An Overview of Voluntary Administration
Section 435A of the Corporations Act 2001 (Cth) (“the Act”) states that the objects of the administration provisions of the Act are to provide for the business, property and affairs of an insolvent company to be administered in a way that:
- Maximises the chance of the company, or as much as possible of its business, continuing in existence; or
- If it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Pursuant to section 435A of the Act, a voluntary administrator’s primary obligation is to administer the company in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence (“Primary Consideration”).
The legislative intent behind the current provisions for external administration is to facilitate the rehabilitation of insolvent companies wherever possible. Any decisions as administrator must therefore aim to facilitate the rehabilitation and ongoing existence of the company or much as possible of its business wherever possible. This may include an outcome where even though the company does not continue in existence, the business or some part of it continues and is run by some other entity.
Therefore, whilst an administrator’s role is to investigate the financial position of the company with a view to making a recommendation to creditors as to the future of the company, this role must be construed in the context of Part 5.3A of the Act as a whole and the intention for the company or its business to continue in existence.
Section 435A(b) of the Act refers to administering the company in a such a way that results in a better return for company creditors and members than would result from an immediate winding up, however it should be noted that this is a secondary consideration (“Secondary Consideration”).
The courts have confirmed that it is only if the ongoing existence of the company or its business is not possible that the secondary consideration of the best return to creditors comes about.
Voluntary administrators hold significant powers, which can include having the power to terminate or dispose of all or part of the business and may dispose of any of the company’s property pursuant to section 437A(1)(c) of the Act. Section 437A of the Act allows an administrator to act unilaterally and to sell the company’s business without first obtaining the consent of creditors or court approval. An objective business judgment must be applied to the proposed sale and the sale must be:
- for value; and
- not tainted with impropriety.
Whilst administrators have immense powers, the courts have reinforced that these powers exist only for the purpose of carrying Part 5.3A of the Act into effect. This means that an exercise of power by an administrator will only be justifiable if it relates to some aspect of the proper discharge of the Part 5.3A functions of an administrator. That is, the power must be exercised so as to:
- maximise the chances of the company, or as much as possible of its business, continuing in existence; or
- if it is not possible for the company or its business to continue in existence; results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Given the time restraints imposed on administrators, courts have recognised that a sale of the assets may be the only realistic option which maximises the chances of a business continuing in existence, whilst also maximising the chances of creditors being repaid. Voluntary administration is a regime under which decision-making is confined to the administrator and, as to certain matters and in certain ways, the creditors. Therefore, whilst it is creditors who make the decision on the company’s future, it is the administrator who is charged with making decisions as to the sale of assets.