Voluntary Administration: Your Questions Answered

As the Australian economy moves into budget repair following two years of COVID-19 fiscal stimulus for business, Greg Dudley, RSM Australia Partner warns companies need to be on guard against an expected increase in the number of voluntary administrations.

“There is set to be a major uptick in formal insolvency activity as government economic stimuli for business are wrapped up,” says Greg, who is based in Perth.

“Companies need to be proactive to ensure they remain profitable. But if there are doubts concerning the financial viability of a company, the key to coming out the other side to resume trading is to declare voluntary administration sooner rather than later.”

Q: What exactly is voluntary administration? 

A: Voluntary administration is a formal process that allows companies in financial distress to identify an appropriate course of action under the Corporations Act 2001 to resolve their futures. Companies enter into this arrangement when they can no longer pay creditors with a view to finding the best financial outcome for all stakeholders.

Q: What is the main purpose of going into voluntary administration?

A: Voluntary administration provides a way forward to a company in financial distress. In a nutshell, it gives the company and its directors the chance to take a breath, restructure and get off the cashflow-driven business wheel, to find the best way to pay creditors and to keep the company in business if possible.

Q: How does the process begin?

A:Primarily, when a company goes into voluntary administration and becomes insolvent, the directors appoint an administrator. As soon as this overt process begins, the administrator takes control of the company and has a duty to run its operations, inform stakeholders and decide upon the best course of action to try to repay creditors. If creditors and stakeholders cannot agree on the course of action proposed by the administrator, the company is placed into liquidation.

Q: What is the benefit of voluntary administration to the company, and to the creditors? 

A: Voluntary administration allows a better result for the company’s creditors and a softer landing for the company directors. Ideally, the end result you want is for a company in voluntary administration to move into what’s called a deed of company arrangement, which is basically the deal done to ensure creditors get a proportion of their money back.

Q: That’s good news… creditors get what they are owed?

A: This varies. Sometimes creditors will receive 100 cents in the dollar over time, others one cent in the dollar over time. It depends on the individual circumstances of each company. But remember: you only go into voluntary administration when you can’t pay all your creditors, so a lack of funds is the commonality. A Deed of Company Arrangement via a Voluntary administration gives creditors a better return than the company going into liquidation. 

Q: Can a company in voluntary administration expect to trade again? 

A: There certainly is a proportion of companies that come out the other side of voluntary administration, but the trick is to start thinking about it early and acknowledge your business is facing serious liquidity issues. 

Q: What does that look like?

A: The business could be continually struggling to pay wages and be on a payment plan with the Australian Taxation Office. If it has extended its payment terms with all its creditors and is still struggling, it is absolutely at the juncture it needs help. 

Q: Is it a hard decision to take as a company director to go into voluntary administration? 

A: It’s incredibly confronting, which is why the vast majority of businesses leave it too late, with no funds left to pay creditors and nothing left to salvage. Go early and you have a chance of paying your creditors and restructuring your business to continue operating.

Q: So, how can companies avoid the necessity for voluntary administration?

A: Utilising good management accounting information is key. Have three-way forecasts that show how your profit & loss, cashflow and balance sheet are tied up together. Look at your monthly accounts and variants analysis and understand what’s going on. Crucially, make sure your pricing is based on your overheads and not someone else’s.

Q: What about cashflow? Business always talks about the importance of cashflow. 

A: Cashflow is one part of the equation, but what’s more important is profit, especially now the government’s economic stimulus measures like JobKeeper have stopped. As a company, you need to be profitable; if you are not, you need to think about how to make yourself profitable. 

Q: That sounds simple in theory, but what’s the key to achieving it? 

A: Becoming a profitable business is a combination of ‘What expenses can I reduce?’ and ‘What income can I increase?’ If you look at your business and you find you can't do both of those things, you really need to ask yourself ‘Does this company have a viable future?’

For more information

Start a confidential, free conversation with our RSM Restructuring and Recovery team today. 

Call 1300 263 816 or find out more here.