Voluntary Administration vs Liquidation: What Is The Difference?

Wondering about Voluntary Administration vs Liquidation?

When a business is in financial difficulty, it can be an extremely stressful time for the owners. Trying to keep the business running while dealing with creditors and employees can be extremely stressful. At times like these, you need to know your options and understand what the best course of action is for your business.

Regardless of your business’s state, getting professional advice is essential. There are two main ways businesses deal with financial troubles: voluntary administration and liquidation. Let’s take a look at each one in more detail.

What is voluntary administration?

Putting an insolvent or nearly insolvent company into voluntary administration is a choice that can be made when the company can’t meet its financial obligations. The process is usually run by a voluntary administrator who has been chosen by the company.

This gives important people in the business or potential new investors time to come up with a plan to save the company’s business. During this temporary moratorium, which lasts for about five weeks, company’s creditors’ claims are usually put on hold.

If creditors agree to the terms in a general meeting, an agreement is written down. The Deed of Company Arrangement (DOCA) is a binding agreement, which means that if the terms aren’t met, someone can be sued. Without DOCA, the company is likely to be put in liquidation.

How are voluntary administrators appointed?

According to the Corporations Act 2001, a company can appoint a voluntary administrator in one of three ways:

  1. The company directors of the company can resolve at a board meeting to appoint an administrator. This must be done before the company enters into insolvency.
  2. A secured creditor with a charge over the whole, or substantially the whole, of the property of the company can appoint an administrator.
  3. The court can appoint an administrator on the application of either the company director or a secured creditor.

Voluntary Administration Process

After the administrator is appointed, they have a period of eight days to convene the first meeting of creditors. The purpose of this meeting is to:

  • Confirm the appointment of the administrator.
  • Elect a committee of inspection (if the creditors decide they want one).
  • The administrator then has 21 days to prepare a report on the company’s affairs and submit it to the creditors. This report must explain how the company got into financial difficulty and what options are available to fix the problem.

At the second meeting of creditors, the administrator presents their report and suggests one of three possible outcomes:

  • The administrator will be appointed as managing controller under a deed of company arrangement (DOCA).
  • The company will be wound up and its assets sold to repay its debts.
  • The company will be returned to the control of its directors.

The creditors vote on the administrator’s proposal and decide what will happen to the company. If the administrator’s proposal is approved, they will carry out the plan and try to save the company. If the proposal is not approved, the company will be wound up and its assets sold off to repay its debts.

What is Liquidation?

Liquidation is when a company is forced to close down and sell off all of its assets in order to pay its debts. This usually happens when the company is insolvent, which means that it cannot pay its debts as they fall due. Once a company is in liquidation, all of the company’s assets (including its bank accounts, property, financial circumstances and stock) are sold off in order to pay its debts.

Company liquidation can either be voluntary or involuntary. Voluntary liquidation happens when the company itself decides to close down, while involuntary liquidation happens when the company is forced to close down by its creditors.

Once a company is in liquidation, the liquidator will take control of the company and its assets. The liquidator will then sell off all of the assets and use the money to pay its debts. Any money left over after the debts have been paid will be distributed to the shareholders of the company.

How are liquidators appointed?

Liquidators can either be appointed by the court or by the shareholders of the company. If the company is insolvent, the court may appoint a liquidator if it thinks that it would be in the best interests of the creditors. If the company is not insolvent, the shareholders can vote to appoint a liquidator at a meeting of shareholders.

The Liquidation Process

After the liquidator is appointed, the following steps are taken in the liquidation of a company:

1. The liquidator must notify creditors of their appointment and inform them of their rights within 10 business days of their appointment.

2. Within 3 months of their appointment, the liquidator must provide creditors with a report on:

  • the estimated value of the company’s assets and debts;
  • inquiries undertaken and further inquiries required;
  • what happened to the business of the company;
  • how likely it is that the creditors will get a payout; and
  • possible ways to get better.

3. A creditors meeting can happen when the liquidator wants to or when the creditors ask for it. At the meeting, the creditors can decide whether or not to go along with the liquidator’s plan.

4. A committee of inspection may be formed to help and advise the liquidator.

5. Liquidation usually includes the following:

  • selling or closing the company;
  • identifying and selling the assets of the company.
  • contacting creditors and receiving claims
  • sending creditor progress reports
  • investigating potential criminal offences or improper transactions
  • making creditor payments (dividends)

6. All of the company’s assets will be liquidated and disclosed to ASIC once the liquidator has done so. An “end of administration return” must be filed with ASIC by the liquidator as proof of their final receipts and payments. The firm will be deregistered by ASIC 3 months after the liquidator files the end-of-administration return.

What is the difference between voluntary administration and liquidation?

Voluntary administration vs liquidation

Voluntary administration and liquidation are two very different things.

  • Voluntary administration is when a company voluntarily enters into administration in order to try and save the company’s business.
  • Liquidation, on the other hand, is when a company is forced to close down and sell off all of its assets in order to pay its debts.

The main difference between the two is that voluntary administration gives the company a chance to try and save the business, while liquidation does not. Voluntary administration also puts a moratorium on creditors’ claims, which gives the company time to negotiate with them. Liquidation does not have this moratorium, which means that the company’s creditors can start demanding payment as soon as the company is placed in liquidation.

Voluntary administration is usually used as a last resort before liquidation, as it gives the company a chance to save itself. However, sometimes voluntary administration is not an option, and liquidation is the only way to go.

If you are thinking about voluntary administration or liquidation for your company, it is important to speak to an insolvency practitioner who can advise you on the best course of action for your particular situation.

Are you eligible for Small Business Restructuring?

If your business is under financial stress and suffering form tax debt, a Small Business Restructure may be a good solution.

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