When Should You Use Voluntary Administration?

February 17, 2017 by admin in Tips

There are a number of insolvency procedures that companies can invoke when facing the prospect of insolvent trading, overwhelming debt, and other insolvency-related challenges. As an alternative to going directly to liquidation, there’s the option of voluntary administration. It’s critical to understand why and when you would use voluntary administration before you consider it as a course of action for your business.

What’s voluntary administration?

Voluntary administration is a formal process that results in an external administrator being appointed to take control of your business. The external administrator reviews the company’s finances during this period, with the aim of restoring the company to financial health, ensuring the creditors get the best possible return, and giving the company an opportunity to decide on its future without the involvement of the courts.

While it can sound drastic, voluntary administration is not an extreme action and it’s not necessarily an indication that you will enter liquidation. It gives you a chance to restructure your business if necessary, and brings in a third party to help identify appropriate courses of action that could enable you to turn around your company and ensure it is financially stable once again.

In some cases, however, the external administrator might conclude that liquidation is the best option. However, the voluntary administration process itself doesn’t actually involve any liquidation of assets and creditors don’t receive any proceeds at this stage.

There are three possible outcomes of voluntary administration:

  • Control returned – The business is returned to the control of the directors.
  • Deed of company arrangement (DOCA) – The company enters into a DOCA, which is a legal agreement made with its creditors. The DOCA will outline how the company will proceed, and its purpose is to give the company a greater chance of succeeding at trading and/or eventually providing the best possible return to its creditors.
  • Liquidation – The outcome of voluntary administration may be to place the company into liquidation, at which point a liquidator is appointed to wind up the business, dispose of assets, and pay the creditors with the proceeds. The liquidation process ends with deregistration of the company.

Process for entering voluntary administration

Usually the voluntary administration process is initiated by a resolution of the board, when the company directors believe the company is insolvent or likely to become insolvent. Less commonly, it’s initiated by liquidator, provisional liquidator, or a secured creditor.

Once the administrator has been appointed, there will be the first meeting of the creditors, where the creditors can vote to replace the administrator with one of their own choosing. The creditor can also vote on whether or not a creditors’ committee is to be formed. The committee has the power to approve the administrator’s fees, consult with the administrator, and receive reports on their conduct. This first creditors’ meeting is usually called within eight business days after the start of voluntary administration.

After this, the administrator starts investigating the company’s affairs and reports to the creditors. There’s then a second creditor’s meeting to decide the company’s future, which takes place within five or six weeks after the voluntary administration process starts. The voluntary administration process will end with one of three possibilities mentioned above, and the entire process usually lasts for around five weeks or less.

Impact and benefits of voluntary administration

Voluntary administration gives businesses breathing space to decide on their next course of action. This is because during voluntary administration, creditors are prevented from taking any further action against the company.

  • Debt recovery claims – Unsecured creditors aren’t allowed to continue, start, or enforce a debt recovery claim against a company that’s in voluntary administration, unless the administrator or a court gives consent.
  • Charges – In most cases, secured creditors can’t enforce any charges over the company’s property.
  • Application to liquidate – Creditors can’t apply (to a court) have the company placed into liquidation.
  • Calling on personal guarantees – Creditors can’t call on personal guarantees that have been provided by the company’s directors.
  • Property recovery – Owners or landlords of property (other than perishable property) that’s occupied or used by the company can’t recover their property.

When to use voluntary administration

Voluntary administration is typically used when a company believes it’s insolvent or about to become insolvent. However, in the rarer cases when it’s initiated by creditors or a liquidator, it could be for other reasons. Generally speaking, voluntary administration could be a useful option when a company is in financial difficulty and needs to take a time out to consider the next step, whether that’s to return to trading, work to a DOCA, or proceed to liquidation.

Voluntary administration is an insolvency procedure that could give your business the breathing room it needs before making a decision to return to trading, enter a DOCA, or go into liquidation. If you think voluntary administration could be the right option for your company, consult with an insolvency expert for advice on the implications before you proceed.