In the lead up to peak periods, many businesses come under financial pressure due to various internal and external factors. Seasonal sales may not have been as planned and provision needs to be made for employee holiday pay.
When financial turbulence hits, all company directors must be conscious of their duties to the company, in particular, the duty not to trade while insolvent. Directors who permit a company to trade while insolvent breach their duties to the company and may also be personally liable for the debts incurred by the company while insolvent. Directors who trade a business while it is insolvent also risk fines and other civil penalties, possible criminal charges, and may even face legal action for compensation brought by the Australian Securities and Investments Commission.
It is important for all directors to understand their obligations and options when faced with these issues. One of the options available to directors is to appoint voluntary administrators to the company.
What is voluntary administration?
The directors of a company may appoint an administrator if they are of the opinion that the company is insolvent, or is likely to become insolvent at some future time.
A company is insolvent if it cannot pay its debts as and when they fall due.
An administrator is appointed to take over management of the company from the directors and to deal with the creditors.
Once a company is under administration, general creditors cannot pursue enforcement action against the company. This includes landlords who are prohibited from enforcing the lease during the administration period. Creditors are also prevented from enforcing personal guarantees from directors during the voluntary administration period.
What happens during a voluntary administration?
During the voluntary administration process the administrator will investigate the affairs of the company and report to creditors, who must decide the future of the business. The administrator can continue to trade the business and can also sell the business. It may also be possible to restructure the business via a deed of company arrangement which must be approved by the creditors. The purpose of the voluntary administration process is to provide an opportunity for the business to survive and be restructured if possible. A voluntary administration is a temporary measure, lasting approximately six weeks.