Voluntary administration takes place when a business is insolvent. A company is said to be insolvent when its liabilities exceeds the assets. It refers to the financial distress to offset the debts among other insolvency reasons. A bankrupt company enters into a voluntary administration for some breathing space away from the creditors. The grace period is often one month but may vary depending with the court. The primary purpose of the appointed independent administrator is to salvage the business from closure.
Voluntary Administration Process and Roles of the Administrator
Appointment of the administrator can be done by various approved individuals or bodies. The administration is headed by the appointed insolvent practitioner. He or she becomes the acting chief executive officer during the stipulated period. The board of directors has no power. The appointed administrator focuses on financial analysis and restructuring for the business to be a going concern. They also have a role of providing a better settlement option for the creditors than when the company would have been liquidated. The latter often happens when saving the business from closure is not successful.
Possible Outcomes of Voluntary Administration
There are several possible potential outcomes. Understanding voluntary administration outcomes is essential for the shareholders. The initial purpose of the process is saving the business from closure. The administrator comes up with successful financial strategy that will return the business to its previous financial position. The company is able to offset its debt and the administrator hands over to the management and boards of directors after the stipulated time.
The second alternative is closure of the business if there is no solution for the insolvent state. The administrator oversees the disposal of current business assets. The money from the disposal is then used to pay the creditors and other prioritized fees such as salaries. The qualified practitioner should compensate the creditors better than the insolvent business offer. The deed of the company arrangement is the third possible outcome. The company’s debts are compromised through flexible arrangements. The arrangements vary among businesses. For example, payment could be done in installments or at once as a lump sum for all the debts.
Effects of the Process on the Shareholders
As soon as the administration agreement takes place, the current chief executive officer and board of directors hands over their management power to the appointed practitioner. He or she is responsible for financial assessment and restructuring of the business. The administrator gets to decide within the first few weeks whether to retain the employees. However, in most cases the employees are retained for effective functioning. Their salaries are prioritized liabilities. They should be paid after the creditors and before the administrator’s fees upon disposal of the assets.
The creditors’ debts are frozen during the voluntary administration phase. The pending payments are subject to disposal of assets or recommended deeds. The landlord of the business premise cannot evict the administrator unless the process had already begun. Banks can also not exercise their security rights after a given period.