From time to time, companies may face financial hardship or difficulties. Directors have a duty under the Corporations Act 2001 (Cth) to prevent a company trading while insolvent. So, if problems go from bad to worse, it may be time to consider the option of entering into Voluntary Administration.
What is Voluntary Administration?
Voluntary Administration is the process where an 'Administrator' is appointed to take control of a company's affairs and make recommendations to the creditors about what the best course of action is to help the company repay its debts. During this process, the Directors cease being in control of the company and its affairs.
This provides the company with time to refocus and hopefully improve its financial position. It may even be possible for the company to continue trading after the Voluntary Administration ends. Importantly, the Administrator assumes liability for any debts incurred by the company during the administration process.
How does Voluntary Administration work?
The decision to appoint a Voluntary Administrator is made by either the Directors of the company passing a resolution, a secured creditor with a charge over the majority of the company's assets, or by a liquidator.
At a meeting of the creditors, the Administrator makes recommendations about what future action should be undertaken, and this is then voted on by the creditors.
Possible recommendations include placing the company into liquidation, accepting a Deed of Company Arrangement ("DOCA"), or allowing the Directors to resume the control of the company. A DOCA is a binding agreement between the company and its creditors, which enables the company to pay its debts to the creditors.
Can creditors still make claims during the Administration process?
During the administration process, creditors are prohibited from enforcing their interests against the company. However, if a secured creditor holds security interests over the whole or majority of the company's assets, then they have 13 business days from the appointment date to enforce their interests. Landlords are also prohibited from enforcing their interests, unless the action commenced prior to the administration process.
- If your company is facing financial difficulties, then we recommend seeking legal and accounting advice as soon as possible.
- If your company is insolvent, then you must ensure that it does not incur any further debts so you do not risk the further consequences of trading whilst insolvent and being in breach of your director's duties.
How can Sharrock Pitman Legal help me?
We have extensive experience assisting customers with advice in Voluntary Administration. If you need advice, please contact us and it would be our pleasure to assist you. We provide fixed prices and offer substantive free benefits to all customers who run a business. Click here for full details. Call Sharrock Pitman Legal today on 1300 205 506.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.