The truth behind an administrator’s role in troubled companies

Over the past year, a number of major Australian businesses have been in the press following announcements of voluntary administration, bringing issues of insolvency to the forefront of public discussion. However, it can be confusing and tricky to understand what and how much a voluntary administrator is able to achieve.

Under the Corporations Act 2001 (Cth) the main objective of voluntary administration is to rescue the business or try and salvage as much as possible. An independent and suitably qualified person (the voluntary administrator) takes full control of the company to try and achieve these aims. When a company reaches this point of insolvency a wide range of stakeholders including creditors, shareholders and employees face a lot of strain and uncertainty. The preferable option being a restructuring of the company in order for it to continue business as usual.

Yet, this noble goal is only attainable in a small portion of the cases, with ASIC reporting 78% of companies being deregistered within five years.

Despite this fact, the auxiliary goal of achieving better results for those involved can be reached compared to if the company had been closed down immediately.

This is evidenced by the same report showing that with a sample of DOCAs the average dollar median dividend return was 5.4 cents to the dollar. In comparison, if a company were to simply wind up immediately, the expected dividend return would’ve been zero. This report and other evidence shows the benefits of entering into voluntary administration even though most appear in a way that has been described as “quasi-liquidation.”

Not always needing to end in such a manner, numerous factors interrelate to lead to the stalling of voluntary administration and failure to achieve the best outcomes. Numerous Inquiry reports by the Australian Government Productivity Commission shows that there is a view in the industry that stigmatises corporate failure, leading to a reluctance to restructure. Coupled with the actions of receivers in enforcing priority debt claims by selling key assets, the inability to access financial support to trade out of an insolvent positon and the risk of personal liability create barriers to business rescue.

Further to such, when companies wait too long to enter voluntary administration it can lead to too little of the companies trading or income producing business to rescue, making the job even more difficult and rescue a slimmer possibility.

In the end, even though rescue of a company can be seen as a daunting possibility, talking to a professional as soon as signs of insolvency are apparent, can help guarantee you the best results for all stakeholders. To discuss this with an insolvency professional, please contact us today.