Here we look at the most typical outcomes, and explain how voluntary administrator costs and fees contribute significantly to the poor returns for creditors. The statistics reflect the commercial reality of the voluntary administration process for small-to-medium sized businesses, and the conclusion is that the voluntary administration process is not fit for purpose.
Until 2021, voluntary administration was the key mechanism for formal restructuring available in the Corporations Act 2001 (Cth) for small businesses. Now that there is another option available for smaller businesses (small business restructuring), it is worth considering what the value of voluntary administration is by considering the typical outcome of this process.
The problem with voluntary administration
The procedure was introduced into statute in 1993 off the back of a recommendation in the ‘General Insolvency Inquiry’ of 1988 (commonly known as the ‘Harmer report’). The idea was that creditors would have a co-operative process where they would get a decent return through a debt compromise, and the insolvent debtor would be saved and go on to trade for another day.
However, the typical outcome of a voluntary administration is now a liquidation, rather than a debt restructure and a saved business. Furthermore, the returns to creditors are now very poor. While they were once higher (this author recalls seeing returns of 25c on the dollar 15 years ago), returns are now generally very low.
While there do not appear to be statistics on this point, a certain number of voluntary administration appointments are simply made to ‘sign off’ on an asset sale through a ‘pre-pack’, so are not intended to save the original company in any way.
What are the possible outcomes of voluntary administration?
Once appointed, the voluntary administrator is tasked with investigating the affairs of the business, chairing creditors’ meetings and coming up with a recommendation for the creditors. The recommendation can be for one of three potential outcomes:
- Deed of Company Administration (DOCA). This is a compromise. A proposal will be put to the creditors by the company’s director(s) to agree to returns at a certain value. If creditors who hold a majority in value and number agree to it, the resolution will pass. Once agreed to, it binds all creditors (whether they voted in favour of it or not).
- End of Administration. The voluntary administrator can advise that the voluntary administration ends. The company is therefore returned to the control of the directors.
- Winding Up. The voluntary administrator can advise that the company be wound up.
What are the actual outcomes of voluntary administration?
In a recent survey of voluntary administrators, published in doctoral research by Professor Jason Harris, 53.78 percent of voluntary administrations ended in winding up, 37.4 percent ended in a DOCA, 7.56 percent were ongoing and 1.26 percent resulted in the end of the voluntary administration.
Two points worth bearing in mind:
- In many cases, the result of the DOCA is a very modest return for creditors. In the same survey, it was estimated that nearly 70 percent of DOCAs resulted in returns of 0-9 cents on the dollar.
- The execution of a DOCA does not guarantee that the business will continue to trade long term. Companies are often liquidated after the DOCA has been executed.
Interestingly, Professor Harris’ numbers also show that the number of voluntary administrations has decreased significantly over the last 15 years, while the number of DOCAs as a proportion of external administration has stayed the same (at around 3-5 percent). This suggests that voluntary administrations are increasingly only being used where a DOCA is viable, otherwise, the business is put straight into a creditors’ voluntary liquidation.
What does the high proportion of DOCAs mean?
Instinctively, it is natural to take the increasingly high proportion of DOCAs as evidence that the goal of business restructuring is being achieved. That would be a premature conclusion, however. In nearly 80 percent of cases, the voluntary administration involved asset sales. This means that after the DOCA is executed, there often isn’t much left for the business to continue operating with. Therefore, it is apt to say that most voluntary administrations are still ‘glorified liquidations’.
Note also, that even though a DOCA is agreed to, a certain proportion of DOCAs terminate early. While there are no statistics on this, it probably means that creditors don’t get a return.
Remuneration in voluntary administrations
One of the chief disadvantages of voluntary administration, relative to a creditors’ voluntary liquidation, is the way that a voluntary administration sucks up scarce assets in remuneration and costs. Harris’ survey of voluntary administrators offered the following responses on the remuneration and costs of voluntary administration (see p. 127 of his thesis).
Q16. Of the voluntary administration appointments (of any size company) that you were appointed in during the last 12 months, how many fit within the following bands for the estimated remuneration for the appointment (not including any DOCA appointment)
|Number of matters
|Percentage of total
|$0 – $5,000
|$5,000 – $15,000
|$15,000 – $30,000
|$30,000 – $50,000
|$50,000 – $100,000
This table demonstrates that the majority of voluntary administrations cost between $15,000 and $50,000 dollars. Given that a significant number of small businesses in Australia go into voluntary administration with less than $50,000 in assets, it is clear that the costs of voluntary administration are a significant contributor to the poor returns to creditors.
Voluntary administration typically means the end of the business.
While voluntary administration’s primary stated purpose is to turn the business around and continue trading, this is rarely the outcome of the process. Only a minority of voluntary administrations result in a debt compromise (a DOCA), and when they do, returns are usually poor. Directors of small-to-medium sized businesses should conduct thorough due diligence before they use voluntary administration for a simple debt restructure.