Voluntary Administration – this is not the only restructuring option available to you
When a company’s financial distress begins to slip downwards towards insolvency, time is of the essence. Directors need to make some quick decisions to protect the kingdom they have invested so much time and effort in building.
A major ‘fork in the road’ will be whether to attempt an informal turnaround and restructure or seek the appointment of a liquidator or place the company into voluntary administration.
However, directors should be aware that appointing a voluntary administrator is a lot like abdicating from your throne. You lose all your powers and effectively lose control over your kingdom.
It is a massive decision whether to attempt an ‘informal restructure’ or head down the formal route of giving control of your company to a liquidator.
In voluntary administration, it will be the registered liquidator who wears the crown and calls all the shots. Their primary duty is to the company/creditors and not to the director (although a study has indicated that odds are against creditors getting a satisfactory outcome).
In this article, we raise some key points that you should be aware of prior to heading down the voluntary administration route.
1. A voluntary administrator does not act in the best interests of directors
Instead, a voluntary administrator has a legal obligation to work in the best interests of your company and creditors. Once you have placed the company into voluntary administration, you relinquish control. There is nothing you can do about it if you don’t like the administrators decisions or actions.
The voluntary administrator:
- takes over control of your company, which means that all directors lose their powers
- works in the best interests of your creditors, not for the directors or the owners (if you put forward a DOCA there’s no guarantee it will be accepted by creditors)
- is not required to tell you about the impact that the process or their decisions will have on you personally.
2. The outcome for your company could be catastrophic
As soon as you appoint a voluntary administrator, your employees, your suppliers, and your customers will all know that the business is insolvent. Voluntary Administration was originally intended to be a formal ‘rescue’ process. The major problem is that it attracts negative stigma and the media and public do not differentiate between the different types of formal insolvency procedures (generally no-one knows or cares about the difference between liquidation/administration/receivership – it usually just means creditors are unlikely to be paid and employees risk losing their jobs).
Think about that for a moment…
Publicly declaring a company is insolvent can have immense consequences on the reputation and, therefore, the values of the business and assets. If your plan was to try and salvage something out of the business and get a DOCA approved by creditors, the damage to your reputation could be irreparable and future trading could prove tricky.
Voluntary administration is reported in the press as the end of a company, with corporate undertakers sent in to sell the business.
Jason Harris, 2014, ‘The effect of voluntary administration on business restructuring.’
Additionally, creditors now have much more power. They can:
- Replace your voluntary administrator at the first meeting, if they don’t like them
- Simply vote against a compromise or your DOCA if they’re unlikely to recover much of their debt
- If they’re a secured creditor, they could specify that you must use their preferred liquidator for the administration. If you don’t take on board that person’s wishes, the secured creditor can appoint a receiver and manager over the top. Once that happens, the voluntary administration process becomes complex and costly, because the receiver takes control the secured creditor’s assets (which can include decisions around trading the business also). You then have two liquidator firms charging fees…
3. Voluntary administration is useful in certain circumstances… the liquidator’s realisation costs can be excessive for small and family businesses
A registered liquidator follows the letter of the law and voluntary administration can be a complex and costly process. Even a small voluntary administration costs an average of $97,000. This is backed up by the study by Mark Wellard (2014 ‘A sample review of DOCA under Part 5.3A of the Corporations Act’).
Beware of referrals from other directors or professional advisors to meet with liquidators for advice about your struggling company. Just because voluntary administration worked for their company or a previous client, doesn’t mean it will work for your business.
Unfortunately, despite all the work and all the money involved, the chance of a good outcome is very small at just 2% and creditors can expect returns from a DOCA of just 5 to 7 cents in the dollar (again, see the study by Mark Wellard).
4. You only get one shot at voluntary administration
You only really get one shot when appointing a voluntary administrator. Basically, if the trading period fails or the DOCA isn’t accepted, there’s no other option but liquidation. It is the end of the line. Your company’s business and assets will be sold off in a fire sale.
Voluntary administrators are accountants and may not possess the industry expertise needed to successfully trade and restructure your business. If the company can’t make its payments while you’ve got an administrator appointed, they can make the snap decision to cease trading. This is because administrators are at risk of paying those debts out of their own pockets. Ceasing trading means loss of value – employees, customers and suppliers all walk away as they have to protect their own business interests.
Additionally, whether or not suppliers, landlords and employees will co-operate during voluntary administration is an unknown. Stakeholders may have previously had bad experiences with a liquidator in the past, and so they could simply refuse to enter into any sorts of negotiation.
Safe Harbour Turnaround or Restructure
A turnaround initiative or restructure under the insolvency safe harbour should always be considered by directors before heading down the voluntary administration route. This is because directors retain control of the process and the costs will be significantly less. If you suspect your company is insolvent or may become insolvent in the future, you can make use of Safe Harbour – this protects you from insolvent trading personal liability.
Don’t rush into appointing a voluntary administrator just because you suspect the company may face insolvency – always seek the directors safe harbour protection first and consider all of your options. The 2017 legislation was purposefully designed to give directors breathing space in a crisis.
Voluntary administration may still be needed…
The voluntary administration process may still be a useful tool for you if your informal turnaround or restructuring attempts are not successful. Our advice is to look at the merits of all your available options prior to making any rash or hasty decisions. Don’t be pressured into making quick decisions – use breathing space and protection afforded by Safe Harbour, seek out professional advice and consider all your options.
Voluntary administration is highly technical and complex, but you can still retain control over the process with planning and professional guidance
Yes, the process of putting a company through voluntary administration is very technical and often quite complex.
Yes, you will require a liquidator with expertise to undertake the voluntary administration.
But it doesn’t mean you have to let go completely. Make sure you have a professional advisor that is on your side and acting in your best interests. ReGroup Solutions turnaround practitioners have comprehensive knowledge of the insolvency framework and have significant experience in this area. Let us help you with the heavy lifting.
If voluntary administration is deemed to be appropriate for your circumstances, ReGroup Solutions will make sure that you:
- have an objective for yourself and for the company
- have a plan that includes a scope for the work to be done
- have exhausted all other options first by negotiating with creditors or prospective buyers.
The planning and preparation ReGroup undertake with you prior to the administrators appointment enables us to help you put forward a DOCA that has the best prospects of being approved by creditors.
Appointing an administrator ought to be just one of the options that you consider if your company is struggling financially.
Make sure you get expert advice by consulting one of our business turnaround practitioners. You can then work out a plan that will achieve a better outcome for both yourself, the business and all stakeholders.
The moral of this story is that you ought to pick up the phone and call the ReGroup Solutions team for a confidential discussion about your situation.
We will help you to assess your situation and we take all stakeholders’ interests into account. A successful restructuring of a business doesn’t need to be at the expense of the directors or business owners. With careful planning, it is possible to achieve a reasonable compromise with all stakeholders. Plus, your business can continue trading into the future.