This week, Dick Smith went into voluntary administration which raises questions about what will now happen to the consumers and creditor’s of Dick Smith.
What is voluntary administration?
Voluntary administration is a process whereby an “external administrator” is voluntarily appointed by a company to manage its affairs, in the hope that the company will ultimately recover from whatever financial difficulty is being experienced and continue to trade.
The idea behind appointing a voluntary administrator is to give the company “breathing space”. The process usually takes a few months and the company continues to trade during the period of voluntary administration.
While a company is under the control of an external administrator, some of the following restrictions apply:
- unsecured creditors can’t commence, progress or enforce their claims against the company without the administrator’s consent or obtaining permission of the court;
- property which is owned, used or occupied by the company, or persons who lease such property to the company cannot recover their property, other than perishable property;
- secured creditors are unable to enforce their charge over company property, except in limited circumstances; and
- a creditor holding a personal guarantee from the company’s director or other person is unable to act under the personal guarantee without first obtaining permission from the court to do so.
What are the options after external administration?
Once the company has been given some “breathing space” so to speak, the administrator issues a report to the creditors of the company advising them as to the financial state of the company. A voting process is then undertaken so that the creditors can in effect determine the future of the company based on the recommendations of the external administrator.
Typically, one of the following courses of action will be recommended and ultimately come to fruition:
- the company will go into liquidation;
- a compromise will be reached in relation to the debts in order to allow the company to continue in existence (this is referred to as a “Deed of Company Arrangement”);
- the company will be returned to the control of the directors.
If a creditor is an employee or shareholder, the administrator is required to prioritise recovering the debt owed to that creditor before compensating unsecured creditors.
Unsecured creditors, including anyone who has goods under layby, a credit note or gift card to redeem must register their debts with the external administrator who will determine whether or not payment, partial payment or a refund can be made after the secured creditors have been compensated.