Voluntary Administrations – don’t get too excited about the chances of success
Let me throw at a proposition for you which is that, whilst Voluntary Administrations can be an excellent remedy for a company in financial difficulty, the ratio of successful VAs to total insolvencies is very low. They are also expensive and so, most often, of little practical use to a small to medium size business. I recently wrote an article for Business Reporter about Voluntary Administrations and covered some of the problems – so I thought it worthwhile to review a few of the facts around VAs rather than just accept the hype you will receive elsewhere.
Success rates for Voluntary Administrations
We track a number of statistics and one of those is the success, or otherwise, of Voluntary Administrations. Here are the facts:
- 15% of corporate insolvencies are Voluntary Administrations – the rest are liquidations or receiverships;
- around 33% of VAs successfully execute a Deed of Company Arrangement (“DOCA”);
- so only 5% of insolvent companies successfully executing a DOCA.
And there is more – of those companies that find their way to a DOCA, only 28% have some sort of creative outcome, such as saving the business. The rest don’t try and save the business – they just settle matters outside of the liquidation process.
So working all of that through we establish that Voluntary Administrations save around 2% of insolvent businesses. That is not a pretty number.
What is a successful Voluntary Administration?
Remember we are dealing with insolvent companies here. Usually the best outcome that can be expected from a Voluntary Administration is to reduce the losses suffered by creditors and shareholders and possibly save the business, assuming it deserves to be saved! In pretty much every case, creditors will lose money and shareholder value has already been destroyed.
So what can be regarded as a success story for a Voluntary Administration? For a Voluntary Administration to be regarded as successful, it will have resulted in a DOCA whereby creditors get a return on their debt, maybe some potential legal cases are settled and the business carries on.
When to use a Voluntary Administration
There is a profile I can paint of what sort of company should consider a Voluntary Administration. It is an insolvent company that:
- needs some sort of debt restructuring;
- is a trading business;
- has some sort of one-off disaster that has caused a financial loss and has led to the insolvency of the company;
- has good prospects for a return to profitability and currently has a positive cash flow, provided the debt burden can be reduced.
The question I will always ask a director is “if we can fix the debt burden, can you see a scenario whereby the company can trade profitably and be cash flow positive within a reasonably short period of time?” If a director can answer yes to that question then Voluntary Administration is likely to be a good solution.
How much do creditors get and what does it cost?
Statistics tell us that a typical Voluntary Administration of a small to medium sized company will cost around $60,000 in professional fees. In addition, the average payment to creditors in a DOCA as a settlement of past debts is around 5 cents in the dollar.
Therefore, a director considering a Voluntary Administration should have a good think about whether the company is suitable and whether the business can afford it! Voluntary Administrations can be an excellent solution for an insolvent company but it will only work in some cases.