Voluntary Administration — a structured path through financial crisis with creditor protection

Under section 436A of the Corporations Act 2001, a director (or the board) may appoint a voluntary administrator by passing a resolution that the company is insolvent or likely to become insolvent, and appointing a registered liquidator as administrator. The resolution must record the directors' opinion on insolvency. The administrator's appointment takes effect immediately upon the resolution being passed and the administrator's consent being obtained. A secured creditor with a charge over the whole or substantially the whole of the company's assets can also appoint a receiver — but if the charge is unenforceable the administrator takes priority. Notice must be given to ASIC within 5 business days of appointment.

Under section 440A and related sections of the Corporations Act 2001, the appointment of a voluntary administrator triggers a moratorium that prevents most creditors from: commencing or continuing proceedings to recover debts; enforcing a judgment against the company; repossessing property; appointing a receiver; and enforcing rights to terminate contracts (in most cases). The moratorium lasts for the duration of the administration. Secured creditors have a right to enforce within the first 13 business days unless a court order prevents them. The moratorium gives the administrator time to investigate the company's affairs, assess viability, and prepare or receive a DOCA proposal.

The voluntary administrator is a registered liquidator appointed to take control of the company during the administration period. The administrator: takes control of the company's business and assets; investigates the company's affairs; assesses whether a DOCA or other outcome would be in the creditors' interests; and reports to creditors at the second creditors' meeting with a recommendation. The administrator acts in the interests of creditors as a whole — not the directors, not individual creditors. The administrator also has the power to investigate director conduct and can report to ASIC about any insolvent trading or breaches of duty identified during the investigation.

At the second meeting of creditors under section 439C of the Corporations Act 2001, creditors vote to determine the company's future: (1) Execute a Deed of Company Arrangement (DOCA) — the creditors accept a formal arrangement that binds all creditors and may allow the company to continue trading under revised terms, often involving a lump sum payment to creditors in full satisfaction of their claims; (2) Return the company to the directors — if the administrator is satisfied the company is solvent and no DOCA is required; or (3) Wind up the company — if creditors determine that liquidation is the best outcome. A DOCA requires a simple majority in both number and value of creditors voting to pass.

Employees occupy a priority creditor position for most of their entitlements. During the administration, the administrator must decide whether to continue trading — if so, employee wages accruing after the appointment date are paid as expenses of the administration (a priority above all creditor claims). Entitlements accrued before the appointment (unpaid wages, leave, redundancy) rank as priority unsecured claims under section 556 of the Corporations Act 2001 ahead of ordinary unsecured creditors in any liquidation. If the company ultimately goes into liquidation and cannot pay employee entitlements in full, employees may be able to claim under the Australian Government's Fair Entitlements Guarantee (FEG) scheme for qualifying entitlements.

The appointment of an administrator does not extinguish a director's pre-administration insolvent trading liability — the administrator will investigate the company's trading history and may report potential insolvent trading to ASIC or the liquidator (if the company moves to liquidation). However, directors who appoint an administrator promptly — before the insolvency position becomes substantially worse — are in a better position than those who delay. During the administration, directors lose control of the company and cannot exercise their management powers without the administrator's consent. Directors must cooperate with the administrator, provide books and records, and attend interviews as required.