PAYG, GST and superannuation liabilities. In this case, the ATO has the discretion to pursue the directors personally for this unpaid PAYG, GST and superannuation liabilities through the issuance of director penalty notices (DPN).

Placing the company in voluntary administration could avoid personal liability if the DPN relates to sums reported to the ATO but unpaid within three months of the end of the reporting period. However, if the amounts owing are both unreported and unpaid for over three months, then the voluntary administration process would not help directors mitigate the risk of personal liability.

What are the keys to a successful restructuring?

The keys to a successful restructuring are almost always (i) ensuring the financial records and reporting are up-to-date and accurate, (ii) early identification of issues during financial difficulties, (iii) obtaining professional and appropriate advice, and (iv) formulating and implementing a well-thought-out restructuring plan.

HLB Mann Judd provides tailored restructuring and risk advisory services. Our experienced team has a proven history of successfully assisting our clients through financial and operational difficulties. As a full-service national advisory and accounting firm, we can provide businesses with comprehensive health checks and tailored strategic financial solutions. Please contact Chew Mar on (07) 3001 8884 or cmar@hlbqld.com.au for a free no obligation consultation.