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When a company is experiencing serious cash flow problems or can no longer pay its debts as they fall due, voluntary administration may provide an opportunity to restructure the business and achieve a better outcome for creditors.
Voluntary administration is a formal insolvency process in which an independent administrator takes temporary control of a company, assesses its financial position and recommends the best path forward. This may involve returning the company to its directors, entering into a deed of company arrangement or placing the company into liquidation.
Below, we answer common questions about the voluntary administration process, its potential benefits and when company directors should seek professional advice.
“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.”
Get confidential voluntary administration advice
Every company’s circumstances are different. Voluntary administration may provide an opportunity to restructure and continue operating, but other insolvency or turnaround options may be more appropriate. RSM’s restructuring and insolvency specialists can assess your financial position, explain the available options and help you determine the most suitable next step.
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: 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: 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?’
Voluntary administration at a glance
Voluntary administration is designed for companies experiencing financial distress or insolvency.
An independent administrator temporarily takes control of the company.
The process gives creditors an opportunity to vote on the company’s future.
A deed of company arrangement may allow the business to continue trading while providing a return to creditors.
Voluntary administration does not guarantee that the company will survive.
Seeking advice early generally gives directors and businesses more options.
Get advice before your options become limited
Voluntary administration can provide struggling businesses with an opportunity to restructure, protect value and achieve a better outcome for creditors than an immediate liquidation. However, every business is different, and the most appropriate solution will depend on your financial position and long-term objectives.
If your business is experiencing cash flow difficulties or you're concerned about meeting your financial obligations, seeking professional advice early can significantly increase the options available to you. RSM's experienced restructuring and recovery specialists can assess your circumstances, explain the available pathways and help you make informed decisions with confidence.
Get confidential voluntary administration advice
Every company’s circumstances are different. Voluntary administration may provide an opportunity to restructure and continue operating, but other insolvency or turnaround options may be more appropriate.
RSM’s restructuring and insolvency specialists can assess your financial position, explain the available options and help you determine the most suitable next step.
Get confidential voluntary administration advice
Every company’s circumstances are different. Voluntary administration may provide an opportunity to restructure and continue operating, but other insolvency or turnaround options may be more appropriate.
RSM’s restructuring and insolvency specialists can assess your financial position, explain the available options and help you determine the most suitable next step.
