In brief – Voluntary administration is not the same as liquidation
The purpose of liquidation is to wind up a company, whereas the purpose of voluntary administration is to assess the company’s viability, turn its fortunes around if possible and provide a better return to creditors if not.
What does it mean if a company is in liquidation?
We all know that when a company is in liquidation, you are not going to be doing much business with them. A company in liquidation it is in its terminal stage.
If you are a secured creditor, you would be looking to your securities. If you are an unsecured creditor, you would be looking to your bottom line, including what, if any, retention of title clauses or guarantees you might have.
There are of course some exceptions to this.
When a company goes into a members’ voluntary liquidation, it does so because its members want to get rid of it. It is not an insolvent company. It will be in a position to pay the debts it has in full within two years.
Insolvent liquidation the most common
When a company goes into an insolvent liquidation, by far the most encountered form, it is not unreasonable to start hoping there might be some cents in the dollar being paid back by the liquidator in perhaps 9 to 12 months’ time.
Voluntary administration not always a signal of a company’s demise
Voluntary administration has been around now for 20-odd years. It is probably not an overstatement to say that most people see it as another form of liquidation. However, it isn’t.
The purpose of voluntary administration is to attempt to turn an essentially insolvent company around to maximise its chances of continuing, or if that is not possible, to provide a better return to creditors (and members) than if there was an immediate liquidation of the company.
How voluntary administrators are appointed
In order to maximise the return to creditors, parliament has legislated to make the process of appointing an administrator reasonably quick and inexpensive.
Generally, a voluntary administrator is appointed to a company by the directors simply passing a resolution that the company is insolvent, or likely to become insolvent in the near future, and that an administrator should be appointed.
The administration itself usually only lasts about five weeks.
During that time, the administrator investigates the company’s business and determines whether or not it is in the best interest of the creditors to allow the company to continue in some form. This is usually a Deed of Company Arrangement (DOCA).
The other option is for the company to be placed into liquidation.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.