Experts consider 2023 a critical year for businesses considering rising interest rates, inflation, decreases in consumer spending, and the ATO resuming its debt recovery strategy. The challenging economic conditions in the Australian market will undoubtedly spark an insurgence in nationwide insolvencies throughout the 2023 financial year, with well-known companies Deliveroo Australia and Ballistic Beers already crumbling under the unrelenting pressure. In this article, Litigation and Dispute Resolution Senior Associate, Lachlan Boyle, and Law Clerk Riley Hickey, explore the concept of voluntary administration as an insolvency response to assist business owners in navigating their options in these ominous economic conditions.

General Overview

Voluntary administration is an alternative process to liquidation where an insolvent company immediately ceases operation. Section 435A of the Corporations Act 2001 (Cth) stipulates that the administration process typically involves either a secured creditor or director of a company that is or is likely to become, insolvent seeking the appointment of a registered insolvency practitioner who takes control of the business. It is intended to be a temporary arrangement, where the administrator seeks to assess the company’s financial position in a last attempt to support the business in maintaining its operations. This is also achieved by evaluating ways to increase the business’ profitability by cutting down operational costs, or seeking to recover unpaid monies from the company’s debtors.  In circumstances where the ongoing operations of the company is not viable, the administrator seeks to obtain a greater return for creditors by initiating the winding up of the company, if necessary. Administrator Responsibility

During the voluntary administration process, the powers of the company’s directors and officers are suspended, with the administrator taking control of administrative functions such as the company’s assets, affairs, and liabilities. In that regard, they may sell or close the company business, sell any existing assets at their discretion, and exercise managerial functions.

Process

The administration process involves two creditors’ meetings to determine the company’s future. The first meeting must be held within eight business days of the administrator’s appointment, which involves a general overview of the administration. The second meeting typically follows some 25 days after the administrator’s appointment, where the creditors meet to determine the company’s future. During the meeting, the voluntary administrator provides their opinion as to three main options, namely whether to:

1. execute a deed of company arrangement (‘DOCA’);
2. cease the administration process; or
3. proceed with winding up the company through liquidation.

Deed of Company Arrangement (DOCA)

A DOCA is a binding agreement between the company and its creditors to facilitate a resolution as to how the company’s assets and affairs will be managed and to consider the associated return to creditors. It operates as a compromise, allowing the company to continue its operations differently. Entering a DOCA may enable the company to avoid being immediately wound up and allows creditors to obtain a greater return on their investments than what would otherwise be anticipated via liquidation. In turn, the administrator proposes the DOCA at the second meeting of creditors, where it must be approved by 50 percent of the number of creditors, and those creditors comprise more than 50 percent of the total value of the creditors’ cumulative liability.

The DOCA may contain various propositions, such as:

1. refinancing or other debt-compromising strategies;
2. dividing and selling portions of the business or combining businesses; and / or
3. initiating a debt-for-equity swap, where the debt owed to creditors may be converted into equity in the relevant company.

Applying to the practical scenario, Deliveroo Australia intended to issue a DOCA to the appointed administrators, including compensation packages for remaining creditors, severance payments for existing employees and compensation to riders and various restaurants.

RAMSDEN LAWYERS – HOW WE CAN HELP

Navigating voluntary administration can be complicated for business owners, especially in times of financial adversity. If you are concerned about your business’ current financial position, we encourage you to seek professional advice to consider your options at the earliest available opportunity. Further, if you are owed money by a company that has recently entered administration, we encourage you to seek advice on your options in recovering that debt by alternative avenues.

If you are seeking legal advice, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the relevant legislation for your circumstances. Our Litigation and Dispute Resolution Division has specific expertise in helping companies enter voluntary administration.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.