Overview

Voluntary administration is a corporate rescue process under Australia’s Part 5.3A of the Corporations Act 2001. The primary aim is to maximise the chances of the company’s continuation through debt restructuring or, if unfeasible, to achieve a better outcome for creditors than would be possible in a liquidation. This process provides a temporary shield from creditor actions, giving the company time to formulate a plan to either recover or conclude its affairs in an orderly fashion.

Legislation

Part 5.3A of the Corporations Act for voluntary administrations states:

CORPORATIONS ACT 2001 – SECT 435A

Object of Part

The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence–results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

Commencement of Administration

A company’s voluntary administration begins on the date an administrator is appointed. This appointment can be made by a written instrument and may be initiated by:

The company’s board: If the board resolves that the company is insolvent, or is likely to become insolvent (unable to pay its debts as they come due), it may appoint an administrator. This is the most common route (Corporations Act 2001, Section 436A(1));
A liquidator or provisional liquidator: If the liquidator believes the company is, or is likely to become, insolvent, they may also initiate administration (Section 436B);
A secured creditor: A secured creditor with an enforceable security interest over all or substantially all of the company’s assets can appoint an administrator (Section 436C).

Notably, the court does not have a general power to appoint administrators at the request of creditors or other parties.

Role and Authority of the Administrator

The administrator assumes control over the company’s business, property, and affairs, with extensive powers, including the authority to continue, cease, or dispose of the business or any of its assets (subject to exceptions under “Business and Asset Sales” below). Acting as the company’s agent, the administrator can perform any function or exercise any power that the company or its officers would otherwise hold if not for the administration.

If a committee of inspection (a creditors’ committee) is appointed at the first creditors’ meeting, it can consult with the administrator on various matters. Once an administrator is appointed, this appointment is final, though creditors may vote to remove the administrator at the first creditors’ meeting, or the court may do so if it would benefit the administration’s progress.

Court involvement in an administration is generally limited, but parties may apply to the court during the administration, and the court retains broad authority to issue orders related to the process. Only registered liquidators may serve as administrators, and they are subject to regulation and oversight by ASIC.

Key Stages in the Administration Process

Voluntary administration consists of two key phases, each marked by a creditors’ meeting.

(1) The First Creditors’ Meeting:

At this initial meeting, creditors decide on two key matters:

Whether to replace the administrator.
Whether to establish a committee of inspection (a group representing creditors’ interests) and, if so, to appoint its members.

This meeting must be held within 8 business days from the start of the administration, unless the administrator applies for and receives a court extension.

(2) The Second Creditors’ Meeting:

This meeting determines the company’s future, with three possible outcomes:

The company enters a Deed of Company Arrangement (DOCA) to restructure its debts.
The company is placed into liquidation.
The company is returned to the directors’ control, which is rare.

The second meeting is typically scheduled within 5 business days before or after the end of the “convening period.” Ordinarily, the convening period lasts 20 business days from the start of administration (or 25 business days if the appointment occurs near Christmas or Good Friday). In complex or larger cases, administrators often request court extensions for the second meeting—sometimes by six months or longer—providing additional time to explore restructuring or sale options.

Most administrative work happens between the two meetings. During this period, the administrator conducts investigations, manages the business, prepares or evaluates DOCA proposals if relevant, and formulates strategies for asset sales or business reorganisation. This intensive phase is essential for developing viable options for the company’s future.

Moratorium: Legal Protections

The voluntary administration process grants a financially distressed company a period of “breathing space” to decide its future path. During this period, an automatic stay is in place, which prevents:

The company from being wound up.
Secured creditors from enforcing their security interests.
Lessors or third parties from reclaiming leased or third-party-owned property (except perishable items).
New or ongoing court and enforcement actions against the company or its property.
Enforcement of guarantees provided by the company’s directors (or their spouses or relatives).

There are some exceptions to these restrictions. Creditors may seek court permission or the administrator’s consent to proceed with specific actions. Additionally, certain secured creditors who had initiated enforcement before the administration may continue, and secured creditors holding security over most or all of the company’s assets can take enforcement action (such as appointing a receiver) within the “decision period,” which lasts 13 business days from the date the administrator is appointed.

Ipso facto stay: Protection Against Contractual Termination Rights

To improve the chances that a company in administration can continue trading and recover, certain contractual rights (including termination rights) cannot be exercised solely because the company has entered administration, unless the administrator consents or the court permits it. Specifically, parties are barred from enforcing contractual rights based on:

The company entering administration.
The company’s financial condition.
Any prescribed reason (none have been specified to date).
Any reason essentially similar to the above.

This “ipso facto” stay is designed to prevent terminations related solely to insolvency status, without affecting enforcement rights for other reasons, such as breaches involving non-payment or failure to perform. Notably, the ipso facto stay only applies to contracts entered into on or after 1 July 2018.

There are numerous exceptions for specific types of contracts and rights. Contracts excluded from the ipso facto stay include:

Agreements governing securities, financial products, bonds, promissory notes, syndicated loans, and related subscription agreements.
Business sale and share sale agreements.
Contracts covered by the Cape Town Convention on International Interests in Mobile Equipment.
Arrangements involving special purpose vehicles for securitization, public-private partnerships, or certain project financing.
Derivatives and specific close-out and netting agreements.

Business Operations

During administration, the administrator has authority to manage the company’s business, including continuing operations, incurring debts, and selling goods and services in the normal course, as long as these actions are authorised by the administrator.

