Voluntary Administration to save a company
“What if there was a way we could save our company, get rid of overheads, costs and staff, and rebuild our sales and profits without closing it? We don’t want to see all of our hard work destroyed and have the misery of going bust!”
There is a great solution for your problem and you’ve found it…
It’s called Voluntary Administration and it is a legally binding deal with creditors. However, Voluntary Administrations are not a magic pill that instantly solves a company’s problems. We have outlined below some relevant matters such as when to use a voluntary administration, when not to use a voluntary administration and we look at how successful they have been over the last 20 years.
Keep in mind the purpose of a Voluntary Administration is to save or sell a viable business. If your business is unviable and you need to wind your company up you should look into liquidation.
Voluntary Administration can also be a pathway to liquidation. In the case that not all directors or shareholders consent to a voluntary liquidation of the company, one director can initiate a Voluntary Administration. At the second creditors meeting of a Voluntary Administration the creditors vote on several options for the future of the company, one of which is liquidation.
When to use a Voluntary Administration
An ideal company for a Voluntary Administration is one that:
- is insolvent and need some sort of debt restructuring;
- is a trading business;
- has had 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.
So the main question we asked a director who is contemplating a Voluntary Administration is: “so if we can fix the debt burden, can you see a scenario where the company did trade profitably and be cash flow positive within a reasonably short period of time?” If a director can answer yes to that question in a Voluntary Administration is likely to be a good solution.
What is a successful Voluntary Administration?
We should firstly realise that in all corporate insolvencies, creditors will lose money and some shareholder value has already been destroyed. So usually the best that can be expected from a Voluntary Administration is to reduce the losses suffered by creditors and shareholders and perhaps to make all stakeholders less unhappy. If a company can be saved the legislation tells us that the appropriate parties should aim to enter Voluntary Administration with a view to executing a Deed of Company Arrangement, or what is commonly referred to as a “DOCA”. A DOCA is simply a deal agreed between a company and its creditors. The legislation is silent on what should be included in a DOCA and so a DOCA can be prepared to suit the situation of each particular company. So in essence, a successful Voluntary Administration is probably best defined as one where a DOCA is executed.
Statistics on the success of Voluntary Administrations
At Dissolve, we prepare a quarterly report known as the Business Stress Report which provides a wide range of statistics on corporate insolvencies. One of the factors we track is the success, or otherwise of Voluntary Administrations. Here are some somewhat surprising statistics:
- only 15% of corporate insolvencies are Voluntary Administrations;
- of those Voluntary Administrations, 33% successfully execute a DOCA;
- that is a net result of only 5% of insolvent companies successfully executing a DOCA
So the statistics tell us that Voluntary Administrations are not particularly successful at saving a company. Therefore, we strongly recommend that any company director considering a Voluntary Administration carefully review the first section of this page which explains when a Voluntary Administration is an appropriate solution.