The Advantages of Voluntary Administration: A Lifeline for Struggling Companies

When a company is in an exceedingly bad financial position, the road ahead may look vague and daunting. Creditors could be on their necks, cash flow could be drying up and internal operations might not be the best.

However, voluntary administration services provide a formal process that is legally recognized, which can potentially give a struggling business the chance to evaluate its situation and view its options.

It provides a breathing room for companies to find sustainable ways of recovery without being threatened with legal suits by creditors.

Hi. In today’s blog, I will be explaining at what voluntary administration is all about. So, if this is something you want to know, keep on reading this blog till the end and thank me later…

What Is Voluntary Administration?

The voluntary administration is a formal insolvency procedure established within the Australia corporate legislation. Yes, there are similar types of frameworks in other jurisdictions.

It entails the installation of an independent insolvency practitioner, known as the administrator. They merely takes over the control of the company for the period of time.

This procedure is triggered by a firm’s directors if after they feel that their company is insolvent or becoming insolvent.

The administrator’s task is to carefully analyse the financial situation of the company, research the reasons of its financial distress and choose the most proper path for the future.

The actual goal is not to shut down the business automatically. Rather, it is to determine if anyone can save or restructure it. Or, if one should just wind it after weighing the two.

The process on average takes about 25–30 business days, and the administrator in most cases advises the following result:

• Return the company back into the hand hold of its directors;
• Provide a Deed of Company Arrangement (DOCA) which is a formal arrangement between the company and its creditors through which debts are to be catered with a structured mode.
• Or liquidate the company if no recover is viable.

Key Advantages of Voluntary Administration

Here are some of the benefits of a voluntary administration that you need to know about:

1. Protection from Creditors

Probably the best and immediate of all the benefits of voluntary administration benefits is the automatic moratorium that is accorded.

As soon as an administrator is appointed, unsecured creditors’ actions become legally prohibited. These include certain enforcement measures such as:

• Starting or continuing court proceedings.
• Seizing property.
• Putting the company under liquidation.

This standstill gives the company a chance that it so desperately needs to take a step back and reevaluate where it is headed, without having to be constantly burdened by impending legal threats or repossession of assets.

2. Independent Financial Assessment

Secondly, a professional objective view of the company’s financial position is brought by an administrator. This unbiased evaluation can discover sensible recovery strategies, which may have escaped the attention of too close company directors.

It can also be useful in rebuilding confidence among the following people:

• Creditors.
• Employees.
• Stakeholders.

All of them can see the fact that someone who is qualified is applying to someone who knows how to lead the company towards a fair and transparent ending.

3. Opportunity for Business Rescue

Thirdly, contrary to liquidation, whereby there is much emphasis on selling assets in order to pay the debts, voluntary administration puts more emphasis on saving and restructuring the business.

Additionally, working with the administrator to present a DOCA, if possible, is something directors can do.

DOCA is a plan that will be used to outline to creditors how they will be repaid over time and make it possible for the business to continue trading.

This process can ensure retention of employees, value of the brand and customer relations that are likely to be inexplicably lost under a liquidation situation.

Besides reducing the cumulative amount of liabilities that the company owes, a successful DOCA can also ensure that there is more certainty as regards to the repayments, a fact that is good for both the company’s creditors and the company itself.

4. Fast and Efficient Process

Time is of essence when a business is in financial distress. Voluntary administration is meant to be fast and structured and with set deadlines for the major decisions and meetings.

This speed is good for all parties involved. For instance, a creditor knows that he/she won’t be left hanging, a director can act without prolonged time delay, and employees have idea about the future of the business.

Prompt resolution usually helps to stabilise operations and gather momentum in recovery.

5. Improved Outcomes for Creditors

In most instances, the creditors are better off if the company is put under voluntary administration as opposed to liquidation.

Because the process aims at rescuing the business at maximum value, a profitable DOCA would permit partial or full repayment in installments. This is often increased from what could come of liquidating the assets of the company.

Furthermore, the creditors also have their stake in the process taking a vote on the presented DOCA and determining the results actively.

6. Director Relief and Risk Management

Voluntary administration can be a blessing for the directors of companies as in some ways it can protect them against the worst of dangers accompanying financial failure.

Trading while insolvent is considered a legal risk directed at the directors of distressed companies, who are personally liable for it and may be subject to penalties, according to the statement.

Entrance into voluntary administration sends a message of activeness and responsibility that can reduce future legal risk.

In addition, directors are freed from the day to day burden of management during the administration, allowing them to regroup and reflect on their moves where they do not bear the full force of creditor pressures or pressures of their imminent insolvencies.

7. Preservation of Business Value

The other ignored, yet extremely important, benefit is the safety of company’s nonphysical assets:

• Goodwill.
• Brand reputation.
• Client contracts.
• Relationships with suppliers.

Liquidation usually obliterates this value at a fast pace whereas the voluntary administration gives a possibility to stabilize and save it.

Where possible, even if the original company cannot be rescued, there may be the possibility of a sale of the business as a going concern under administration, thus saving jobs and maintaining economic activity.

Wrapping It Up!

Voluntary administration is not an act of defeat. It is a sensible and many times a brave choice to make recovery work rather than crash.

It gives troubled companies an opportunity to regroup and restructure. Additionally, you can also engage in meaningful dialogue with their creditors under the supervision of an independent administrator.

For directors, it provides a route out of managing legal risks and looking at viable options without the stigma and chaos made by an unmanaged insolvency.

When your company is financially constrained early intervention will do the trick. Talking to a licensed insolvency professional can help determine if voluntary administration is appropriate for your circumstances.

The proper approach will make what might appear at face value as the end of the road but instead a new beginning with the preceding outline of strategy, structure, and legal protection.

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