External administration in Australia: Voluntary liquidation compared to voluntary administration

Estimated reading time: 6 minutes Voluntary administration, Company liquidation, Other

Voluntary liquidation (CVL) and voluntary administration (VA) have a range of pros and cons, relative to each other. Here we look at the advantages of voluntary administration, including the ability to turn around the business, director initiation and the breathing space it provides to directors. We compare this with CVL, which is generally more cost-effectiveand more streamlined than voluntary administration. It is also generally the more appropriate option where the business is unlikely to be saved through a restructure process. This overview is intended for company directors of small-to-medium sized businesses weighing up their options for external administration.

Voluntary liquidation compared to voluntary administration

Voluntary liquidation versus voluntary administration


Typically, once a company becomes insolvent, directors have two choices: Initiate a voluntary administration, or (with the agreement of the shareholders), initiate a creditors voluntary liquidation (CVL). A CVL is the procedure for insolvent companies to initiate their own liquidation rather than wait for creditors to apply for a court to make an order. Here we look at the pros and cons of each option for struggling businesses. There is a third option, restructuring under the Corporations Act 2001 (Cth), but this option is only available for companies with liabilities not exceeding AUD $1 million. 


Pros of voluntary administration compared to CVL

First, let’s consider the pros of voluntary administration relative to CVL:

Prospect to recover the business as a trading entity

The primary goal of voluntary administration, according to section 435A of the Corporations Act 2001 (Cth), is to allow the business to restructure its debt and live on as a trading entity. By contrast, the primary goal of CVL is to get the best outcome for creditors, according to the priority rules set out in the Corporations Act 2001 (Cth). A CVL will involve the termination of trading of the business. 

It is worth noting that it is possible to use a CVL in an attempt to turnaround a struggling business through a ‘pre-packaged insolvency arrangement’ (also known as a ‘pre pack’). In pre packs, the directors can use the ‘safe harbour’ from insolvent trading in the Corporations Act 2001 (Cth) to arrange a sale of assets from the original company to a new company they also control. Sometimes these arrangements gets final sign-off by a voluntary administrator or voluntary liquidator. In other cases, the voluntary administrator or voluntary liquidator, whilst not approving of a pre pack for policy reasons, may acknowledge that it is not illegal and take no action to reverse it.


Sometimes voluntary administration means a higher return for creditors


If there was no prospect of a better return in voluntary administration, then the rational choice for creditors would always be to go straight to CVL. But why would the returns be better? In short, the possibility of the business being ‘turned around’ means that directors may have an incentive to contribute their own funds into the pool for distribution, or to arrange financing in order to do so. CVLs usually result in zero return to creditors so even if there is a small return to creditors through a voluntary administration this is preferrable for creditors.


Directors can initiate voluntary administration

A voluntary administration can be initiated by directors resolving that the company is insolvent or likely to become so, and appointing a voluntary administrator. There is no requirement for creditors or members (i.e. shareholders) to be involved at the initiation stage. Of course, in some small businesses the directors will be the sole shareholders in the company, so the distinction becomes academic. But in many cases they are not. This may be pertinent in the event of a breakdown in relations between shareholders about how to respond to company insolvency.

By contrast, the shareholders need to initiate a CVL. Where there is a dispute between owners this could be a barrier to starting a voluntary liquidation. 

Voluntary administration can provide breathing space for directors 

Voluntary administrators do not have the power to take recovery actions against directors, such as claims for uncommercial transactions or unreasonable director-related dispositions. These powers are reserved for the insolvent liquidation process (i.e. a CVL). This means that a voluntary administration provides a temporary reprieve for worried directors to work out what steps to take if the liquidator does eventually make a claim against them. 

Voluntary administration allows for the continued trading of the business for a time and non-enforcement of ipso facto clauses 


During the voluntary administration, the business can continue to trade with the voluntary administrator in control. This may be particularly useful where works-in-progress can be completed during that time and added to the assets of the company. There is also a moratorium on enforcing ipso facto clauses during a voluntary administration. These are clauses which allow contracts to be terminated on the occurrence of an insolvency event. This further supports the continued trading of the firm, and may be particularly useful in construction where the performance of one contract often relies on the performance of other contracts.

Non-enforcement of director personal guarantees during voluntary administration


Commonly, directors personally guarantee the debts of a company and are liable to pay those debts when the company is wound up. However, these cannot be enforced during a voluntary administration. As with the lack of recovery actions noted above, this gives directors extra ‘breathing space’ while they get their affairs in order.

Pros of CVL compared to voluntary administration

The pros of a CVL, relative to a voluntary administration, include:

A more streamlined process


CVLs are generally less complicated, procedurally, than voluntary administration. There are fewer creditor meetings and they can generally be skipped altogether. 


CVLs are generally much less expensive than a VA


In a CVL, the liquidator has a discrete task; to investigate the affairs of the company and to realise and distribute assets. By contrast, voluntary administrators also take control of the company from directors and can choose to operate the business itself. This can add significantly to the cost of the administration. And then there is also the extensive compliance requirements relating to creditor involvement in the voluntary administration (e.g. reports and meetings), which are generally more extensive than what occurs in a CVL.


More likely to be funds available for investigations/ recovery from the director


While voluntary administrators also have a remit to investigate director conduct, they don’t have the same incentive to do so. As mentioned above, only in a liquidation can money or assets be recovered from directors through voidable transaction actions. In light of this, it is more likely that creditors will fund investigations in a CVL. There is also more time in a CVL, for example, to investigate fraud than in a voluntary administration procedure.

Lack of creditor meetings can streamline the process


The creditors’ meetings in a voluntary administration can be an opportunity for disgruntled creditors to ‘throw a cat among the pigeons’ and delay/ extend the process. CVLs can be less volatile due to the reduced requirements for creditor involvement. 

Creditors voluntary liquidation vs voluntary administration: What’s your best bet?


While there are pros and cons to both respective types of external administration, generally speaking, voluntary administration is preferable where the business proposition is viable and there is a possibility of the business being turned around.Where the business is no longer viable, it is generally preferable to save money and move the process quickly by going straight into liquidation via a CVL. While Restructuring is another option, this is only available for the smallest of businesses (no more than $1 million in liabilities).