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Voluntary Administration

Voluntary Administration places an insolvent company in the hands of an independent person who can assess all the options available to generate the best return for creditors. In some cases, the owner may be able to retain control or a part share in the business, in others the business can be sold as a going concern and employees may be able to retain their jobs.

Voluntary Administration is an easy process which:

* is inexpensive to initiate;
* creates the opportunity to maintain a business;
* provides creditors with an independent review of the company and its business; and
* provides a mechanism to negotiate a compromise between a company and its creditors.

Directors have a strong incentive to address corporate insolvency. Personal liability arises from the severe insolvent trading provisions of the Corporations Act and the tough new personal liability notices issued by the Australian Taxation Office. The insolvent trading laws can make directors personally liable for debts incurred whilst a company is insolvent. The personal liability notices issued by the Australian Tax Office require a company to pay various tax liabilities within 14 days or the directors will become personally liable for the debt, unless an administrator or liquidator is appointed.

Therefore, one of the strengths of the voluntary administration process is that it limits a director’s personal liability.

A company can avoid liquidation if creditors believe the administrator’s proposal will provide them with the best commercial return. If not, they may return the company to its directors, or more commonly, force liquidation of the company without the need to hold further meetings or petition the Court.

Voluntary Administration triggers a moratorium on any recovery action by creditors, and at the same time the directors’ powers cease. It stops the enforcement of guarantees against directors. The only exception is that a lender with a mortgage over all of the assets of the company may enforce its security within a 10 business day decision period.

The appointment of an administrator is usually made by a company’s directors. The administrator will take control of the company and continue to maintain the business, if that is the best option.

A proposal for the way forward can be accepted by a simple majority of creditors. Once accepted, it becomes formalised as a Deed of Company Arrangement, which binds all unsecured creditors, including those who did not vote. This power to coerce an unreasonable minority of creditors is one of the procedure’s strengths.

The length of time involved in the voluntary administration process varies. A Deed of Company Arrangement can be finalised in two or three months after the appointment of the administrator. If appropriate, the terms of the deed can last for several years.

If the company does not meet its obligations under the deed, it can be terminated and the company wound up, but this is not automatic.