In today’s tough economic climate, a troubled business may call upon an independent expert for financial help in an attempt to remain operational. This process is known as Voluntary Administration.

What happens when a business is in voluntary administration?

During voluntary administration, the voluntary administrator is to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.

A voluntary administrator is usually appointed by a company’s directors, after they decide that the company is insolvent or likely to become insolvent. Less commonly, a voluntary administrator may be appointed by a liquidator, provisional liquidator, or a secured creditor. The administrator decides if the business can keep operating, if it should go into liquidation (also known as ‘winding up’ or going insolvent) or if it should keep operating as it was before.

When a business is liquidated, it is closed and the assets are sold to pay off the business debts. When this happens, employees will most likely lose their job. This can mean they are entitled to termination and redundancy payments.

What happens to employee entitlements?

If the voluntary administrator continues to trade the business, they must pay, out of the assets available to them, ongoing wages for services provided and other employee entitlements that arise after the date of their appointment. These payments are treated as an expense of the voluntary administration.

The appointment of a voluntary administrator does not automatically terminate the employment of the company’s employees. As a result, unless the voluntary administrator adopts the employment contracts or enters into new contracts of employment with employees, they are not personally liable for any employee entitlements that arise during voluntary administration.

As voluntary administration is an interim form of external administration, employee entitlements that arose prior to voluntary administration are not usually paid during voluntary administration.

How and when these employee entitlements are paid depends on the option passed at the creditors’ meeting (i.e. company returned to directors, a deed of company arrangement, or liquidation).

If the company is returned to the directors, the directors will be responsible for ensuring that the company pays outstanding entitlements as they fall due. It is only in very rare circumstances that creditors will resolve to return the company to the control of its directors.

What are the Fair Entitlements Guarantee (FEG) and the General Employee Entitlements and Redundancy Scheme (GEERS)?

Employees who are owed certain employee entitlement after losing their job because their employer went into liquidation may be able to get financial help from the Australian Government.

This help is available through either the Fair Entitlements Guarantee (FEG) or the General Employee Entitlements and Redundancy Scheme (GEERS). On 5 December 2012, the Fair Entitlements Guarantee Act 2012 commenced, establishing the FEG as a legislative scheme to replace GEERS.

If you require further information on whether Voluntary Administration is a viable option for your business, or other related Accounting or Legal advice, contact the experience lawyers and accountants at The Quinn Group today. Call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment or submit an online enquiry.