In the current economic climate businesses need to be adaptable
to the increasing risk of their suppliers and distributors facing
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
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
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
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
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
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
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.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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