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In its 2020 Inquiry into the insolvency industry, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) observed that “most voluntary administration processes are expensive, even when the liabilities or assets of the small business are small”. In this article we will dig into the reports of industry insiders on the cost of voluntary administration to work out how much they usually cost in practice.
What is the cost of voluntary administration?
When ASBFEO investigated the cost of voluntary administration, it interviewed registered liquidators (the professionals who carry out voluntary administrations) and found that the minimum for a straightforward voluntary administration was around $12,000, with an average close to $50,000 (ASBFEO p. 28). This relates to small-sized companies.
This, taken in conjunction with the fact that the majority of insolvent businesses have assets worth less than $10,000, indicates that voluntary administration in Australia may be too expensive to be effective. Or at least that this form of restructuring is not suitable for small-sized companies.
In recent doctoral research, Professor Jason Harris surveyed insolvency professionals about the true cost of voluntary administration. This survey revealed a figure of $30-50,000 per administration. Note also that this does not include:
- The cost of administering a Deed of Company Arrangement (DOCA). The intended purpose of a voluntary administration, according to the Corporations Act 2001 (Cth), is for a company to restructure its debt and then go on to trade unencumbered by previous creditors (see Part 5.3A). However, the execution of a DOCA is not itself part of voluntary administration. If the creditors agree to a DOCA, it is implemented by a ‘deed administrator’ (who is often the same individual as the voluntary administrator). This often costs at least as much again. So the full cost of the voluntary administration plus DOCA can easily exceed $100,000.
- Any personal indemnities that may be required of directors. As voluntary administrators are personally liable for the cost of a voluntary administration (more on this below), prior to appointment it is common for voluntary administrators to require that they be indemnified by directors. This ensures that they are paid, even if the voluntary administration runs out of assets to do so.
What is the spread of the cost?
Industry insiders report a wide range when it comes to the cost of voluntary administration (Harris p. 188):
- 48% of administrations had no reported remuneration;
- 28% reported remuneration up to $50,000; and,
- 3% reported remuneration in excess of $250,000.
For deed administrators:
- 85% of cases reported no remuneration;
- 10% reported remuneration up to $50,000; and,
- Less than 1% reported remuneration over $250,000.
It would be intensely frustrating (and uncommercial) for a voluntary administration to not provide the insolvency practitioner with any renumeration.
What drives the cost of voluntary administration?
Voluntary administration is certainly expensive for smaller companies, so, given how low the asset base of most Australian companies is, is it too expensive? Commentators have often noted that a court-supervised process such as ‘Chapter 11’ in the United States, or the ‘Official Management’ procedure that existed in Australia up until 1993, cost a lot more to run.
When it comes to cost drivers, Harris’ research identified the following as having a substantial impact (Harris pp. 188-190):
- Investigations. Voluntary administrators need to investigate any potential wrongdoing of directors and report it. This is time-consuming.
- Compliance requirements. Voluntary administrators must provide voluminous reports and administer creditor’s meetings, with compliance requirements having tended to increase over time
- Personal liability. The voluntary administrator is liable for a range of costs incurred while in charge, including any debts entered into as well as compliance costs and obligations to employees.
However, it must also be said that the steadily increasing hourly rates of insolvency practitioners have played a role in driving up the price. In addition, there is arguably a tendency for aggressive billing where the company has a larger asset base — insolvency practitioners are loading up the staff hours on paying jobs to compensate for the jobs that either pay poorly or pay nothing.
Are the costs of voluntary administration reasonable?
There is no overall policy strategy that seems to guide voluntary administration for small sized companies, as well as its underlying costs. Is this a genuine turnaround procedure designed to revive struggling companies? Or is this simply ‘glorified liquidation’, an attempt by directors to exercise more control over the process than they would in a voluntary liquidation (read more in ‘How to avoid a voluntary administration of your company’)?
There is no objective target as to the number of businesses that are, or might be, worth saving. This is a pity because this means we have no clean conception of what qualities and deliverables the policy-makers set for voluntary administration.
We could put all insolvent SMEs to the sword and force ‘dodgy’ builders, truckies and small retailers to become employees. But we would suggest that this is not the appropriate goal. We benefit as an economy from small business, even where they aren’t consistently profitable. Cafes and hairdressers still make a contribution to society, even where they don’t produce an economic profit. There is no expectation in our society that we should be paid a return based upon the effort contributed to our work. If we were like communist Cuba, our taxi drivers would be paid more than doctors.
The economic problem our insolvency system tries to fix is compliance and the black economy. Too many companies (which may or may not be insolvent) evade paying the taxes that they owe and their other entitlements.
Voluntary administration is usually too expensive to be applied to the turnaround of small businesses in Australia. However, it appears to still be a useful mechanism for turning around larger companies. For smaller businesses (with less than a million in debt), the new small business restructuring regime may end up being beneficial. Because the directors of the company remain in control, the restructuring practitioner does not need to take on (and factor into their prices) personal liability for the company. Furthermore, as the compliance obligations are streamlined, the process can be offered at a more reasonable price.
Voluntary administrations in Australia generally cost $30-50,000 in voluntary administrator remuneration for small companies. While this has the effect of depleting the already low asset base of most small insolvent companies in Australia, the cost, in part, reflects the obligations and extensive liability that the voluntary administrator takes on.
As the new small business restructuring process substantially reduces the cost of debt restructuring, it is expected that this will be more beneficial to the small enterprises that dominate the Australian economy.