Day 151 Voluntary administration

Voluntary administration

When a company faces insolvent, it is not necessary to wind it up immediately. Since the creditors and members may want to reconstruct the business, in order to help it out from the temporary financial problem. In this case, the company may pass a ordinary resolution in board of directors to appoint an independent insolvency practitioner to help them out. This occupation is referred as the ‘ Administrator’ and generally the administrator will take control of the entity for less than three weeks. During this period, the administrator investigates the company’s affairs and reports them back to creditors. Hence the creditors may rely on this information to decide the enterprise’s destiny. 

The objective of this administration process is to maintain the business’ existence, because it might fit the best interest of creditors. If it is not achievable, then the practitioner would try to maximize the return to creditors, compare to the immediate wind up of the company. At the start, the company, liquidator or secured creditor (who has security interest over all or nearly all the property) may initiate the voluntary administration. After that, the creditors will have the first meeting to elect the creditor’s committee. This committee would be responsible to review the administrator’s report, and if they are not happy with the current administrator, they may appoint another individual to do it. The position as an administrator has many powers to control the company’s business, management and affairs. For instance, the administrator can remove/appoint directors, sell company's property and perform all relative functions as a normal business officer. However, the person will be liable for any breach of director’s duties, contract entered and leasing expense during the administration process. Why does this position have these powers and restrictions? It is due to the process will create a safety zone for the business to catch on its steps. Under Corporations Act, most of the creditors are not allowed to enforce their debts during this administration process. Of course, there are two exemptions to this provision, where secured creditors has charge all/ nearly all property in the company(S.441A) and creditors with charge over perishable goods (s.441c) are not limited by this moratorium. 

At last, the creditors will have a second meeting and decide the company’s fate in regard to administrator’s report. In fact, there are three different decisions they can make: wind up the company, enter the deed of company arrangement or simply end the administration. If the creditor voted in favor of executing a deed of company arrangement, the administrator must provide an instrument containing the terms. (s.444A) Commonly, the administrator becomes the administrator of the deed unless someone else is appointed.(S.444A(2)) The deed is very flexible, it may comprise the term which certain proportions of debts are extinguished. All unsecured creditors and secured creditors who vote in favor of the deed are bound by it. Therefore, these people cannot enter legal proceedings against the company during this period. 

In conclusion, the administration process will provide the insolvent company some space to breath. It may still confront liquidation at the end, but at least some of them would be able to solve the financial issue and come back to business.