Key benefits of choosing Voluntary Administration for struggling businesses in Australia

When a business faces financial distress, its future can seem uncertain, and decisions around restructuring, insolvency, or liquidation can feel overwhelming. In Australia, voluntary administration is a legal process that provides struggling companies with a structured way to address financial issues while exploring potential for recovery. Choosing voluntary administration can offer a lifeline to businesses that might otherwise face closure. Here’s an in-depth look at the benefits of voluntary administration for struggling businesses in Australia and how it can set them on a path toward stability.

What is Voluntary Administration?

Voluntary administration is a formal insolvency process initiated by the directors of a financially distressed company. Once an administrator is appointed, they take control of the business to assess its financial position and determine whether it can be restructured to continue operating. During the process, administrators work with creditors, negotiate with stakeholders, and develop a strategy for the company’s future. The goal is to maximise the chances of business survival or, if that’s not possible, achieve a better outcome for creditors than immediate liquidation would offer.

Key benefits

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.

Is Voluntary Administration the right choice?

While voluntary administration offers numerous benefits, it’s not the right fit for every struggling business. It’s essential to evaluate the company’s financial situation, assets, and debt obligations carefully before choosing this path. Consulting with an insolvency professional or financial advisor can provide valuable insight into whether voluntary administration is a viable option or if alternative paths, such as liquidation or informal restructuring, may be more appropriate.

For many businesses in Australia, voluntary administration provides a lifeline that can lead to financial recovery, debt restructuring, and a fresh start. By protecting the business from creditors, enabling structured debt arrangements, and offering professional guidance, voluntary administration supports companies as they work to regain stability and avoid closure. If your business is facing financial difficulties, voluntary administration could be the first step toward a more sustainable future.

By considering voluntary administration early on, struggling businesses can regain control, protect their brand, and work toward a viable solution that benefits both the company and its creditors. With the right approach, voluntary administration can transform financial difficulties into an opportunity for revitalisation, giving businesses a renewed chance to thrive.

How AVA Advisory can help

At AVA Advisory, we understand the unique challenges small and medium business owners face. In these uncertain times, our experienced team of debt solutions experts and corporate advisors can provide practical, actionable advice to help you boost business preparedness, as well as build resilience to financial and operational risks.

Contact us now at 1300 181 220 for a private, obligation-free discussion, or schedule a meeting via our online booking system.

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