Voluntary Administration aims to provide a flexible procedure to enable a company time to attempt a compromise or other arrangement with its creditors, which may allow for the the company, the business and jobs to be saved while maximising the return to creditors. The process is used to provide a company with the opportunity to establish a strategy to survive if the company is insolvent and therefore, unable to pay its debts.

Directors of an insolvent company are able to take advantage of a suspension period (known as a moratorium period) during which time an external administrator is in control of their company and will propose an arrangement for the payment of debts for consideration by the company’s creditors.

In the event the company cannot formulate a proposal for the payment of debts which is acceptable to creditors, then the administrator can recommend the company be wound up or dissolved.

Commencing the Process

The directors of a company, a liquidator, provisional liquidator or a secured creditor can appoint a voluntary administrator.

Appointment of Voluntary Administrator by company directors

It is usually the case that Voluntary Administrators are appointed by the directors of the company. The process of appointing an administrator will commence when the directors of the company resolve that the company is, or is likely to become insolvent. This discretion is provided for under section 436A of the Corporations Act 2001 (Cth). To begin the process of appointment, the directors must be satisfied that there is a possibility that the company will become insolvent at some future time.

Appointment by a liquidator or provisional liquidator

An administrator can also be appointed by either a liquidator or a provisional liquidator under section 436B of the Corporations Act. Unlike appointment by company directors, the court’s approval must be sought if the liquidator or provisional liquidator seeks to appoint an administrator.

Appointment by secured creditors

The Corporations Act also provides for appointment of an administrator by secured creditors of the insolvent company. Secured creditors have the power to appoint where they have a charge on “the whole, or substantially the whole, of a company’s property”. For example, where the secured creditor is entitled to enforce a security interest (which is “perfected” and registered on the Personal Property Securities Register) in whole, or substantially in whole of a company’s property.

Who can act as an administrator and what do they do?

To be appointed as an administrator, the individual must be a registered liquidator. Once appointed, the administrator has control over the company and its property, business, affairs and financial circumstances. Effectively, the administrator bears the same responsibility for the company as the directors did prior to the administrator’s appointment.

They will also provide an opinion as to the creditor’s options and advise as to which would be in the creditor’s best interests. Specifically, they will consider whether they believe the voluntary administration should be ended and the company returned to the director’s control, whether a deed of company arrangement through which the company can pay all or parts of its debts owed, or whether the company should be wound up and a liquidator be appointed.

In providing their opinion, the administrator will attempt to devise the best solution to the company’s problems, assess any proposals put forward by others for the company’s future, and compare the possible outcomes of the proposals with the likely outcome in a liquidation.

Once an administrator has been appointed, it is mandatory that notice of the appointment of an administrator is published. Under the Corporations Act and accompanying regulations, the notice must be published by the administrator on the ASIC published notices website within 3 business days following appointment.

If an administrator has been appointed by a secured creditor, then it is the charge (the person who holds a charge over the company’s property) who must give written notice of the appointment to the company as soon as practicable, but before the end of the next business day.

What is the ‘moratorium’ that is put in place?

From the commencement of the Voluntary Administration, a moratorium (or a ‘stay’) comes into effect. In effect, it puts on hold all insolvency proceedings or legal processes underway against the company. The moratorium prevents the company being wound up and disallows creditors from taking actions or proceedings against the company or its property during the Voluntary Administration without the administrator’s written consent or the Court’s leave (permission). It also prevents third parties or lessors from taking possession of the company’s leased or retained property.

The following exceptions apply to the moratorium under section 440B of the Corporations Act. The following are circumstances enabling parties to enforce their property rights.

  • Creditors who hold a charge or charges on “the whole, or substantially the whole, of the property of a company” are not bound by the moratorium if the charge or charges are enforced in respect of all of the secured property. Importantly, enforcement must have commenced prior to the appointment of the voluntary administrator or within 13 business days of being notified of the administrator’s appointment;
  • A secured creditor holding a charge over the company’s property who commenced the enforcement process for that charge prior to the commencement of the voluntary administration;
  • A secured creditor who holds a charge over “perishable property” or an owner or lessor of such property;
  • Owners or lessors of property used, occupied by or in the possession of the company who have enforced a right to take possession of the property prior to the administrator’s appointment.

Directors’ guarantees are unenforceable

Under section 440J of the Corporations Act, a guarantee of a debt or liability incurred by a company cannot be enforced during voluntary administration, except with the leave of the court. It should be noted that this section does not prevent the enforcement of guarantees when the company goes into liquidation or executes a Deed of Company Arrangement. This is because, in these circumstances, the company is no longer under administration once the process has progressed to that stage.

What next?

If you would like to know more about how we can help you navigate through your voluntary administration matter or other insolvency proceeding, contact our office today for a confidential discussion on (07) 3036 0649. Our principal, Tracey Robinson, has successfully completed the ARITA Advanced Certification post graduate specialist accreditation course for restructuring and insolvency professionals.

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this update to specific issues or transactions. For more information or specific advice on your circumstances please contact tracey@robinsonnielsen.com.au.