As a trusted advisor, how can you guide your clients through the financially and emotionally troubling time of voluntary administration?
A client going through voluntary administration has no doubt had a turbulent time. As their accountant, it’s important to give them peace of mind by explaining all the necessary steps to the proceedings and making it clear you’re on top of the latest financial and regulatory requirements.
Assess the situation
Ensure you obtain all the financial and business records necessary to assess the situation from the outset. You will need to conduct a thorough check on the company’s situation first to determine whether voluntary administration is the right solution before offering all options to the client.
Indicators of voluntary administration include: continuing losses, liquidity ratios below one, overdue taxes and poor relationships with financial institutions. Other indicators include the inability to borrow funds or raise equity capital, suppliers demanding payments before resuming supply to the company and evidence of post-dated or dishonoured cheques. More serious indicators are warrants relating to court proceedings against the company and the inability to produce accurate or timely financial information.
Benefits of voluntary administration
Voluntary administration gives a company an opportunity to offer creditors a proposal and avoid winding up. It serves as a way to preserve the organisation’s company structure, business or to provide a better solution for creditors than winding up. It also helps maximise the return of the company’s assets.
For the director, voluntary administration can help limit their personal liability. This can be a great alternative to insolvency, as insolvent trading legislation can make directors personally liable for debts incurred while a company is insolvent.
Lay out the procedures
The client needs to be aware of the steps required to begin voluntary administration. An administrator needs to be appointed by the director, secured creditor or liquidator, who must convene an initial meeting of creditors within eight business days after the appointment. The administrator needs to investigate the company’s affairs and report to the creditors on the company’s background, financial position, reasons for its difficulties, director’s conduct and duties, and any potential legal action. The administrator also offers details of any proposal for the creditors’ consideration and any alternative solutions available.
Twenty days after the appointment, the administrator then convenes a second meeting where creditors vote to either wind up the company or accept the proposed deed of company arrangement (DOCA). Alternatively, creditors could decide to adjourn the meeting for further discussion or to end the administration altogether.
It is imperative to advise directors of the importance of due diligence and the need to address the regulatory requirements of voluntary administration and insolvency. They need to be made aware that under the federal government’s Corporations Act 2001, personal liability can arise from the strict insolvent trading provisions of the act and they could face tough director penalty notices, or section 222 notices, issued by the Australian Taxation Office.
If creditors believe the administrator’s proposal provides a robust commercial return, a company may avoid liquidation altogether. If not, they may return the company to its directors, or force liquidation of the company without having to hold further meetings or petition the court.
In some instances, the owner may be able to keep control or a part share in the business. In other instances, the business may be sold as a going concern and employees may be able to keep their jobs.