Introduction
Voluntary Administration (VA) often carries a negative connotation but in reality, it can be a powerful tool for business continuation and growth. Many business owners don’t realise that Voluntary Administration is a process designed to provide a lifeline, offering a chance to restructure, renegotiate and ultimately, revitalise their operations.
By seeking expert guidance and understanding the process fully, businesses can leverage VA as an opportunity to address challenges head-on, emerge stronger and chart a course toward a more sustainable and successful future.
When a company enters Voluntary Administration, external administrator/s are appointed to manage the company’s affairs and provide recommendations to creditors about its future.
Corporate insolvencies snapshot?
• There was a significant rise in formal insolvency appointments in Australia during FY2023–24.
• 1,492 Voluntary Administration appointments were recorded in FY2023–24, representing a 14.5% increase from FY2022–23 and a 121% increase compared to FY2021–22.
• A total of 11,053 external appointments in FY2023–24 marks the highest level since FY2011–12 when 10,757 insolvencies were recorded.
Current challenges faced by business owners
Small businesses are the backbone of the Australian economy, accounting for over 97% of all businesses and employing around 41% of the workforce. However, running a small business is not without its challenges.
According to corporate insolvencies statistics from the Australian Securities and Investments Commissions (ASIC) published in December 2023, the leading reported reasons for business failure were: Inadequate cash flow (52%), Trading Losses (49%), and Pandemic-Induced Failure (19%).
External Administrations rise in Q4 FY2023–24
Several factors are contributing to the rise in external administrations across different industries in Australia:
- • Economic uncertainties: Global economic headwinds, including inflation, rising interest rates and supply chain disruptions, are impacting business confidence and profitability. This uncertainty can lead to reduced consumer spending and investment, putting pressure on businesses, particularly in sectors like construction and hospitality.
- • Increased costs: Businesses are facing escalating input costs, including materials, labour and energy. This pressure on margins can make it challenging to remain viable, especially for smaller businesses with limited cash flow.
- • Debt levels: Many businesses took on additional debt during the COVID-19 pandemic, supported by government assistance programs. As these programs wind down and interest rates rise, servicing these debts becomes more challenging, increasing the risk of insolvency.
- • Construction industry pressures: The construction industry is facing unique challenges, including fixed-price contracts, labour shortages and rising material costs. These factors have contributed to a wave of high-profile insolvencies in the sector.
- • Consumer spending patterns: Changes in consumer behaviour, such as reduced discretionary spending due to cost-of-living pressures, are impacting sectors like retail and hospitality. Businesses reliant on discretionary spending may struggle to adapt quickly enough to changing market conditions.
It’s important to note that the specific factors driving external administrations can vary across industries and individual businesses.
It is anticipated that there will be a rise in formal insolvency appointments in 2024 and 2025, surpassing the number of appointments in 2023. This is particularly due to the ongoing enforcement actions taken by the ATO to collect unpaid debt.
Common misconceptions about Voluntary Administration
It is crucial for small business owners to understand the Voluntary Administration process and its potential consequences.
- • Misconception 1 – Voluntary Administration means the end of the business: Entering Voluntary Administration does not necessarily mean the end of the company. Instead, it provides an opportunity for the business to restructure and potentially continue trading.
- • Misconception 2 – All debts are wiped out during Voluntary Administration: While Voluntary Administration can help a company restructure its debts, it does not automatically eliminate all debts. Creditors may still be entitled to a portion of the money owed to them.
- • Misconception 3 – Directors lose all control during Voluntary Administration: Although an external administrator is appointed to manage the company’s affairs, directors can still play a role in the process and provide valuable insights to the administrator.
A second chance for small business owners
Voluntary Administration can be a valuable tool for small businesses facing financial challenges, providing an opportunity to restructure and avoid liquidation. By working with an experienced small business debt advisor and an Administrator, business owners can:
- Develop a plan to restructure the company’s debts and operations
- Communicate with creditors and negotiate repayment terms
- Identify areas for improvement and implement changes to enhance the company’s viability.
Don’t delay seeking help
If you’re a small business owner facing financial challenges, don’t hesitate to reach out for help.
By seeking professional advice early on, companies may be able to avoid insolvency altogether or minimise its impact on their operations.
At AVA Advisory, we understand the challenges faced by small business owners across the country and are committed to providing expert guidance and support throughout the Voluntary Administration process.
Our team of experienced debt advisory and restructuring professionals can assist directors and owners by:
- Conducting a comprehensive review of the company’s financial situation
- Identifying potential risks and opportunities for improvement
- Developing tailored strategies to address cash flow issues and optimise operations
- Providing advice on restructuring options, including Voluntary Administration and deeds of company arrangement (DOCAs)
- Liaising with creditors and other stakeholders on behalf of the company.
Our focus is on safeguarding the financial future of Australian businesses and our approach is collaborative – we work closely with business owners to ensure they have a clear understanding of the Voluntary Administration process and its implications for their business.
Call AVA Advisory on 1300 181 220 or book an obligation-free, cost-free consultation through our website to discuss how Voluntary Administration could provide a second chance for your business.
