Written by Ian Niccol in July, 2007

Voluntary Administration (“VA”) is an instrument introduced by parliament in 1993 by which an insolvent company or soon to be insolvent company can enter into a temporary safety zone from the clutches of creditors. The goal of Parliament was to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chance of the company, or as much as possible of its business, to continue in existence; or

(b) if it is not possible for the company or its business to continue in existence;

may result in a better return for the company’s creditors and members than would result from an immediate winding up of the company. Section 435A of the Corporations Act 2001 (“the Act”).

During the period of VA which initially lasts for period of 28 days, the Administrator assess the current situation of the company in order to provide creditors with an opinion on whether the company should:

(1) Execute a Deed of Company Arrangement (“DOCA”);

(2) Be wound up; (placed into Liquidation); or

(3) Be returned to the control of its directors.

The option of executing a DOCA allows the company to try and trade out of its financial troubles, or to restructure the company by selling off some of the business assets / operations in order to revive the main source of business over an extended period of time.

Placing the company into VA potentially has the following advantages:

• Higher return to creditors than otherwise ordinarily would be achieved through a company winding up.

• Fewer job losses associated with VA.

Another advantage of placing an insolvent company or soon to be insolvent company into VA allows the directors some degree of protection against the liability of an insolvent trading action. Section 588H(5) of the Act allows a defence to a director who is alleged to have allowed their company to incur a debt while insolvent is that the director took all reasonable steps to prevent the company from incurring a debt. The court takes into consideration the actions of the director in appointing an administrator under a VA.