Voluntary administration is an alternative to liquidation when winding up an insolvent company. It is used to protect the company from any legal action by creditors as the company voluntarily agrees to pay regular payments to settle their debts over a period of time. An appointed administrator handles the voluntary administration process, as well as receiving the payments to distribute to creditors. Once the agreement is in place, the administrator takes a step back, handing control of the company back to the directors and acting as a supervisor.
Why enter voluntary administration?
If a limited company is struggling with debt and is unable to pay their liabilities, or bills, or that this situation is likely to occur in the near future, directors can decide to enter into voluntary administration. One of the advantages of administration is that it immediately stops any legal action being taken by creditors against the company, and avoids assets being seized. It is worth noting that some creditors, such as HMRC or a bank that holds a floating charge or debenture, is able to make an application to put a company into voluntary administration.
Administration usually lasts for no longer than 12 months. However, for large corporate companies or those with a complex situation, it can go on for longer. The main aim with administration is to resolve the company’s debt problems, either by continuing to trade or by finding a buyer for the company. Once the voluntary administration process is completed, control is handed back to the directors. But if the voluntary administration process fails, the company’s assets are sold, fees and creditors are paid and the company is liquidated.
The voluntary administration process
Firstly, only a qualified, licensed insolvency practitioner is able to act as administrator. The administrator is appointed by either the court or the company. A creditor that has a debenture (floating charge order) must be contacted by the company to discuss possible resolutions, and they must be given five days’ notice that the company is intending to enter voluntary administration.
If a company is not able to develop a debt management plan to rescue the company that is agreed with creditors, the administrator takes over the company with the aim of agreeing better arrangements for the creditors. An administrator will draw up a Deed of Company Arrangement (DOCA) which is binding for all parties.
The voluntary administration process starts with a moratorium period that lasts for eight weeks and stops any creditor from taking legal action. This provides the company with time to develop a plan going forward to rescue the company and avoid liquidation. However, at this point, directors hand control of the company over to the appointed administrator.
There are a standard set of steps to the voluntary administration process, governed by the Insolvency Act 1986.
Step 1 – an administrator is appointed either by the directors of the company, a secured creditor, such as a bank, a provisional liquidator or the court. The administrator takes control of the company to handle the voluntary administration process.
Step 2 – the administrator holds the first creditors meeting within eight days of being appointed. Sometimes this is extended but only on the agreement of the court. Creditors must have five days’ notice of the meeting. At the meeting, creditors are allowed to vote to replace the appointed administrator or to form a committee of inspection.
Step 3 – the administrator prepares a report on their investigation into the company’s affairs, including the different options, which is presented to the creditors at a second meeting.
Step 4 – the administrator holds a second creditors meeting within 25 days of being appointed (30 days if the date falls within a national holiday period). Again, creditors must be given a minimum of five days’ notice of the meeting. The administrator will have submitted their report and the creditors vote to decide:
- To return control of the company to the directors
- To accept the DOCA – the deed must be signed by the company after the meeting within 15 days, unless the court grants an extension
- To force the company into liquidation. If this is the decision, the company is immediately placed into compulsory liquidation and the administrator is appointed as the liquidator, in most cases.
The administrator’s role
A licensed insolvency practitioner acts as the administrator in a voluntary administration process. It is their duty to take control of the company to handle the process, investigating and reporting on the company’s affairs including detailing the assets, any property and the financial situation. The administrator also reports on the various options available, such as:
- Ending administration and giving control back to the directors of the company
- Approving the DOCA whereby the company will pay its debts over a period of time
- Liquidating the company.
Within the report, the administrator must set out their reasons for each option, and which would be the best course of action. As well as taking control of the company, the administrator also has the power to close the business or sell off any assets until the creditors decide on the best outcome. They also investigate the directors of the company to ensure proper conduct, reporting to ASIC if there are any potential offences by anyone involved in the company. When the administration comes to an end, the administrator submits a detailed account of the company’s payments and receipts with ASIC. This is called the ‘end of administration return’.
When a company is in administration, the directors lose their powers and are obliged to assist the administrator throughout the voluntary administration process. Their powers are only granted back when the administration period ends, and the company is not in liquidation, or they are to play a role as part of the DOCA.
Company insolvency is not something that any business wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has to recover. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 2465895.