Protection from creditors’ legal action

One of the most immediate benefits of voluntary administration is that it provides temporary protection from creditors. Once an administrator is appointed, an automatic “moratorium” takes effect, preventing creditors from pursuing legal actions against the business to recover debts. This includes pausing legal proceedings, winding-up petitions, and any repossessions of company assets. This breathing room is critical for businesses on the verge of collapse, as it buys valuable time to develop a feasible recovery plan without the constant pressure of creditor demands.

Opportunity to restructure and trade out of difficulties

Voluntary administration provides an opportunity for businesses to restructure their operations, cut unnecessary expenses, and streamline processes. Administrators will assess the company’s finances and operations, often identifying inefficiencies or non-core activities that can be minimised or eliminated to improve cash flow. This allows the business to trade out of its financial difficulties, often under the guidance of the administrator who may propose changes that help stabilise finances, boost profitability, and return the business to solvency.

Ability to propose a Deed of Company Arrangement (DOCA)

A key outcome of voluntary administration is the potential to enter into a Deed of Company Arrangement (DOCA). A DOCA is a binding agreement between the company and its creditors that outlines a strategy for repaying debts over time, often at reduced rates, and sometimes even forgiving part of the debt. Creditors vote on whether to accept the DOCA, and if approved, it allows the company to continue operating under agreed-upon terms. This structured approach can provide a realistic path for businesses to settle debts in a way that works for both the company and its creditors.

Preserve brand and reputation

A public collapse, especially through liquidation, can irreparably damage a business’s brand and reputation. Voluntary administration, however, signals to the market, clients, and employees that the business is actively working to resolve its issues and is committed to a sustainable future. By restructuring rather than closing down, the business may preserve client relationships, maintain a workforce, and reduce the damage to its brand image. This can be crucial for customer retention and employee morale, allowing the business to bounce back once it has addressed its financial issues.

Retain control over business operations

Unlike liquidation, where assets are sold off to pay creditors and the business ceases operation, voluntary administration allows the possibility of regaining control over the company. After restructuring and implementing a DOCA, directors can resume control if the administrator decides the business is viable. This is especially important for owners who have invested significant time and resources in building the company and are looking for a solution that keeps the business alive.

Structured and transparent process with professional guidance

Navigating financial distress can be daunting, especially for directors without experience in insolvency. In voluntary administration, directors benefit from the guidance of insolvency advisors and a professional administrator who have expertise in assessing financial health and negotiating with creditors. The advisors and administrator handle complex negotiations, legal requirements, and creditor communications, allowing business owners to focus on their business and not on legalities. This structured approach offers transparency for all stakeholders, increasing the chances of a fair and effective resolution.

Prevent personal liability risks for directors

In Australia, directors can be held personally liable for debts incurred while a company is insolvent. By opting for voluntary administration, directors can reduce the risk of personal liability, as they’re acting responsibly by appointing an administrator once they recognise the company’s financial difficulties. This proactive approach demonstrates a commitment to resolving insolvency issues responsibly and can shield directors from future claims or penalties related to insolvent trading.