Voluntary Administration | Compromising Debt & Reducing Director Personal Exposure

Voluntary administration offers crucial support for companies grappling with financial difficulties. For company directors, understanding this process is essential not only for managing liabilities but also for improving tax outcomes. This knowledge can help safeguard both personal and professional interests. In this post, we'll explore how effectively navigating the voluntary administration process can significantly reduce liability and enhance tax situations for directors.

*Please note this article does not constitute legal advice. A lawyer specialising in insolvency should be consulted prior to acting on any of the information herein.

Understanding Voluntary Administration

Voluntary administration is a formal insolvency procedure that enables companies to restructure while prioritising creditor returns. When a company enters this process, it limits unsecured creditor actions (inclusive of the ATO), giving management time to develop a strategic plan.

This process starts when company directors initiate it or when a resolution is passed. An appointed administrator takes charge of the operations, evaluating the company's financial status, exploring options for future viability, and communicating plans with creditors.

For directors who want to minimise liabilities during challenging times, comprehending the nuances of this process is crucial.

Benefits of Voluntary Administration

Limiting Director Liability

One of the key benefits of voluntary administration is limiting future personal liability for directors. In certain circumstances, it can protect directors from claims stemming from insolvent trading (as opposed to if a company was placed into liquidation).

By proactively entering voluntary administration, directors take essential steps to address financial issues, offering them protection against future legal repercussions as opposed to continuing to trade.

Enhanced Negotiation Power with Creditors

The voluntary administration process can improve directors' bargaining power with creditors. An administrator represents creditor interests, leading to a cooperative dialogue about repayment options. Rather than confronting individual creditors demanding immediate payment, directors can work together to establish a manageable repayment plan.

This cooperative atmosphere often results in more favourable terms for the company, facilitating a smoother recovery process. .

Streamlining Tax Outcomes

Tax Restructuring

Entering voluntary administration opens up various tax restructuring strategies for struggling companies. Putting forward an acceptable Deed of Company Arrangement (DOCA) can lead to significant reductions in the overall company liabilities. In some instances, this may reduce the debt payable (inclusive of taxation liabilities) by over 80%.

Additionally, during administration, companies can reassess their financial statements to identify deductions or potential claims that may lower their overall tax burden.

Improved Financial Reporting

Accurate and timely financial reporting is another advantage of the voluntary administration process. With administrators closely reviewing company accounts, they can detect discrepancies or errors in reporting that negatively affect tax liabilities. By correcting these issues, directors can not only ensure compliance but also potentially reduce tax liabilities.

Essential Steps for Directors during Voluntary Administration

Acquiring Professional Advice

Successfully navigating the voluntary administration process requires careful planning and professional guidance. Directors should connect with expert lawyers and insolvency practitioners who can help them understand the intricacies of the process. These experts assist in developing a strategic plan aligned with the company's goals, reducing risk.

Transparent Communication with Stakeholders

Open communication with stakeholders, including employees, creditors, and customers, is critical during voluntary administration. By being transparent, directors cultivate goodwill, which is vital for negotiating favourable terms and establishing long-term relationships after administration ends.

This openness provides stakeholders with insight into the company's restructuring strategy, boosting trust and collaboration throughout the process.

Key Takeaways for Directors

The voluntary administration process serves as a valuable resource for company directors aiming to mitigate liability and improve tax outcomes. By grasping the protections this process offers and employing acceptable tax restructuring strategies, directors can strategically position themselves during times of financial distress.

As corporate governance becomes more complex, proactively engaging in processes like voluntary administration is increasingly important. The is goal is to maximise the chances that the company, or as much as possible of its business, continues in existence or failing that, maximise the return for the company's creditors and members.

For directors embarking on this challenging journey, informed decision-making, professional consultation, and clear communication will be essential ingredients for successfully navigating the voluntary administration process.