What You Need to Know About Voluntary Administration

Businesses that are facing financial distress and insolvency often turn to Voluntary Administration as one way of resolving their issues and repaying creditors. The process is simple, and it gives business owners access to financial experts to help develop a plan that benefits everyone involved with the company.

But, before you decide that voluntary administration is the best choice for your business, you should always seek advice from an industry professional. Administration is just one option available to businesses that are struggling financially, but it’s not the right option for everyone. To help you figure out if it’s the right decision for your business, we’re going to dive deeper into voluntary administration and some of the things you need to know before you make any decisions.

What is Voluntary Administration?

Voluntary Administration is a process where an independent administrator takes control of an insolvent business, assesses its situation and works to develop a solution that benefits the company and its creditors.

Insolvency occurs when your business becomes unable to pay its debts as they’re due or when they’re due. Not only is insolvent trading illegal, it can cause your business to incur additional debts and place even more strain on your creditors. Creditors will often begin trying to collect the money they are owed at this point, which can include taking actions like applying to have your company wound up. Instead of waiting for that to happen, you can choose to appoint an independent administrator to help figure out how to settle the business’ debts.

What Happens During Voluntary Administration?

The voluntary administration process is straightforward and only consists of a few simple steps:

1. First, the insolvent company recognises that it’s struggling and appoints an independent administrator. The administrator takes temporary control of the  company and begins investigating its situation and finances to figure out how best to proceed.
2. Second, the administrator works with the company to find a solution that works for everyone involved. The ultimate goal is to increase the chances of the business’ survival and help creditors recover more of the money they are owed than they would through liquidation.
3. Finally, the administrator presents their findings to the creditors. The administrator will include the details of the business’ financial situation and make a recommendation on whether it should continue to trade or if creditors should seek to have the business wound up.

The Outcomes of Voluntary Administration

The final stage of the voluntary administration is the most important. Once the independent administrator has finished assessing the business, they will then report their findings to the creditors. At this point the administrator will also provide a recommendation on the best way to resolve the business’ debts.

Administrators are required to present their findings and offer their opinion on whether:

1. The administration period should be ended and control of the company returned to its directors.
2. The company should be immediately wound up and liquidated (the administrator often becomes the liquidator).
3. Creditors should approve the business’ Deed of Company Arrangement (DOCA) and allow the business to trade on while paying its debts.

What is a Deed of Company Arrangement?

Entering into a Deed of Company Arrangement (DOCA) is one of the possible outcomes for the voluntary administration process. A DOCA is a binding agreement between an insolvent business and its creditors. The document includes details about how the company’s affairs will be dealt with and how creditors will be repaid.

The goal here is to design a DOCA that allows creditors to recover more of the money they are owed than through liquidation. The company will be allowed to trade on and continue to make repayments to creditors, and in exchange the creditors may forgive some of the debts they are owed. Once the DOCA is complete, any agreed-upon debts are forgiven, and the company continues to trade as normal.

How Voluntary Administration Affects Creditors

Creditors play an important role in the voluntary administration process. Since the goal is to find a solution that helps creditors recover as much of their money as possible, creditors are given the opportunity to decide the business’ future.

The company’s creditors will be called together for two key meetings during the voluntary administration process. The first meeting occurs up to eight days after the administrator is appointed, where the creditors decide whether to continue with the current administrator or seek the services of another. The second meeting occurs about five weeks after the start of the administration period. At this meeting, creditors will vote on whether to accept the company’s DOCA or to have the business wound up. In most cases, votes by creditors are decided in favour of the majority in number and value, although some exceptions exist.

This way, creditors are given the power to determine how they can recover their debts, and businesses are given the chance to potentially avoid liquidation.