The aim of Voluntary Administration is to prevent liquidation and find a way through financial challenges.
What is Voluntary Administration?
Voluntary Administration is the legal process used to rescue companies facing financial difficulties. It provides a moratorium period and is regarded as an alternative to liquidation.
How the Voluntary Administration process helps businesses in financial distress
Voluntary Administration is a model law designed specifically for companies that are experiencing trouble but have the potential to turn around if reconstruction can occur. Working with a competent insolvency practitioner, businesses can navigate financial challenges, explore options, and work towards rebuilding and reclaiming control.
How it works
The VA Model
The Voluntary Administration process is made up of three separate parts: the initiation phase, the investigation phase and the decision phase.
The initiation phase starts with the appointment of the administrator. This is normally a simple document executed by the directors. This phase ends on day eight when the first meeting of creditors is convened, and the administrator’s appointment is affirmed by the creditors.
The investigation phase involves the administrator engaging in the affairs of the company so they can gain a better understanding of the business. A proposal for rehabilitation and recovery is drawn up to be submitted to creditors.
The decision phase is the final phase. This starts on day 20 when the administrator’s report is provided. It ends on day 25 when the watershed meeting is held.
Resolution of the directors
Starting Voluntary Administration
Starting the VA process is very simple. All that is required is the resolution of the directors to appoint an administrator. There are other ways for the VA to begin (secured creditor, court, liquidator), but resolution of the directors is by far the most common way.
Starting the VA process is effectively a statement by the directors that they have run out of options to deal with the affairs of the company. The company needs the protection of the VA process to see if liquidation can be avoided.
However, there is an important time limitation regarding the directors’ right to start the process. If a creditor has started liquidation proceedings against the company, the directors have only ten working days to make an appointment, or their right to do so is lost.
Directors Appointment Authority vested in the Administrator
Administrator controls the affairs of the company & prepares a report
Watershed Meeting Creditors determine outcome of the Administration
START OF ADMINISTRATION
DURING THE ADMINISTRATION
END OF THE ADMINISTRATION
Outcome of Watershed Meeting
RETURN AUTHORITY TO DIRECTORS
DEED OF COMPANY ARRANGEMENT
APPOINT A LIQUIDATOR
Finding the best outcome for all
The Watershed Meeting
The watershed meeting is held on day 25. It is called a watershed meeting because it is a watershed event in the life of the company.
VA is an alternative to liquidation. The law is very clear that the purpose of Voluntary Administration is to administer a company’s affairs in a way that maximises the opportunity of the company’s continued existence. The administrator’s mission is to achieve that outcome. How this will be done is unique to each different company, and will be covered fully in the administrator’s report. At the watershed meeting the ultimate decision around the company’s future rests with the creditors. It is highly likely that the creditors have a bigger stake in the company than its shareholders.
The Deed of Company Arrangement
Often called a DoCA, this document is the basis of the agreement reached between the company and its creditors. It is the deal that has been struck to ensure that the company can continue to trade. There will be standard terms involved – but at the heart of the document are the arrangements made to ensure the company survives and that liquidation is avoided.
If a DoCA is recommended its terms will be spelt out in the administrator’s report. If approved by the creditors at the watershed meeting, the administrator will prepare the DoCA and ensure it is executed within 15 working days.
Selection of the Administrator
Choosing the right administrator is vital. The Voluntary Administration process is a major event in the company’s life and the person chosen to run that process will have significant impact on the outcome.
Preventing liquidation by way of Voluntary Administration is not an easy task. The start of the process disrupts normal business – there is a flurry as everyone comes to grips with what has happened and how it will affect them. This is a time when a cool head counts, and experience is essential.
VA brings heavy time demands to meet the requirements of an organisation that has been impacted by a major event. Dealing with difficult issues requires dedication and commitment from both the administrator and directors.
How much does VA cost?
Costs of Voluntary Administration
The directors must find a way of dealing with the situation. In the past, the only options were liquidation or fighting it out with impatient creditors. There had to be a middle ground where companies that could survive, were given an opportunity to do so. Voluntary Administration, or VA as it is commonly known, is that opportunity.
Voluntary Administration came into force in New Zealand on 1 November 2007. It is now widely accepted as being an alternative to liquidation.
Is backed up against a wall. Its options diminish as the situation gets worse. Business activity starts to drown in a torrent of creditor demands. Voluntary Administration puts an immediate and effective stop to all those demands.
The creditors understand their position in the company, and the company gets breathing space to organise a recovery plan for creditors to consider.
When directors initiate the Voluntary Administration process, it serves as a statement that the company has run out of options and requires protection and assistance in exploring alternatives to liquidation.
With the right administrator, a company that has entered the VA process can go on to lead a successful life. The administrator will look at restructuring the business and rebuilding it into a state that can return to profitability. This process is seen as beneficial to creditors, who are more likely to receive a greater return on the debt owed than in liquidation.