Voluntary administration is an insolvency procedure where the directors of a financially troubled company appoints a ‘voluntary administrator’ who investigates the company’s current state of affairs and advises whether it should go into liquidation or be returned to the directors.
A lot of business owners incorrectly think that this is a viable option to save their company in times of crisis – unfortunately the stats show otherwise.
Voluntary administration is set out in the Corporations Law as the way to “administer a company’s affairs with a view to executing a Deed of Company Arrangement”. Otherwise known as a DOCA, it is simply a deal between a company and its creditors.
Usually the best that can be expected from a voluntary administration is to reduce the losses suffered by creditors and shareholders and save the business. However, according to ASIC, voluntary administrations only save around 2% of insolvent businesses and that is largely due to the fact that voluntary administrations are used inappropriate in many situations.
Voluntary administration is most suitable where the company:
- Is insolvent and can’t trade out of its difficulties;
- Has had some sort of one-off disaster that has caused a financial loss and has led to the insolvency of the company;
- Is an otherwise viable trading business, has good prospects for a return to profitability and currently has a positive cash flow, provided the debt burden can be reduced
Essentially, if the debt burden is relieved and you can see that your company can become cash flow positive again quickly, voluntary administration could be good solution.
Statistics tell us that a typical voluntary administration of an SME will cost around $60,000 in professional fees and can be resolved within 35 or so business days.
For further reading on the voluntary administration process and finer detail the Australian Securities & Investments Commission (ASIC) has a very comprehensive dedicated section on their website:
Comment