When your business is in financial trouble, the first question to ask is a simple one: What are my options?

Having supported many business owners in this situation, we know the answer is different for every business, as each is facing its own set of unique challenges. Perhaps your challenges centre around cashflow or unexpected expenses. Or maybe it’s a mountain of tax debt and you’ve just received a Director Penalty Notice (DPN). 

Whatever the case, being clear on the options available to you is fundamental. 

Whenever we discuss these options with clients, a question that typically arises is:   

What’s the difference between voluntary liquidation and voluntary administration? To shed some light, let’s look at what each process is designed to do…

Voluntary liquidation (of a solvent business)

If your business is solvent (meaning it can still pay its debts when they’re due), but you want to wind it up, you can enter what’s called members’ voluntary liquidation. 

A members’ voluntary liquidation is common in these circumstances:

1. Directors or board members are ready to step away and close the company.
2. There may be significant debts but there are enough assets to pay them in full, and directors want a liquidator to handle the process.
3. The company has incurred risk, and the directors would prefer to wind up the company rather than simply deregister it so they can access the heightened risk management and asset protection benefits of a liquidation.
4. The company has served its purpose and directors want a structured, tax-efficient way to wind it up.
5. Two or more companies have merged, or one company has sold or transferred its business and assets to another company, and the owners are left with a surplus company.

The goal: To wind up the business, pay creditors in full, and distribute any remaining funds to shareholders in the most efficient and tax effective manner. 

How it works: Directors decide that the company is solvent and they want to recommend that shareholders pass a resolution to wind it up. We provide advice on any taxation matters, create a wind up plan, prepare all the template documents and resolutions, and guide directors and shareholders through the process of preparing for and commencing the wind up. 

The directors then sign a series of documents and both directors and shareholders pass a number of resolutions at director and then shareholder meetings to declare the company is solvent, wind up the company, and appoint a liquidator. Once appointed by those documents and resolutions, we then wind up the company which may require selling assets, paying off creditors, and distributing the surplus to shareholders.

Voluntary liquidation (of an insolvent business)

If your business is insolvent and cannot pay its debts, you will need to enter creditors’ voluntary liquidation. 

A creditors’ voluntary liquidation is common in these circumstances:

• Directors have received a DPN.
• There’s no realistic prospect of turning the business around.
• Directors want to take control of the decision making to appoint a liquidator and wind up rather than wait for creditors to force it and appoint their nominated liquidator.
• Creditors are pushing for payment and a formal process is needed to deal with them in order of priority, and in circumstances where you can’t reach a compromise.
• The company doesn’t have sufficient assets to pay outstanding employee entitlements and winding up can grant access to the Fair Entitlements Guarantee Scheme that will guarantee payment for the majority of employee entitlements.  

The goal: To proactively wind up your business in the most cost effective way, and get the best possible result for your employees and creditors. 

How it works: Directors declare that the company is insolvent and recommend that the shareholders pass a resolution to wind it up. The shareholders then pass a special resolution to wind up the company and appoint a registered liquidator who engages with creditors. The liquidator sells assets and pays creditors in order of priority (rarely in full).  

What to consider: Because the company is insolvent (unlike a members’ voluntary liquidation), the liquidator does have an obligation to investigate the company’s failure, including why it failed and whether any offences have occurred. These investigations are reported to creditors and, if necessary, ASIC. The result may be that the liquidator needs to take further action and seek to recover money for creditors by pursuing certain claims.  

Before you appoint a liquidator for voluntary liquidation of an insolvent business, the liquidator can discuss these investigations in more detail and how they may impact you as a business owner. These investigations are compulsory processes, but they also don’t immediately mean that someone has done anything wrong, or that anyone has to pay any money or is guilty of an offence. Directors and other parties all have defences to any allegation or claim against them, and successfully prosecuting claims for things like insolvent trading or preferences is complex and requires a comprehensive legal process to be followed. 

It's also worthwhile remembering that liquidator claims are predominantly designed to recover money for creditors. The biggest reason why a liquidator won’t commence any action is if the potential defendant has limited financial capacity, which is very common. In that case, the liquidator will typically advise creditors of these concerns and recommend no further action. Again, if you sit down with a potential liquidator before appointing them, they will discuss these matters with you. If necessary, they can refer you to a lawyer for specialist advice so you’re clear on what the risks may be if a liquidator is appointed.

