For small business owners facing financial difficulties and dealing with a Director Penalty Notice (DPN) , a Voluntary Administration (VA) can be an effective strategy especially when a Small Business Restructure (SBR) , or going into liquidation are not viable options. When a company is insolvent or likely to become insolvent, a director may consider appointing a Voluntary Administrator to provide the company with the best chance of continuing, while potentially avoiding personal liability under a DPN.
In this article, we will explore how a VA works, its benefits, and how it can be used to satisfy a DPN.
What is Voluntary Administration?
A Voluntary Administration is a restructuring process where a company’s director appoints an independent ‘voluntary administrator’ to take control of the company. The goal of the VA is to provide the company with "breathing space" to maximise the chances of its survival. Under a VA, a company may restructure its affairs, including:
- Debt compromises
- Asset sales
- Debt-for-equity swaps
- Closing unprofitable parts of the business
- Terminating unprofitable contracts
- Selling the business
These steps can help reduce liabilities and set the company on a path to recovery.
Effect of a Voluntary Administration Appointment
When a Voluntary Administrator is appointed, the following occurs:
- Control of the company: The Administrator takes over the management and operations of the company for the duration of the VA period.
- Investigation and report: The Administrator investigates the company’s financial position and prepares a report for creditors, outlining the company’s situation and possible outcomes.
- Trading status: The Administrator may continue trading the business if there are sufficient funds, or may cease trading if not.
- Creditor moratorium: A temporary moratorium is placed on creditors, preventing them from taking legal action against the company while the VA process is underway.
Deed of Company Arrangement (DOCA)
One of the main tools used during a VA is a Deed of Company Arrangement (DOCA). This is a binding agreement between the company and its creditors, often involving a compromise of the company’s debts and provision by the company or a related entity of a fund to pay creditors a partial return on their debt.
If a DOCA proposal is put forward:
- Comparison to liquidation: The Administrator will compare the DOCA proposal to the potential return under liquidation and recommend the best option for creditors.
- Related party creditors: Related party creditors can vote on the DOCA, but may choose not to participate in the distribution, which can improve the return under the DOCA compared to liquidation.
- Voting by creditors: A DOCA is passed if 50% of the value of creditors and 50% of the number of creditors vote in favour at the creditors’ meeting. If the DOCA is not passed, the company will automatically transition to liquidation.
Acceptance of the DOCA
If the creditors vote in favour of the DOCA, the company must sign the deed within 15 business days of the creditors' meeting, unless the court permits a longer period. Once in place, the DOCA:
- Is monitored by the Administrator to ensure the company meets its obligations.
- Binds all unsecured creditors, even if they voted against the proposal.
- Does not prevent creditors who hold a personal guarantee from pursuing repayment from the guarantor.
Termination of the DOCA
A DOCA can be terminated under several circumstances:
- Completion of obligations: If the company has met all of the commitments under the DOCA and creditors have been paid, the DOCA ends.
- Failure to meet conditions: If the company is unable to meet the terms, or if the Administrator calls a meeting of creditors to vote on ending the DOCA, it may be terminated.
- Court termination: A creditor, the company, or any interested party can file an application to terminate the DOCA in court. If the court terminates the DOCA, the company automatically moves into liquidation.
Advantages of Voluntary Administration
A VA provides a number of advantages for directors issued with a non-lockdown DPN, including:
- Protection from personal liability: directors avoid personal liability for unpaid company tax debts and claims that may exist against the directors by a liquidator if the company was placed in liquidation.
- Structured process: ideal for companies facing more complex financial issues, as it allows for an independent assessment of the company’s situation.
- Flexibility and time: a VA gives the company breathing space to determine the future of the business and provides an opportunity to save the business by restructuring through a DOCA.
Takeaways and How an Insolvency Lawyer Can Assist
A VA offers a way for directors to manage insolvency risks and satisfy a non-lockdown DPN . While this option may not be suitable for all companies, it can provide a valuable lifeline to businesses facing financial distress.
If you are a director who has received a DPN or is struggling with financial difficulties, it is important that you act promptly given the time critical consequences and consult with an insolvency lawyer to determine whether a VA, small business restructure or liquidation option is right for your situation.
BlueRock’s Melbourne-based insolvency lawyers are here to help directors navigate the complexities of insolvency, including DPNs and provide strategic advice as to your options. Submit the form below and we’ll be in touch to arrange a consultation.
