In my previous article, I examined ASIC’s recent review (ASIC Report 836) of Voluntary Administration and Deeds of Company Arrangement, which confirmed that Voluntary Administration remains an important restructuring tool, particularly for larger and more complex businesses. 

For many directors, however, the more important question is not whether Voluntary Administration remains relevant. 

It is when should it be considered? 

After acting in more than 150 Voluntary Administrations, I have found that the biggest mistake directors make is rarely choosing the wrong restructuring process. 

The more common mistake is waiting too long before seeking advice. 

By the time directors begin considering their options, the business may already have lost opportunities that were available only months earlier. 

Financial distress rarely happens overnight 

Most businesses do not move suddenly from profitability to insolvency. 

The warning signs usually develop gradually. 

Cash flow becomes tighter. 

Creditors begin waiting longer for payment. 

The Australian Taxation Office is placed on a payment arrangement. 

Suppliers reduce credit limits. 

The business begins relying on overdue liabilities to fund day-to-day operations. 

These issues often develop over many months. 

Unfortunately, directors sometimes become accustomed to operating under increasing financial pressure and assume that improved trading will eventually resolve the problem. 

Sometimes it does. 

Often it does not. 

Voluntary Administration is not a last resort 

One of the biggest misconceptions surrounding Voluntary Administration is that it should only be considered when a business is about to fail. 

That is not its purpose. 

The objective of Voluntary Administration is to provide breathing space while an independent administrator assesses the company’s position and considers whether a better outcome can be achieved than an immediate liquidation. 

In many cases, that may involve: 

• restructuring the company’s debts; 

• selling the business as a going concern; 

• negotiating with creditors through a Deed of Company Arrangement (DOCA); or 

• preserving part or all of the business where it remains commercially viable. 

The earlier those options are explored, the greater the likelihood they remain available. 

What are the warning signs? 

Every business is different, but there are several indicators that directors should not ignore. 

These include: 

• repeated ATO payment arrangements; 

• mounting tax debt; 

• increasing pressure from suppliers; 

• difficulty meeting wages or superannuation; 

• declining cash flow; 

• threatened legal proceedings; or 

• receipt of a Director Penalty Notice. 

None of these necessarily means Voluntary Administration is inevitable. 

However, they do indicate that the business should be reviewed before its financial position deteriorates further. 

Why timing matters 

Timing is one of the few factors directors can still control during financial distress. 

Once creditors commence recovery proceedings, options often become more limited. 

Employees may leave. 

Customers lose confidence. 

Key suppliers may cease trading with the company. 

Working capital becomes increasingly difficult to obtain. 

As those pressures increase, the range of realistic restructuring alternatives often narrows. 

Seeking advice early allows directors to evaluate all available options before external events begin dictating the outcome. 

Voluntary Administration is only one option 

Importantly, seeking advice does not automatically mean placing the company into Voluntary Administration. 

In many cases, another restructuring pathway may be more appropriate. 

Depending upon the company’s circumstances, directors may instead consider: 

• informal restructuring; 

• negotiated arrangements with creditors; 

• Small Business Restructuring; 

• refinancing; or 

• if the business is no longer viable, a Creditors’ Voluntary Liquidation. 

The purpose of obtaining early advice is not to force a particular outcome. 

It is to identify the option most likely to preserve value and achieve the best result for all stakeholders. 

Every business is different 

One of the reasons restructurings is rarely straightforward is that no two businesses experience financial distress in exactly the same way. 

A manufacturing business with secured lenders presents different challenges to a professional services firm. 

A family-owned business has different priorities to a national retailer. 

Likewise, a company with temporary cash flow difficulties requires a different solution from one that is fundamentally no longer viable. 

That is why restructuring should never be approached as a one-size-fits-all exercise. 

The right solution depends on understanding the business, its creditors and the commercial objectives capable of being achieved. 

Experience matters 

The value of an experienced restructuring specialist is not simply knowing the available options. 

It is the ability to assess the circumstances, explain the alternatives clearly and determine the pathway most likely to achieve the best outcome. 

Having undertaken more than 150 Voluntary Administrations, this is the practical judgement we bring to every engagement. 

Sometimes that advice leads to a Voluntary Administration. 

Sometimes it leads to Small Business Restructuring. 

Sometimes it confirms that the business can continue trading without a formal appointment. 

And sometimes the most appropriate recommendation is an orderly liquidation. 

The important point is that the recommendation should follow the circumstances—not the other way around. 

Final observations 

ASIC’s recent review confirms that Voluntary Administration remains an important restructuring mechanism within Australia’s insolvency framework. 

For directors, however, the more important lesson is not simply that the process remains available. 

It is that timing matters. 

Businesses that seek advice while options remain available generally have more flexibility than those that wait until creditors have commenced enforcement action. 

In my next article, I will compare the three principal restructuring pathways available to financially distressed companies—Voluntary Administration, Small Business Restructuring and Creditors’ Voluntary Liquidation — and explain how directors can determine which option is most appropriate for their particular circumstances. 

Our services 

Our digital booklet, Voluntary Administration vs Creditors’ Voluntary Liquidation Explained, is a practical resource for advisers and their clients, helping them understand the key differences between these two insolvency options. 

We also offer complimentary presentations for professional firms and their teams. 

David Levi has been appointed Voluntary Administrator to more than 150 companies, providing practical, real-world experience across a wide range of industries.