Voluntary Administration


  • What is Voluntary Administration? 
  • Key Reasons to Opt for Voluntary Administration 
  • The Process of Voluntary Administration 
  • Employee Entitlements in Voluntary Administration 
  • The Best Outcomes for Different Creditors in Voluntary Administration 
  • Benefits of Voluntary Administration 

What is Voluntary Administration? 

Voluntary administration is a strategic approach taken by companies facing insolvency, which means they are unable to pay their debts as they become due. The process is initiated by the company directors who appoint an independent voluntary administrator. Part 5.3A of the Corporations Act 2001 outlines statutory requirements for voluntary administration.  

Causes of Insolvency 

Insolvency can arise from various situations such as unfortunate events or poor financial management. Recognising the onset of financial troubles is critical for timely intervention. Voluntary administration serves as a proactive measure to manage and mitigate financial failures before they evolve into irreversible damages. 

Upon suspecting insolvency, or foreseeing potential insolvency, directors can appoint a voluntary administrator. This appointment is generally made swiftly to increase the likelihood of a successful recovery. The administrator’s task is to impartially assess the business’s financial health and propose a strategic plan. This plan might involve negotiating with creditors, restructuring the business operations, or other necessary actions to stabilise the company financially. 

Smiling lawyer, realtor or financial advisor handshaking young couple thanking for advice.

Key Reasons to Opt for Voluntary Administration 

A company might opt for voluntary administration under specific circumstances that jeopardise its financial stability. This approach is suitable for a business in the following scenarios: 

Insolvency and Debt Negotiation

Voluntary administration is appropriate for companies that are insolvent and unable to meet their debt obligations. This process allows these companies to negotiate arrangements with their creditors to address and manage outstanding debts in a structured manner. 

Response to Singular Financial Setbacks

Companies that have experienced a significant financial setback, such as a one off loss or a poor trading period, might consider voluntary administration. This situation typically arises from unexpected events that temporarily derail the companys financial health. 

Business Restructuring

For businesses that are fundamentally sound but temporarily hampered by debt, voluntary administration provides a crucial pause. During this pause, the company can halt demands from creditors and focus on internal adjustments.  

This might include cutting operational costs, reducing staff numbers as a last resort, and strategic efforts to boost sales and enhance profit margins. The goal is to restructure effectively in a way that allows the company to emerge stronger and more stable. 

The Process of Voluntary Administration 

The process of voluntary administration begins simply with a resolution passed by a majority of the company’s directors. This straightforward method does not require court involvement, which makes the initiation quicker and less cumbersome. 

The entire voluntary administration process is generally completed within just over a month. During this period, there is a moratorium in place, which prevents creditors from taking recovery action against the company. Additionally, the enforcement of personal guarantees against directors is halted. These measures provide a protective breathing space for the company to reassess and plan its next steps without external pressures. 

What Happens on Appointing an Administrator?

When an administrator is appointed, the company directors lose their authority to manage the company. This control is transferred entirely to the administrator, marking a significant shift in who makes critical decisions about the company’s future. 

  • Administrator’s Role and Decision Making 

The administrator evaluates the company’s current situation and decides on the best course of action aimed at maximising returns for creditors and shareholders. This may include various strategies such as continuing to operate the entire business, operating parts of it, selling the business, or even ceasing operations altogether depending on what is most viable under the circumstances. 

  • Communication and Notifications 

One of the first tasks the administrator undertakes is to inform both the public and the creditors about their appointment and the current status of the company. This is done through posting a Notice of Appointment on the Insolvency Notices website and dispatching an Initial Report to Creditors.  

These steps ensure transparency and keep all stakeholders updated on potential future actions and plans. 

Key Meetings in Voluntary Administration

First Meeting of Creditors 

The process of Voluntary Administration involves critical early interactions with creditors. The voluntary administrator is required to convene the first meeting of creditors within eight business days after their appointment.  

An extension for this timeline may be granted by the court if necessary. Creditors must be notified about the meeting at least five business days in advance. During this initial meeting, creditors have the opportunity to vote on whether to replace the administrator or to establish a committee of inspection, which aids in overseeing the administration process. 

Administrator’s Investigation and Reporting 

A significant duty of the voluntary administrator is to thoroughly investigate the company’s financial affairs. Following this investigation, the administrator must prepare and present a detailed report to the creditors. This report outlines the various options available for the company’s future, helping creditors make informed decisions at subsequent meetings. 

Second Meeting of Creditors: Deciding the Company’s Future 

The second crucial meeting, aimed at deciding the company’s future, must occur within 25 business days from the administrator’s appointment. This period extends to 30 business days if the timing coincides with the Christmas or Easter seasons.  

Again, extensions can be granted by the court if deemed necessary. Creditors must receive at least five business days’ notice before this meeting.  

