When a business is facing mounting debts and cash flow is tightening, Voluntary Administration (VA) can provide a lifeline. This process offers the possibility of restructuring your company to regain stability while protecting the company director from creditors. However, VA also brings a range of legal obligations and responsibilities for directors. Failing to understand and fulfil these duties can lead to significant personal and financial consequences.
At SALEA Advisory, we’re here to help you navigate the complexities of a VA, empowering you to make informed decisions and work through the process seamlessly during what could be a critical time. Read on as we explore the legal implications for directors during and after voluntary administration — arming you with the knowledge to protect your business and personal liability.
Loss of Control During Voluntary Administration
Once a company enters voluntary administration, director powers cease. The Administrator expert takes over the company’s day-to-day operations (with the assistance of key staff), assuming responsibility for making decisions about the business, its assets, and its future. This means directors no longer have the authority to manage company affairs, even if they have strong feelings regarding the best course of action.
Directors cannot object to the decisions made by the administrator, whose role includes investigating the company’s financial situation and determining whether it can continue trading, whether a Deed of Company Arrangement (DOCA) proposed provides a greater return to creditors, or if the company should be liquidated. While this loss of control can feel daunting, it’s a necessary step to create a clear path forward.
Legal Obligations for Directors During Voluntary Administration
Despite ceding control, directors retain several important legal obligations during the voluntary administration process. They must provide the administrator with full access to the company’s financial records, contracts, and other relevant documents. This helps the administrator get an accurate picture of the company’s financial health.
Failure to comply with these obligations can have serious consequences, including civil penalties and even criminal charges. Under the Corporations Act 2001, directors who fail to assist the administrator may face fines of up to $200,000 or imprisonment for up to five years.
Mitigating Insolvent Trading Liability
One of the most significant risks directors face is insolvent trading, where a company continues to incur debts when it cannot pay them. The penalties for insolvent trading can be severe, with directors potentially held personally liable for any debts incurred during insolvency.
Once an administrator is appointed, directors are temporarily relieved of their duty to prevent insolvent trading. This “safe harbour” period can protect directors from personal liability for some debts, allowing them to focus on restructuring the business.
However, VA doesn’t protect directors from all liabilities. For example, unpaid PAYG withholding tax and superannuation guarantee charges that have remained unreported for over three months past their due date are not covered under VA protections. Therefore, directors must act promptly when financial distress becomes apparent, rather than waiting until debts have ballooned.
Director Penalty Notices and Personal Guarantees
Director Penalty Notices (DPNs) are issued by the Australian Taxation Office (ATO) to directors who fail to meet tax obligations, such as PAYG withholding or superannuation payments. While voluntary administration can pause certain actions from unsecured creditors, it does not automatically relieve directors from personal liability associated with DPNs, especially if these debts have been outstanding for an extended period.
Similarly, while personal guarantees provided by directors may not be enforceable during the administration process, creditors can enforce them once the administration concludes or if the company is liquidated. Directors should remain vigilant about their personal liabilities as they navigate the VA process.
Post-Voluntary Administration Scenarios
The voluntary administration process generally leads to one of three outcomes:
- Deed of Company Arrangement (DOCA): If a DOCA is approved by creditors, directors may regain control of the business, depending on the terms of the arrangement. The DOCA aims to return the company to profitability or to maximise the return for creditors.
- Liquidation: If the company’s financial situation is beyond recovery, the administrator may recommend liquidation. In this scenario, the company is wound up, and directors lose control permanently.
- Return to Trading: In some cases, the administrator may determine that the company is capable of resuming normal operations. When this happens, directors regain control of the business. This only applies where the company is solvent.
Key Legal Takeaways for Directors
Voluntary administration is a powerful tool for restructuring and protecting unstable businesses, but it comes with significant legal responsibilities for directors. Understanding the implications of ceding control to an administrator, fulfilling your obligations, and mitigating personal liability are all essential to navigating the process successfully.
Directors must comply with legal obligations during VA, including providing all necessary information to the administrator and relinquishing control over decision-making. Insolvent trading liability can be mitigated by VA, but personal guarantees and certain tax liabilities may still pose risks.
Acting quickly to seek professional advice is key to ensuring directors meet their obligations and protect their business and personal assets.
By fully understanding the legal implications of voluntary administration, directors can take proactive steps to guide their companies through financial distress and toward a more stable future.
At SALEA Advisory, we provide expert support to help you navigate these challenges with confidence. Please contact us for further guidance or to discuss specific concerns.