The reality of appointing a liquidator for an insolvent business is that it’s never a business owner’s preferred choice. But if all other options have been exhausted, it is inevitable that a creditor will eventually apply to court to wind up the company. 

Being proactive and taking control of the situation can help to:

• reduce the personal risk to you (particularly if you’ve been issued with a non-lockdown DPN and you remain within the 21 day decision period)
• remove the fear and uncertainty often experienced by directors who don’t know what to do and where to turn
• deliver other benefits such as assisting employees to access government safety net schemes to pay outstanding entitlements  

Voluntary administration

If your business is teetering on the edge of insolvency and the next steps aren’t clear, you might choose to enter voluntary administration. 

Voluntary administration is common in these circumstances:

• Directors have received a DPN.
• You need more time to evaluate options for the company’s future.
• There’s a chance the business can be restructured or sold.
• You can pay some of the company debt over time or by a lump sum (or a combination of the two), but not all the company debt in full immediately and you want to propose a compromise through a Deed of Company Arrangement.
• Directors want to protect the company from creditor action while plans are being developed.

Keep in mind that this is a more expensive option than moving straight to voluntary liquidation because significant additional work needs to be undertaken for a VA. However, if a liquidator is never appointed, the big advantage of a VA is that directors and creditors are protected from liquidator claims and investigations. I.e.: there will be no claims for preferences or insolvent trading. 

The goal: To have more time to explore your options and usually to try and save the business and avoid liquidation.

How it works: Directors pass a resolution that the business is insolvent, or likely to become insolvent, and appoint an administrator (who must be a registered liquidator). From this point, the administrator takes control of the company and notifies creditors that this has taken place.

The administrator then evaluates the company’s financial position, which leads to one of three possible outcomes: 

• Deed of Company Arrangement (DOCA) – the administrator may recommend that a DOCA is a viable alternative to liquidation. The DOCA lays out how the company will deal with its debts, and is presented to creditors to vote on. If approved, the business can continue trading as long as it meets its obligations under the agreement, which is commonly to pay amounts from future profits or an advance from a third party to compromise past debts for cents on the dollar. Once the DOCA is completed, the company is released from the debts covered by it. If the DOCA fails, the company usually goes into liquidation.
• Liquidation – if the administrator determines the company cannot be saved, or directors don’t wish to save it or can’t, once all options have been explored then the company will typically be liquidated. This may also happen after a sale or merger, where assets and resources have been transferred, leaving only the shell of the company which needs to be wound up.
• Administration ends and the administrator hands back control to directors – while extremely rare, an administrator may return control to directors without a DOCA or liquidation if they determine the company is viable and can continue trading successfully. Creditors must also vote to end the administration.

What to consider: While it is common for us to get appointed as an administrator with limited notice, we always prefer to have as much time as possible to explore all options first. For example, we can provide an Options Report, which then allows us to plan for the preferred option (which may be a voluntary administration) and assist directors to prepare a DOCA proposal with cash flow forecasts and appropriate budgets. This gives the directors a degree of comfort that what will be proposed is workable, viable, and will achieve their goals and objectives. We can then hit the ground running with a plan and action list for everything we have to do immediately – such as reassure employees and customers with meetings and urgent communications, and so on. 

Keep in mind too that a voluntary administration process is a team effort. You need a plan so everyone knows their role; from our team to the lawyers, directors, management, staff, and any others involved. 

Voluntary administration in practice

We work with many companies entering voluntary administration in the hope of avoiding liquidation. While this isn’t the outcome every time, we almost always see a result that leads to enormous immediate relief for leadership and the board. By the time they reach this point, they’re often out of ideas and feel they are carrying an overwhelming burden that is causing immeasurable stress.  

Having us come in gives them support and takes away a lot of that burden. Many say it’s like a weight being lifted off their shoulders. While there may be some shock felt by employees, creditors and customers, the key is communicating what the voluntary administration means for them. This includes how we propose to save the business, save jobs, and get them paid in full (or at least more than what would occur in a liquidation). 

