Businesses today operate in an increasingly dynamic and competitive environment. Slowing growth patterns, increased competition and an uncertain economic outlook all present threats to performance and viability.
A company can face unexpected cash flow problems, even if it is trading profitably. Often it can trade out of temporary cash flow problems without external assistance. However, if this cannot be achieved, voluntary administration provides a framework for a company and its creditors to negotiate a compromise, whilst protecting the key stakeholders.
A Voluntary Administration is an invaluable tool available to companies facing financial stress. At times, it will be the only avenue available to a company to address its short term financial problems and return it to a position of financial strength.
Symptoms of Insolvency
The presence of any of the following may flag solvency problems that need to be addressed through voluntary administration:
- Ongoing losses;
- Bouncing cheques;
- Exceeding overdraft limits;
- COD terms from suppliers;
- Debt recovery action;
- Asset sales to fund trading;
- Falling stock levels;
- High staff turnover; or
- Postponement of essential maintenance to save money.
Voluntary administration addresses the critical needs of stakeholders in three important ways:
- It removes creditor pressure from the business, allowing a focus on trading, rather than juggling the competing demands of creditors.
- Assets and operations are protected by placing them under the supervision of an independent person, the administrator.
- It provides a statutory framework for negotiation with creditors, assisted by the preparation of a report by the administrator.
Critically, a compromise can be put in place if agreed to by a majority of creditors – it can not be unreasonably blocked by a minority
Voluntary administration can be quickly and inexpensively implemented by a resolution of directors. Secured lenders may also appoint an administrator, but this occurs infrequently in practice.
The diagram below sets out an overview of the process of voluntary administration.
Voluntary administration is designed to keep a business together until the administrator has had the opportunity to assess the position and prepare a report.
To assist the process, recovery action by creditors is frozen. Except with permission of the court or the administrator:
- Leased and hired equipment cannot be repossessed;
- Reservation of title stock cannot be removed;
- Contracts such as franchise agreements can not be terminated;
- The business can not be forced to vacate leasehold premises;
- Secured lenders cannot enforce their security except in limited circumstances.