Voluntary administration appointments do not help small companies due to the expense associated with having administrators become personally responsible for the business, one insolvency expert has warned.
The warning comes as new insolvency figures shows collapses are continuing to rise, leading many to believe that this year could be a record year for company collapses and insolvencies.
Cliff Sanderson, director of insolvency firm Dissolve, says voluntary administrations for small companies aren’t successful and they end up destroying shareholder value.
He points to figures that analyse the 9,829 companies that collapsed during the year to June 2011. Only 15% of corporate insolvencies were voluntary administrations, and of those only 33% successfully produced a deed of company arrangement.
Sanderson says this produces a net 5% rate of insolvent companies producing a DOCA – “in my book that is a fail”.
He points to two key factors. One is that because the voluntary administrator is responsible for the business, that requires a heavy level of involvement and thus cost. He also says that most larger businesses will have a secured creditor, and explains that “there is very little incentive for a secured creditor to leave a company in the hands of an administrator”.
“They are too expensive,” he says. “The minimum time period for a VA is really 30-35 days. If you trade that under the control of an administrator, fees are going to be high, and for a small business it’s just uneconomical.”
“The vast majority of insolvencies are small business insolvencies, and this just doesn’t work for them. When you get to medium and large companies with a secured creditor, they will let the VA process run its course. But there’s not a lot of upsides to the secured creditor doing that.”
Sanderson is of the view that voluntary administration procedures should differ for companies depending on their size.
“I have the view that there should be thresholds. There should be shortened periods for certain companies, and in some cases the VA wouldn’t control the trading.”
“For administrators like me it scares me when operating the business.”
The warning comes as 2011 continues to be a record year for corporate insolvencies. According to ASIC the number of companies entering any form of insolvency administration in July was 921 – the highest July ever.
In the year to July there were 1,355 appointments by secured creditors, which is the highest number on record. The number of liquidations continues to rise, although the number of voluntary administrations has continued to fall.
Sanderson says this suggests that “we are seeing a lot of companies that have previously ceased to trade being given their last rights”.
“I’m sure this year will be the highest on record. It’s ahead of any other year so far. Many of these companies are old that have ceased to trade quite awhile ago. I think it’s going to continue.”
Sanderson says many of these companies have been struggling on for the past few years, ever since the financial crisis. He says that because the Australian Taxation Office was so lenient, many companies were able to hang on until now.
“In all economies there are businesses that need to be cleaned out. It looks bad at the moment because after the financial crisis there wasn’t that period of cleaning out.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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