We also ask for their help and support to achieve this by working together. All stakeholders appreciate that they have someone independent in control, who they can rely on for transparent information. Creditors also appreciate that there is a finite timeline, including two meetings and a report that ensures they are well informed and get to vote and decide the company’s future.

To shed some light on voluntary administration in practice, we worked with a company that had substantial debt and many customers and employees relying on it. The owners no longer wished to run the business, but they wanted to save it for their customers and employees. We quickly engaged with all stakeholders to see what could be done, and were able to secure funding to keep the business open until it was sold. While the sale proceeds didn’t cover all the debts, it covered most of them, the business was ultimately saved, customers continued to be served, employees were retained, and the landlord maintained a tenant. 

We worked with another company where directors were initially very casual about their situation. They knew the debt level was serious and cashflow was tight, however the company had significant property assets and believed selling them or borrowing against them would solve their cashflow troubles. When we met, a deeper look revealed the company was going to run out of money much faster than expected and the entire business model wasn’t viable. 

A bank loan wasn’t possible because the banks they approached wouldn’t lend to companies making losses with overdue tax debts. Given that selling their property assets would take six to 12 months, the company appointed us as administrators. We presented a DOCA to creditors who agreed to give us time to organise the sale of the assets in an orderly fashion. 

In the end:

• assets were sold above valuation
• creditors were paid in full
• directors were saved from personal liability
• there was even a material surplus to distribute  

Another example of a successful voluntary administration involved a startup company that we helped to recapitalise and restructure through a DOCA. As administrators, we worked with the team to manage debt and improve profitability, and the directors offered a compromise of 30 cents on the dollar for $5m in debt. Now the directors are back at the helm and the company is doing better than ever – saving jobs, helping customers, and continuing to work with many of the same creditors who supported the restructure. 

Is there a clear path out of financial distress for your business?

Every business owner in trouble has a plan. It might involve borrowing money, selling an asset, boosting sales, or any other step they believe will fix the problem. We call this ‘Plan A’. Often, business owners engage us while working through Plan A because it helps support their eligibility for Safe Harbour, and gives them the time and space to see it through.  

Where we frequently see business owners get stuck is with realistic Plan B options. They might say, “If this doesn’t work, then…” but their backup plan may not fully reflect the severity of the situation. 

This isn’t intended to sound negative. The reality is that many companies might have been saved if directors had sought professional advice sooner. Most reach out when they’re extremely tired, making very little money, and the situation has become irretrievable. They’re also worried at that stage about the serious consequences of trading while insolvent, but often the reality is this risk has already crystalised as they have breached this duty. So by the time they come to us, it doesn’t take long to explain why their Plan A may not work and their Plan B needs to be refined.

Know your options

So when should you get professional advice? Any time you’re losing money or are forecast to lose money – even if you have cash reserves. 

You have to create a seat at the table for the experts you need, as you will need them from time to time through the ups and downs of business ownership. Sometimes that’s a tax advisor, other times a business advisor or a lawyer, and occasionally a restructuring and recovery advisor. We fill a seat when you need us and step away when you don’t. 

While in the seat, we work through your options. This starts with developing an Options Report which carefully refines your Plan A to give it the best chance of success, and provides a clear roadmap for Plan B.

If Plan A works and you don’t need Plan B, you can keep the Options Report in the filing cabinet to re-visit in the future. It’s very common for directors to dust off an Options Report months or even years later, when they realise they need it and our expertise at short notice.

What’s most important is that you have full clarity of all the options available to you right now. This may not require voluntary liquidation or administration, but a carefully devised strategy that utilises other workable options such as Small Business Restructuring. If your business is eligible, a small business restructuring practitioner can work with you to determine if this is a viable way to restructure your debts.

We know that dealing with financial stress in your business is daunting – and so can be the idea of handing your business over to an administrator or liquidator. In all honesty though, most business owners we work with say that deciding to get us involved gave them a sense of relief. After months of stress, sleepless nights and the threat of personal insolvency or bankruptcy, the best option was to be proactive, get advice from an expert, and take that advice.  

To arrange a free initial meeting, contact the restructuring and recovery team at your local RSM office.