Voluntary Administration of a Company
The main purpose of a Voluntary Administration is to provide a company with a viable alternative to winding up where there is scope for restructuring its financial affairs. It allows the Directors or others, through the administrator, to put forward a proposal, for example, to pay off the debts over time, or at a reduced amount, thereby allowing the company to survive and trade on. This is often attractive to creditors, who may prefer this to the loss of one of their large customers. The proposal is accepted, or rejected, by a meeting of creditors.
Usually a voluntary administration will be initiated by the directors of a company that is insolvent or may become so. The appointment of an administrator is much easier and quicker than appointing a provisional liquidator or convening a meeting of members and creditors to effect a creditors’ voluntary winding up.
Voluntary administration can remove the risk of liability of directors for insolvent trading yet still enable the company and its creditors to effect a work out.
Some secured creditors can opt out of a voluntary administration. They may for example appoint their own receiver over the company’s assets. Clearly this would frustrate any plans to trade out of difficulty, so this option is limited only to secured creditors with a charge over all or substantially all of the company’s assets. Secured creditors having a charge over some of the assets, or creditors claiming over leased or hired property, or under retention of title provisions may be forced to go along with the voluntary administration, at least in the short term, so as not to frustrate the process.
A company may make a formal agreement with its creditors and other relevant parties to satisfy debts by means of a Deed of Company Arrangement. It is less formal and cheaper than a scheme of arrangement. A secured creditor is not bound to become a party to it. Creditors holding guarantees from directors may still enforce them for any shortfall.
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