The Possible Outcomes 

The choices facing creditors at this meeting include: 

  1. Returning Control to the Directors: This option allows the original directors to resume control and continue trading, assuming the business is viable. 
  1. Acceptance of a DOCA: If creditors agree, a Deed of Company Arrangement can be implemented, which must be signed by the company within 15 business days after the meeting. This deed outlines the arrangements for the company to settle its debts and potentially continue operations under agreed terms. 
  1. Liquidation: Should the creditors decide, the company can be put into liquidation immediately. In many cases, the administrator will then act as the liquidator, managing the process of selling the company’s assets to pay off debts. 

These structured meetings and the procedures outlined ensure that creditors are well informed and actively involved in the decision making process regarding the company’s future under voluntary administration. 

Employee Entitlements in Voluntary Administration 

The fate of employee entitlements during a Voluntary Administration largely hinges on the outcome of the administration process itself. Typically, entitlements accrued before the commencement of Voluntary Administration are not addressed immediately within the administration period. 

Payment During Ongoing Operations

If the voluntary administrator decides to continue trading the business, they are obligated to pay employees for any work performed during the administration. This ensures that while the company is still operating, even under administration, employees are compensated for their ongoing services. 

Outcome of a Deed of Company Arrangement (DOCA)

In scenarios where a Deed of Company Arrangement is successfully negotiated and agreed upon, this document will specify the terms regarding how and when past employee entitlements will be settled. The DOCA serves as a formal plan that may include provisions for clearing unpaid wages, benefits, and other dues as part of the companys restructuring efforts. 

Scenario of Liquidation

If the administration process leads to liquidation, the handling of employee entitlements then falls under specific liquidation laws, which can be complex. Typically, in liquidation, employee claims are prioritised, although the full settlement of these claims depends on the assets available after other secured debts are cleared. 

Government Support Schemes

In situations where employees cannot be fully compensated through the DOCA or liquidation process, government schemes like the Fair Entitlements Guarantee (FEG) may step in. This scheme aims to protect employees by providing them with a safety net that covers certain unpaid entitlements in cases where their employer cannot pay due to insolvency or bankruptcy. 

Smiling lawyer, realtor or financial advisor handshaking young couple thanking for advice.

The Best Outcomes for Different Creditors in Voluntary Administration 

Secured Creditors

Secured creditors hold an advantage in voluntary administration due to their security interest in specific assets of the company. This security interest, particularly if registered on the Personal Property Securities Register (PPSR), affords them greater protection compared to other creditors.  

Although secured creditors cannot enforce their security during the administration phase, they hold a high priority once the company’s future is decided. If the company is liquidated, enters a DOCA, or is returned to directors’ control, secured creditors are prioritised for payment right after the employees’ unpaid wages and benefits. 

Unsecured Creditors

The situation for unsecured creditors is less favourable. These creditors do not have a security interest in the company’s assets and their chance of recovering debts depends heavily on the company’s ability to pay other prioritised debts first. This includes situations involving unpaid invoices or unsecured loans. If the company is restored to the directors, there might be a chance for debt repayment, but this is not guaranteed.  

In the event of a DOCA, unsecured creditors typically fall behind secured creditors and certain other priority claims in terms of repayment. Should the company enter liquidation, unsecured creditors may recover little to none of their claims, potentially resulting in significant financial losses. 

Creditors with Personal Guarantees

Creditors who hold personal guarantees have a potential recourse beyond the company’s assets. These guarantees are often issued by individuals associated with small to medium sized businesses.  

In cases where the company fails and enters liquidation, these creditors can pursue the guarantor personally, depending on the specific terms laid out in the guarantee. This provides an additional layer of security for the creditor, offering a possible path for debt recovery if the company itself cannot fulfil its obligations. 

Each type of creditor faces different risks and potential outcomes in the event of a company entering voluntary administration, with secured creditors generally having the most protection, followed by those with personal guarantees, and unsecured creditors facing the highest risk of loss. 

Benefits of Voluntary Administration 

  • Prevention of Liquidation and Deregistration: Voluntary administration can save a company from being liquidated or deregistered, offering a chance for recovery and continued operation. 
  • Structured Time for Creditor Negotiations: This process provides an organised framework for the company to engage with creditors, allowing time to develop a structured proposal aimed at maximising returns to them. 
  • Independent Review by a Practitioner: An independent administrator reviews the company’s financial situation, offering expert management and alleviating the pressures from creditors. 
  • Protection Against Actions by Secured Creditors: Voluntary administration reduces the risk of secured creditors taking action against the company’s assets while under administration. 
  • Avoidance of Insolvent Trading Claims: It helps in mitigating the risk of claims against the company for insolvent trading, which can occur if the company continued to incur debt without the ability to repay. 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.