Voluntary administration (VA) rates for listed companies look set to soar as directors of growing numbers of small and medium companies in financial dire straits, opt for administration as a potential lifeline for the business, rather than face personal exposure for insolvent trading.
Recent research has shown that nearly a third of all ASX-listed companies were close to insolvent in 2013, including more than half of the smallest 500 and 28 per cent of medium companies. [Source: CPA Australia: Audit Reports in Australia 2005 – 2013: Preliminary findings (September 2014).]
And of the more than 700 small and medium companies in serious financial distress, those in the energy and mining, consumer staples, industrials, health care and utilities sectors were at greatest risk of collapse.
“Small and medium companies are facing a perfect storm of financial woes”, said Antony Resnick, principal of turnaround and business advisory firm BRI Ferrier.
“The capital markets have been brutal, making it especially challenging for small caps to fund working capital. Coupled with low levels of consumer confidence, falling commodity export prices and stagnating household incomes, it’s no wonder many listed entities are struggling. Many directors will not be in a position to vouch that their business is a going concern when statutory accounts and solvency declarations fall due on 30 September.”
Resnick commented that directors who had exhausted conventional funding options would be likely to turn to voluntary administration, leading to an uptick in VA cases in the months ahead.
“ASIC statistics recorded a 28 per cent rise over the previous quarter in voluntary administrations in the three months to June 30, 2014. We expect this upward trend to continue as more directors opt for a VA as a final resort attempt to salvage the business when the realization dawns that the company no longer has the means to continue trading.”
As an example, food manufacturer, Spring Gully Foods went into VA in April 2013. The company emerged from VA in July 2013 with a deed of company arrangement under which creditors agreed to the company’s plans to modernise manufacturing processes and make the entity more sustainable. The business remains family-owned and controlled.
Resnick said that while voluntary administration was sometimes regarded as a precursor to liquidation, perceptions were changing and more companies were proactively using VAs as a positive tool to save the business.
“If initiated early enough and the directors have a considered plan for restructuring the business, VAs can be a valuable lifeline, giving distressed companies the maximum chance of survival. There are many brands and businesses who have emerged successfully from the VA process including Darrell Lea, St Hilliers Group, Spring Gully Foods and many more.
“Administrators can implement many options that are not readily available to the directors, including capitalising debt using a deed of company arrangement or restructuring for the purposes of a backdoor listing.”
Gavin Robertson, principal of the commercial law group at M+K Lawyers said that directors often viewed voluntary administrations as a viable strategy to save the company because of the various benefits available to the company and directors.
“The company gains a freeze on its creditors, giving it vital breathing space to restructure and preserve the value of company assets, including trading businesses, for the benefit of all stakeholders.
"And where assets sales are part of the solution the administrator will in most cases be able to achieve a better result than the directors because of their strong commercial reputation and ability to inject competitive tension into any bidding process. Additionally, shareholder and director approval are not required to carry out the sale which can save significant time and money.”
Robertson added that another major advantage of a voluntary administration is that directors are protected from exposure to claims of insolvent trading which can leave them vulnerable to significant personal liabilities.
“The law requires directors to protect the interests of creditors. They can be held personally liable if they incur debts once a company becomes insolvent. But by placing the company in voluntary administration, directors are protected from further liability and the company can then efficiently carry out a reconstruction.”
Robertson said that the chances of rehabilitating a company can be significantly improved if companies act at the earlier stages of financial distress.
“Putting a company into administration is a finely balanced decision but at the end of the day, erring on the side of being proactive can allow the directors to preserve a measure of control over the company’s destiny and enhance their chances of saving it through a reconstruction that can mean the difference between liquidation and a new lease on life,” Robertson said.
[Image: Spring Gully Foods]