Considering Voluntary Administration Adelaide? Make sure you’re aware of what happens…
Appointing a voluntary administrator is a lot like abdicating from your throne. You lose your powers as a director and lose control of your business. If you think about it, this is a massive decision. Seeking to utilise a voluntary administration Adelaide, a registered liquidator wears your crown and calls all the shots. You might even end up worse-off as a result, and that’s actually not their primary concern… This is because a liquidator’s legal duty is to the company/creditors (although a study demonstrates the odds are against them getting a satisfactory outcome also).
In this article, we raise some key points that you may not be aware of about the voluntary administration process.
1. A voluntary administrator isn’t in your corner – they do not act in the directors best interests
Instead, a voluntary administrator is working in the interests of your company and creditors. Of course, they will smile, be nice, and make you feel comfortable prior to their appointment. But once they are in control, there is nothing you can do about it if you don’t like the procedure, their decisions or their actions.
A voluntary administrator will:
- take over control of your company, which means that you’ll have no powers
- work in the best interests of your creditors, not for you (if you put forward a creditors compromise/DOCA there’s no guarantee it will be accepted)
- decide whether or not your business is worth trading in the short term (no guarantee trading continues)
- not be required to tell you about any impacts that the process may have on you personally.
2. The outcome for your company could be catastrophic – irreparable damage to reputation & destruction of value
As soon as you appoint a voluntary administrator Adelaide, your employees, your suppliers, and your customers will all know that the business is insolvent. Voluntary Administration was supposed to be a formal ‘rescue’ process but it attracts negative stigma and has extremely low success rates. The media and public do not differentiate between the different types of formal insolvency procedures (hardly any knows or cares about the difference between liquidation/administration/receivership – just means creditors most likely wont be paid).
Think about that for a moment…
Publicly declaring a company is insolvent can have immense consequences on the values of the business and assets. If your plan was to try and salvage something out of the business and get a DOCA over the line, the damage to reputation may mean it is difficult to trade going forward.
Voluntary administration is reported in the press as the end of a company, with corporate undertakers sent in to sell the business.
Jason Harris, 2014, ‘The effect of voluntary administration on business restructuring.’
Additionally, creditors have much more power than you perhaps realise. They can:
- Replace your voluntary administrator at the first meeting, if they don’t like them
- Simply vote against a compromise or your DOCA if they’re facing not going to get paid a decent sum
- Specify that you must use one of their preferred liquidators for the administration, if they’re a secured creditor. If you don’t take on board that person’s wishes, the secured creditor can appoint a receiver and a manager over the top. Once that happens, the voluntary administration process is merely a quasi-liquidation process, because the receiver takes control over the business and assets under it’s security. You then have two liquidator firms charging fees…
3. The chance of a good outcome is very small… but the liquidator’s realisation costs are high
As far as insolvency work goes, voluntary administration Adelaide is the most profitable work of all for a liquidator. Even a small voluntary administration costs an average of $97,000! This is backed up by the study by Mark Wellard (2014 ‘A sample review of DOCA under Part 5.3A of the Corporations Act’).
It’s very possible that those who are referred in to you are there for the wrong reasons, so it’s critical that you pay attention and do your due diligence on any referral. Don’t just trust the person because your administrator suggested them.
Unfortunately, despite all the work and all the money involved, the chance of a good outcome is still ridiculously small at just 2% and creditors can expect returns from a DOCA of just 5 to 7 cents in the dollar (again, see the study by Mark Wellard).
4. You only get to do this once
Appointing a voluntary administrator is the kind of opportunity you only get once. By which I mean: If it fails, if you don’t get the outcome you were after, this is it, sunshine. Your business and assets will be sold off in a fire sale.
One of the reasons why good outcomes are unlikely is because voluntary administrators are not always commercially minded. They’re accountants and may not be experts in your company’s industry. If the company can’t make its payments while you’ve got an administrator appointed, they may make the snap decision to cease trading. This is because they must pay those debts from their own pockets. Ceasing trading means loss of value – employees, customers and suppliers all walk away as their business must continue.
Additionally, even though the work is really about people and negotiation, if your administrator is a shy or retiring type, the chances of a good outcome drop away even further.
Safe Harbour Turnaround or Restructure
A turnaround initiative or restructure under the insolvency safe harbour should always be considered by directors. This is because directors retain control of the process and the costs can be significantly less. If you suspect your company is insolvency or may become insolvent in the future, you can make use of Safe Harbour – this protects you from insolvent trading personal liability and has been enormous successful since it’s introduction in 2017.
Don’t rush into appointing a voluntary administrator just because you suspect the company may face insolvency – always seek the directors safe harbour protection first and consider all of your options. This is purposefully designed to give you breathing space in a crisis.
Also beware of liquidators who attempt to frighten you by mentioning ‘illegal phoenix activity‘ or citing dodgy ‘pre-insolvency advisors’ (which they tend to class as anyone who isn’t a registered liquidator…). There are legitimate ways to undertake a prepack or safe harbour restructure provided it is done so under the supervision of a qualified and insured business turnaround specialist (such as TurnAbout AU…).
Voluntary administration Adelaide may still be needed…
The administration process does have its place and can be extremely valuable in certain situations. Our advice is to look at the merits of all your available options prior to making any rash decisions.
Voluntary administration can be technical, but you can still retain control over the process with planning and professional advice
Yes, the process of putting a company through voluntary administration Adelaide is very technical.
Yes, you require someone (or a company) with expertise to do the work for you.
But it doesn’t mean you have to let go completely. Before you decide to appoint a voluntary administrator, speak to us about getting the following prepared:
- have an objective for yourself and for the company
- have a plan that includes a scope for the work to be done by the voluntary administrator
- exhaust all other informal turnaround and restructuring options first.
The last point needs emphasising. Appointing an administrator should only be considered after exploring fully your informal restructuring and turnaround options. Before heading down the voluntary administration route, get expert advice by consulting a TurnAbout AU business turnaround practitioner. You can then work out a plan that will achieve the best possible outcome for yourself, the business and all stakeholders.
If the DOCA is rejected by creditors, and the voluntary administration results in liquidation, this might end the company but it doesn’t necessarily stop your business. Your company is a separate legal entity and you are just a director/owner of the company. It is more likely that the goodwill, IP and ‘know-how’ of the business rests with you. The company is unable to function without you. The company is a legal shell which owns the business. When managed appropriately, a formal insolvency process does not necessarily mean it is the end to a viable business model. It may not even adversely your ability to continue on as a director.
The moral of this story is that you ought to pick up the phone and call the TurnAbout AU team for a confidential discussion about your situation. We will help you to assess your situation, work out the best options for everyone, and create a plan to work your way through.
Get in touch for a free consultation.