Key Points

  • In the current economic climate businesses need to be adaptable to the increasing risk of their suppliers and distributors facing financial difficulty.
  • The failure of a key supplier or distributor can have significant ramifications for your business and being prepared is of paramount importance.
  • As more companies begin to struggle as a result of bad debts, we will see voluntary administration become an increasingly common form of external administration.

What is voluntary administration?

Essentially, an independent person (the Administrator) is appointed to the company and assumes day to day control of the company. The Administrator is usually appointed by the directors passing a resolution that the company is insolvent or likely to become insolvent.

The Administrator investigates the company's affairs and reports back to creditors about the options and recommendations for the company going forward. With this information the creditors vote on the future of the company.

Voluntary administration involves two meetings. The first is held shortly after the Administrator is appointed at which creditors can only vote to replace the Administrator and whether to form a committee of creditors. At the second meeting, creditors vote on the future of the company. It is usually held within 25 business days of the Administrators being appointed, although this period can be extended or the meeting can be adjourned.

The two most common outcomes at the second meeting are that the company is placed into liquidation or the company enters into a deed of company arrangement. This mechanism can be used to achieve complex restructures or deals involving creditors receiving an agreed dividend in return for releasing the company from the debts owed. As a result, voting at the creditors meeting is important. A resolution is passed at the meeting if a majority of creditors (in dollar value and number) vote in favour of the resolution. The Administrator has a casting vote if the creditors are split.

What are some of the important effects of voluntary administration?

  • Directors are not replaced but their powers are effectively suspended. The directors cannot bind the company. Any dealing with company property without the Administrator's consent is void.
  • The Administrator becomes personally liable for debts he or she incurs for such things as services rendered, goods bought, repayment of money borrowed and property hired, leased, used or occupied.
  • Contracts are not automatically terminated by the appointment of an Administrator. A contract needs to include an express right of termination upon the appointment of an Administrator. This can create real practical difficulties if you need to get a new supplier or distributor engaged quickly and you do not have a clear right to terminate the existing contract.
  • There is a moratorium preventing creditors from continuing with any claims against the company while in voluntary administration. This includes any claims against directors or their families under personal guarantees.
  • Subject to limited exceptions, owners or lessors of property in the possession of the company are prevented from recovering their property while the company is in voluntary administration without a court order or the Administrator's consent. This can have significant ramifications for a business. For example, if a distributor in administration has possession of a large quantity of your stock then you could be prevented from recovering that stock even if you have not yet received payment for it.

If your major customers or suppliers are placed into voluntary administration you should seek advice on your rights as soon as possible. Our Corporate Recovery & Insolvency team has extensive experience dealing with a range of voluntary administrations and can assist you with any queries you may have.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.