Voluntary administration is where the company’s board of directors elects to have the company controlled by an external officer. The company enters into it when the board suspects their company might be insolvent- i.e. unable to pay their debts when they fall due.
Voluntary administration is not like Liquidation where the external officer’s duty is to pay off the creditors of the company according to certain rules. The company is still operating and collecting debts while it is under voluntary administration. However, the rules and priorities for who gets paid during voluntary administration are very different from Liquidation.
Employees will continue receiveing wages during Voluntary Administration. Their wages fall under the debt the voluntary administrator incurs during administration.
However, any employee wages and entitlements incurred before the administrator is appointed are not paid under administration. Employees can pursue these debts at a later stage, for example during liquidation. Or, the Government can pay their wages and entititlements through schemes such as the Fair Entitlement Guarantee. This then allows the Government to pursue the company for the debt.
Since Voluntary Administration is an attempt to save the company from liquidation, payment of debts is not the primary concern. The means the court will freeze all debts for the duration of the administration. This means:
- Secured creditors cannot seek to enforce their security interest without permission from the court
- Unsecured creditors cannot look to enforce their claim without the consent of the court
- Creditors cannot seek to wind up or liquidate the company
Why are debts frozen?
The courts are reluctant to grant any orders against a company in Voluntary Administration. This is because the purpose of Voluntary Administration is to allow the administrator to assess the situation of the company so creditors can make an informed decision moving forward. To allow Court proceedings during this time would only make the process harder, more expensive and time-consuming for the administrator. It would also reduce any chances the company has at reviving itself and paying back all creditors in full.
When will the Court grant permission to creditors?
The court will, however, grant leave in specific situations. This is, for example:
- Where the company is insured against liability, or
- If the claim involves a proprietary remedy (i.e. where the creditor is seeking goods- especially perishable goods).
Debts Incurred During Voluntary Administration
Appointing an Administrator incurs its own set of debts. These costs are necessary for the process of administration to successfully occur. Debts are usually related to:
- Operating costs of the business.
Any debts the Administrator incurs during administration is their liability. They can pay for these debts with company assets, but often the resources are not enough. In order to help meet the requirements, the Administrator will usually seek funding from an existing lender or a new lender like a bank. The liability falls on the Administrator to meet any shortfall. If they are unable to secure funding, the Administrator will be personally liable for sending the debt.
The Court can, however, limit the liability an Administrator has for these debts. The Court would do this where it deems the company and/or creditors benefit from the debt incurred. For example, borrowing money in order to cover the cost of operations or paying employee entitlements benefits the company by allowing it to stay afloat. It also benefits creditors because they are more likely to be paid in full if the company can be brought out of insolvency. In such circumstances where there is a clear advantage, the court can grant leave relieving the Administrator’s liability and assigning it to the company instead.
For more information on insolvency and what to do if you suspect your company may be insolvent, speak with an insolvency lawyer today.
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