Voluntary administration in Australia in decline

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Voluntary administration has been in decline for 25 years

In 1993, whilst you were playing cassettes in your nice new Sony Sports Walkman, the voluntary administration procedure was introduced to make it easier to restructure insolvent businesses in Australia. It was hoped that it would streamline the restructuring process and wrap up restructures through creditor voting, meaning the Courts weren’t involved too much. In 1993 it was a neat idea and it was warmly greeted by the insolvency industry. 

Voluntary administration was, up until recently, the primary mechanism for restructuring a company provided in the Corporations Act 2001 (Cth). However, this mechanism has been on the decline in Australia for the last 25 years. 

In this article, we examine this phenomenon and consider why voluntary administration could be on the wane. 

The promise of voluntary administration

Voluntary administration was introduced in Australia in 1993. This procedure, which replaced a rarely-used court-supervised procedure known as ‘official management’, puts an independent professional (a voluntary administrator) in charge of a debtor company. This individual, appointed by directors after they have resolved that the company is insolvent or likely to become so, meets with creditors and strives to arrive at a debt compromise. 

If passed, this debt compromise, the ‘Deed of Company Arrangement’ (‘DOCA’), is executed, the debt is restructured and the company can continue to trade. You can read more about this process in our comprehensive guide to voluntary administration. 

Voluntary administration started boldly, with the legislation making clear that the primary objective of voluntary administration was the saving of the company as a trading entity (see s 435B of the Corporations Act 2001 (Cth)). 

It was a response to the Law Reform Commission’s 1988 ‘General Insolvency Inquiry’ (the ‘Harmer report’) that recommended the introduction of that procedure. The report observed that in the existing insolvency law: 

‘no one procedure provides an ordered method of dealing with the company’s affairs that is sufficiently swift, cost-effective and flexible.’ (p. 5). 

However, a reduction in popularity of voluntary administration would suggest that voluntary administration is not seen to be the ‘saviour’ procedure that it was intended to be. 

According to data collated in Professor Jason Harris’ recent doctoral research, voluntary administrations made up approximately 30 percent of external administrations in 1997 (i.e. voluntary administrations, liquidations or schemes of arrangement). In 2018, they made up approximately 10 percent (see p. 88). This represents a massive change when, at the same time, the overall external administrations didn’t go down. Why the change?

What has caused the decline in voluntary administrations? 

In 2021, the Corporations Act 2001 (Cth) was altered to introduce a new formal restructuring process for small businesses. In the new small business restructuring framework, a registered liquidator is appointed by the directors of the business when they have resolved that the business is insolvent or likely to become insolvent. This individual, a ‘restructuring practitioner’, is charged with coming up with a restructuring plan for the company within a set time frame. 

The restructuring plan, along with the restructuring practitioners preferred option is presented to creditors for a vote. If a majority of creditors in value support the proposal, it is accepted and the business is restructured. 

Crucial differences between small business restructuring and voluntary administration are: 

1. Small business restructuring is only available for businesses with debts of  $1 million or less. There are no monetary limitations on voluntary administration being available. 
2. It is a ‘debtor-in-possession’ model, where the directors of the business remain in control throughout. This means that the business can go on trading, relatively uninterrupted. By contrast, in a voluntary administration, the voluntary administrator takes control of the company. 

The desire to retain control of their business could certainly motivate company directors to choose this option over voluntary administration. However, as this procedure is brand new, it cannot be the cause of the decline. This is an indicator of one of the problems of voluntary administration – that an insolvency practitioner takes over the day-to-day running of the insolvent business. 

Another restructuring option is an informal one. Businesses can use the ‘safe harbour’ introduced into the Corporations Act 2001 (Cth) in 2016 to informally restructure an insolvent business without fair of being prosecuted for insolvent trading. This can be achieved via a ‘pre-packaged insolvency arrangement’ or ‘pre-pack’ where the assets of the insolvent company are sold to a new company (at fair market value) and the original company is wound up. The pre-pack gets a final ‘sign off’ by a voluntary administrator or a liquidator. 

As there is no requirement to publicly notify of this process, it is unclear just how many occur in Australia. Nevertheless, as the safe harbour is relatively new, it is unlikely that this option is the cause of the decline in voluntary administration. This is, however, another indicator that giving directors control of the restructuring process is seen as a sensible alternative to a voluntary administration procedure. 

The key lies in Deeds of Company Arrangement (DOCAs)

The primary goal of a voluntary administration is debt compromise — the DOCA.

If we look specifically at the number of DOCAS overall – they remain consistent at 3-5 percent of total external administrations. This means, given that the number of voluntary administrations is on the decline, the number of DOCAs must be on the increase. 

Why would this be? One possibility is general frustration with the way voluntary administration is interpreted by the business community as ‘glorified liquidation’. Further, when a voluntary administration is reported in the media it is treated as a corporate collapse – not as a restructuring process to the benefit of the economy. Voluntary administration appointments have a chilling effect on the company rather than becoming what the policymakers had originally hoped for — a genuine restructuring opportunity.

In light of this, it may be that directors are unlikely to turn to voluntary administration except where they genuinely believe that a successful DOCA is a real possibility, i.e. it is reserved for viable businesses that have a balance sheet problem only, with the rest going straight to liquidation. A viable business would be one with a positive profit and loss account but a poor balance sheet position.

Another possibility is that the nature of businesses going into voluntary administration has changed. Previously, when voluntary administration was more popular, it was used by large enterprises and SMEs alike, but increasingly there is a realisation that voluntary administration is not appropriate for smaller businesses — they don’t have the assets to absorb the costs of voluntary administration. Many of the cost drivers (such as a voluntary administrator’s hourly rate) remain the same or virtually the same, no matter what the size of the company, making it harder for smaller companies to manage fees and costs. 

Coupled with these potential causes, there is the increased ease in carrying out a voluntary liquidation. In 2007, changes were made to the law to make it significantly faster for directors to initiate a voluntary liquidation (due to changes in mandatory meeting timelines). This added an incentive for directors to move straight to liquidation. 

Conclusion 

Voluntary administration is arguably a relic — it was introduced the same year as the Sony Sports Walkman. It is an example of the law falling behind the times and failing to innovate. Since then, business regulation has generally developed in a way that is more enabling of innovation and less wedded to hard-and-fast rules. The heavy financial cost of voluntary administration, plus the transfer of control from directors, makes it an unattractive proposition for most directors when there are other options available.