So why is it so expensive? Here we touch on some of the observations of industry insiders as to what is driving the cost of voluntary administration.
Table of contents:
What are the general cost structures in voluntary administration?
Voluntary administrators don’t take on appointments out of charity. Nor are they paid by the government for their work. Rather, voluntary administrators are paid by the company in voluntary administration prior to distributions being made to creditors or the company being wound up.
Where there are insufficient assets to pay the voluntary administrator, unless there is some other arrangement in place, they will go unpaid. Sometimes, as a condition of appointment, voluntary administrators require that the directors of the company reimburse them in this situation through an indemnity.
More specifically, the voluntary administrator is entitled to:
- reasonable remuneration for the work performed (approval required);
- to be reimbursed for internal disbursements they incurred (approval required); and,
- to be reimbursed for out-of-pocket costs incurred (no approval required).
The strict rules for approval are set out in the Corporations Act and Insolvency Practice Rules (Corporations).
Voluntary administrators have a choice in how they charge, including:
- on an hourly basis;
- by a quoted fixed fee (based on an estimate);
- by a percentage of realised assets; or,
- on a contingency basis, depending on the outcome achieved.
Charging on an hourly basis is, by far, the most common approach in Australia. This is unfortunate, because in the writer’s opinion this only supports the inefficient and unethical.
Approval must be sought from creditors, or in some cases committees of inspection, for fees and disbursements. Where the creditors ultimately refuse the remuneration proposal, voluntary administrators can (and almost always will) apply to the court for approval. Note, however, that the courts have tended to side with voluntary administrators for hourly fees. Courts don’t generally value the work accomplished by voluntary administrators by their results, unfortunately. ‘Reasonable’ fees that are approved by courts could include fees that produce no outcome for creditors.
There is also a relatively new procedure available, the appointment of a ‘reviewing liquidator’. These individuals can be appointed to provide an independent professional review of fees and costs. This procedure appears to be little used thus far.
Below we consider some of the underlying costs that drive the fees that voluntary administrators charge.
What are the actual costs of voluntary administration?
In recent doctoral research, Professor Jason Harris surveyed industry insiders – voluntary administrators and others in the insolvency industry – on the costs of voluntary administration in Australia. Generally, voluntary administrations cost between $30,000 and $50,000, even where the company in administration is a non-trading business.
Where a debt compromise (a ‘Deed of Company Arrangement’ or ‘DOCA’) is agreed to, the cost is likely to be at least as much again for the deed administrator (who is usually the same person as the voluntary administrator).
Harris’ research uncovered a range of opinions about the underlying cost drivers for voluntary administration. We consider them below.
Potential cost driver 1: Trading costs
A unique element of voluntary administration in Australia is that the voluntary administrator has the power to continue trading after appointment. By contrast, once a voluntary liquidator is appointed, the firm stops trading. When a small business restructuring practitioner is appointed, the directors of the distressed company remain in control and can continue to trade.
When voluntary administrators continue to trade, they usually take on a supervisory role, delegating day-to-day core business to existing management and staff. This is quite sensible. Voluntary administrators are accountants by profession and they are not known for being entrepreneurial. Instead, they spend their time doing compliance, recovery of debts, checking accounting reconciliations and making sure business trading is cash flow positive.
If the voluntary administrator is not involved at a day-to-day level, then why does it add to the costs of voluntary administration? In short, because voluntary administrators could become personally liable for debts incurred by the business after appointment if there is a trading shortfall. Any of the debts incurred in day-to-day business activity (e.g. goods and services supplied on credit) become the ultimate responsibility of the voluntary administrator. While the voluntary administrator attempts to mitigate this risk through a lien on the business assets, this may not be enough to cover them. Building this risk into their fee is an important way in which voluntary administrators mitigate potential risk. They are also averse to take any trading risks whilst the voluntary administration is on foot.
By contrast, in debtor-in-possession models, such as small business restructuring, the directors of the business remain in control of operations, with the restructuring practitioner playing a monitoring role (and hence helping to keep the costs down).
Potential cost driver 2: Personal liability
As mentioned earlier, the voluntary administrator may incur personal liability for debts incurred while the business trades if there is a shortfall in income to expenses. However, their personal liability is not limited to this. They are also liable for a range of other costs relating to the business, including health and safety, tax and employment. As with debts, the voluntary administrator must account for this significant potential liability in their pricing.
Potential cost driver 3: Compliance
Voluntary administrators must look into the company’s business, property, affairs and financial circumstances. After doing so, they must prepare a lengthy report for creditors (sometimes hundreds of pages) on how they should vote at the final creditors’ meeting.
Throughout, they must also investigate any potential wrongdoing and prepare various other documents such as remuneration approvals.
These time-consuming compliance tasks are core to the role and tend to increase with successive amendments to insolvency laws and regulations. This means that voluntary administrators will look to charge fees that include the costs of compliance as part of their remuneration approvals.
Potential cost driver 4: Creditor disputes
Secured creditors have a curious position in the case of voluntary administration. Generally speaking, the moratorium on creditor action that applies as soon as the voluntary administrator is appointed, applies to secured creditors. This means they cannot appoint a receiver/receiver and manager to realise any secured assets during that time.
However, there is an exception for secured creditors with a secured interest in all, or substantially all, of the company’s assets. These creditors have a 13-day decision period on the appointment of the voluntary administrator, during which they can choose to enforce their interest. If a receiver is appointed, the voluntary administrator will be cut off from the company assets. This is a disappointing outcome for creditors because it means that two insolvency firms will be working on the same company and therefore fees will double.
If a DOCA is agreed to, a secured creditor is not automatically bound by it. By default, they must agree to the terms of the DOCA in order to be bound. However, if they do not agree, the voluntary administrator has the option to go to court and stop the secured party enforcing their security interest.
Disputes with secured creditors over provisions such as this are a common occurrence in voluntary administration, meaning that the voluntary administrator has to plan and account for negotiations with secured creditors in an attempt to avoid potential litigation. Making allowance for this activity inevitably drives up the cost of voluntary administration.
The costs of voluntary administration
The costs of voluntary administration are high primarily because the voluntary administrator takes control of the business and has primary responsibility for the business. In light of this, they need to charge fees which they feel recognise the risk involved and compensate them for the scale of the work involved. It is for this reason that it is expected that the new simplified debt restructuring process for small businesses will be more effective than voluntary administration for many businesses.