When a company is facing financial strife, and it wants to avoid liquidation, it can opt for Voluntary Administration (VA). It is a legal step that can be taken by a company that is at the verge of liquidation. An independent and unbiased administrator is hired by the directors of the company. The administrator has to make decisions on the company’s behalf in such a manner that the interests of all the stakeholders are protected. The most stakeholders in this entire process are the creditors as they have a lot to lose if the company is directly shut down.
How Does Voluntary Administration Work?
The process of Voluntary Administration covers three different phases: initiation, investigation, and decision. It is vital to know about all of them in order to make the correct decision.
This is the phase in which the administrator is appointed. The directors take the first step in this direction. Then the matter is turned towards the creditors who affirm the appointment of the administrator on day eight since the directors’ execution of the document.
This is the phase in which the administrator starts to get involved in the business in order to grasp the actual situation. A formal report of recovery is made and it is presented to the creditors of the company for their perusal.
This phase is basically the five days duration between the report submission to the creditors and the final watershed meeting.
Key Facts About Voluntary Administration That Every Business Owner Must Know
If your company is going through financial troubles, and you are considering it as a last resort, then you should definitely understand all that there is a lot to know regarding this process. There are several key factors that one should keep in mind when starting the initiation phase.
Voluntary administration is an inexpensive process, and it paves a way out of financial troubles for businesses. The administrator that is appointed will have to get intensely involved in the company operations so that they can understand the situation and report their findings accordingly.
It gives creditors an opportunity to gain an unbiased view of the happenings inside the company and give them a clear picture of the financial issues that occurred. VA helps the company and creditors in reaching a mutually agreed upon compromise.
While the administrator takes charge of the company, the directors can look for potential solutions to save the company. If the directors are unable to come up with a solution in the designated time then it is up to the administrator to come up with a solution that can offer the creditors a better return than they would get if the company had been shut down right away.
DOCA (Deed of Company Arrangement) is an agreement between the company and creditors, which is signed in the second meeting held by the creditors. This document outlines the terms and conditions of how the company affairs will be dealt with if the directors are unable to save the company even after voluntary administration.
The creditors can also decide to immediately liquidate the company. In this case, the administrator will also have to take on the role of a liquidator.
Benefits of Appointing a Voluntary Administrator
There are many benefits of opting for VA instead of going directly for liquidation.
- Stall Liquidation
The first and foremost advantage of VA is that it puts off liquidation until the company can figure out another way to save the business financially. It is basically a tactic to buy out time in the case where the creditors are circling in on the company, waiting for it to liquidate, so that they can get something in return. The main goal of this process is to provide the most desirable outcome for creditors.
- Curb Insolvent Trading
It is a legal obligation upon the directors to curb any and all trading while the company is insolvent in order to avoid taking on even more debt. The director can opt for Voluntary Administration in order to stop any trading during insolvency.
- Calm Down the Creditors
When things get as bad as the company reaching close to liquidation, the creditors are already at a point where they are out for blood. Voluntary Administration works as a calming tactic because the directors appoint a third-party, unbiased administrator to handle the affairs of the company. This gives the creditors some peace of mind that they might get a better deal out of the situation than they would get if they were to argue for immediate liquidation.
- Formulate a DOCA
This is one of three outcomes of Voluntary Administration. This process gives the directors a break from the incessant demands of the creditors, which gives them time to regroup and think of a plan to save the business. In the case where that does not work, the directors may still be able to make the creditors agree to a DOCA. This agreement contains the future plan for the business. It gives the directions on how the company will pay off its debts; in lump sum or instalments. This works in the favour of the company because it is a much better option than liquidation. The business might be able to recover from the financial strife if the conditions of the DOCA can be carried out properly.
It is basically up to the directors to figure out whether VA will help their situation or not. However, in most cases it can make the situation much better instead of immediate liquidation. It can open more avenues for the company that the directors were unable to figure out while they were under constant pressure from the creditors. The overall process takes around 25 days and this is sufficient time for the directors to take a step back and think through things. In any case, once you have entered Voluntary Administration, you may also be able to reach DOCA which can further improve your situation depending on the terms and conditions of the agreement.