But the perception that when a company goes into administration it will inevitably wind down is not always true.
In fact, appointing an administrator may be the difference between the business being able to continue and shutting its doors. Administration can also help directors prevent the company from incurring debts for which they might otherwise find themselves personally liable.
The journey through administration — and the potential for an administrator to successfully turn the business around — depends heavily on directors taking action before the business’ circumstances become terminal.
So what is voluntary administration?
A voluntary administration is typically initiated by directors of a company that have formed a view that the company is (or is about to become) insolvent. They agree to appoint an independent administrator to take control of and investigate the affairs of the company.
During the administration period, creditors’ claims are put on hold and all legal proceedings against the company are frozen. It is the appointed administrator’s role to examine the company’s affairs and maximise the chances of the company, or as much as possible of the business, to continue.
There are three possible outcomes:
- a deed of company arrangement (DOCA) that sees creditors’ debts settled and the company continuing in a restructured form,
- liquidation, or
- the administration simply ends (this is a rare outcome).
The process is actually quite fast: the administration period is around 25 business days unless the Court allows an extension. During this time, the administrator conducts investigations and determines the best way forward given the company’s circumstances. The administrator is then required to issue a report outlining the recommended option (usually the option that maximises the return to creditors).
A DOCA will be put in place if the administrator determines there is greater value in the company continuing (in a restructured form) than in winding up the company. A DOCA is a binding agreement between the company and its creditors addressing how the company’s creditors will be paid. It’s a flexible tool that can be tailored to suit the company’s situation.
If the administrator determines that winding down the business will provide a better outcome for creditors, the company will go into liquidation. In this case the company’s assets will be divided up between creditors according to the law and any surplus will be distributed to its shareholders.
Rescue mechanisms such as these provide businesses with the best possible way to avoid any legal ramifications (including potential personal liability) that can occur when a business is struggling to pay its debts — and early intervention ensures both the options available to save the company and the return to creditors is maximised.
Pitcher Partners is a leading provider of business recovery services to companies using the voluntary administration process. Pitcher Partners specialises in business turnaround and restructuring approach for its administration clients. We have extensive experience in achieving desired outcomes through the voluntary administration process. Contact your expert for more information.