The administrator is personally responsible for debts incurred while fulfilling their duties, specifically for: (i) services provided, (ii) goods purchased, (iii) property leased, rented, used, or occupied, and (iv) repayment of borrowed funds, including associated costs and interest. Additionally, the administrator is liable for rent or other amounts under existing leases, starting 5 business days into the administration period, as long as the company continues to use the leased property.

To cover debts or liabilities incurred, the administrator is entitled to an indemnity from the company’s property, which is secured by a lien. This lien has priority over unsecured creditors but typically ranks behind secured creditors, except in cases where the security is circulating in nature.

New Funding Options

The administrator has the authority to raise funds on the company’s behalf and is personally liable for any debts incurred, with a right to indemnification from the company’s assets (see “Operation of the Business” above). Administrators often secure such funding if the company has sufficient unencumbered assets to support the loan, either directly or by granting security to the lender.

In practice, if additional funding is needed (for instance, to continue operations), the administrator typically first approaches an existing secured creditor, especially one holding security over most or all of the company’s assets. If this creditor declines, the administrator may seek funds from other sources, such as a rescue financier. However, such external funding is usually only obtained with “priority” or “super-secured” status (i.e., the new lender’s security takes precedence over existing secured debts), which generally requires consent from the current secured creditor.

While no court orders are legally required to obtain such funding, administrators commonly apply to the court beforehand to limit personal liability. Similarly, lenders may request a court order to validate the security granted by the company for the new loan.

Business and Asset Sales

The administrator is empowered to sell the company’s business and assets, directly overseeing or authorising the sale.

However, if property is subject to a security interest or owned or leased by a third party, the administrator can only proceed with the sale if one of the following conditions is met: (i) the sale occurs in the ordinary course of the company’s business, (ii) written consent is obtained from the secured party, owner, or lessor, or (iii) court approval is granted. When making a sale, the administrator must act reasonably, exercising sound business and commercial judgment.

For assets covered by a valid security interest, any net proceeds from the sale must first be used to pay the secured debts. Buyers acquire these assets free from any previous claims or security interests.

A Pathway to Restructuring

Before the second creditors’ meeting, any party can propose a DOCA to restructure the company’s debts and operations. A DOCA is a flexible restructuring tool that establishes a binding agreement between the company and its creditors, detailing how to address outstanding debts after the administration period.

A DOCA can include various arrangements such as rescheduling debt repayments, extending payment terms, converting debt to equity, selling some or all assets, distributing funds to creditors, or establishing a creditors’ trust. Proposals often come from directors, shareholders, or potential buyers of the company’s business or assets. The main requirement for a DOCA is that it offers creditors a better outcome than liquidation. It may treat different classes of creditors differently if there is a valid business rationale for doing so.

A DOCA does not, however, interfere with the rights of secured creditors to enforce their security interests or prevent property owners or lessors from exercising their rights—unless they voted for the DOCA or a court orders otherwise.

The administrator reviews DOCA proposals and issues a report to creditors, recommending whether entering the DOCA would serve their best interests. Creditors vote on the DOCA at the second meeting, with approval requiring a majority in both value and number of those present (including proxies). All creditors vote as a single class.

If approved, the DOCA must be finalized and signed within 15 business days following the second meeting, unless the court grants an extension. It must include key provisions, such as the administrator’s powers, termination conditions, and the formation of a committee of inspection. If the DOCA is not approved, the company typically enters liquidation, and the voluntary administrator generally becomes the liquidator.

Upon signing the DOCA, the administrator becomes the deed administrator unless creditors appoint someone else by vote. The DOCA then binds the company, its officers, shareholders, deed administrator, and all creditors (subject to certain rights of secured creditors and lessors as mentioned).

Depending on the DOCA’s terms, control of the company may either remain with the deed administrators or return to the directors. Recent practice has seen DOCAs paired with creditors’ trust deeds, allowing funds or assets to be held in trust for distribution. This setup can expedite the return of the company to normal operations, while the trust handles payments to creditors independently.

Set off

Entering administration does not automatically trigger a set-off requirement. However, set-off rights fall under the types of contractual rights that are exempt from the ipso facto stay (see “Ipso Facto Stay” above). This means the stay does not restrict a counterparty’s contractual right to offset amounts the company owes them against amounts they owe the company.

Effect on stakeholders

Upon the appointment of an administrator, the powers of directors and officers are put on hold. Employees remain employed unless their positions are terminated by the administrator. Additionally, members are generally prohibited from transferring their shares in a company under administration, with some exceptions. While administration does not automatically terminate the company’s contracts, refer to the sections on “Moratorium” and “Ipso Facto Stay” above for information on how administration affects creditors and the implications for contractual rights arising from insolvency.

End of procedure

An administration generally concludes after the second meeting of creditors, during which they decide whether the company should: (i) enter into a DOCA; (ii) go into liquidation; or (iii) return to the directors’ control (which is uncommon).

Once a DOCA is terminated, the company is no longer bound by its provisions. Termination usually occurs due to specific conditions outlined in the DOCA. However, under certain circumstances, a company may continue to be subject to a DOCA if it is ordered by the court, approved by the creditors’ resolution, or through a notice issued by the deed administrators.

Support from Levi Consulting

Below are the available options for informal workouts (reconstruction) and formal procedures in Australia. Levi can assist clients with situation assessment, strategic planning, and effective implementation of the most appropriate restructuring strategy.

Voluntary Administration