Voluntary administration explained: what happens when businesses collapse

Australian-owned businesses are closing their doors at an alarming rate and entering voluntary administration. But what does this actually term mean?

Transcript

00:00This is becoming a familiar sight across the nation as Australian-owned businesses close

00:05their doors at an alarming rate.

00:08When a struggling business announces its close-off, it's often said to open to voluntary administration.

00:13So what does this mean?

00:14When a company is unable to pay their debts, they become insolvent.

00:19As they can no longer meet their financial obligations, they can choose to go into voluntary

00:23administration and appoint an administrator.

00:27This gives the company, and potentially any new investors, time to formulate a plan with

00:32the administrator in the hopes of saving the business.

00:36So this involves going through accounting reports, financial reports, talking to management

00:41and talking to key staff, sometimes talking to key customers and key suppliers, and if

00:47there's a key lender or lenders in the business, usually talking to them as well.

00:52The voluntary administration period normally lasts between 25 to 30 days.

00:57During this time, unsecured creditors are stopped from continuing or commencing any

01:01claims against the company.

01:03A creditor is someone who is owed money from the collapsing business.

01:07They may be owed payment if loans have been made or if goods or services have not been

01:11received.

01:12A creditor may also be an employee of the collapsing company who is owed wages and entitlements.

01:18At the end of the administration period, the business will either continue to trade

01:22under the control of its directors, or it could be placed into liquidation, or a deed

01:28of company arrangement will be organised.

01:32Liquidation is when the company can no longer function and the focus from this point is

01:36distributing the company's assets in a way that returns the most value to its creditors.

01:41A liquidator is appointed to protect, collect, sell and distribute the company's assets.

01:47A deed of company arrangement, or a docker on the other hand, is a binding agreement

01:52between a company and its creditors.

01:54It's made to show transparency about how the company's affairs should be dealt with.

01:59Dockers maximise the chance of the company's survival and aims to provide a better return

02:03to creditors.

02:04Often, this means creditors will accept partial payment of their debts, with the remainder

02:09being forgiven once the docker is complete.