Voluntary administration vs liquidation: how they differ

Voluntary administration is sometimes described as the “rescue” option, and liquidation as the “end” option. That’s broadly right, but the details matter, especially for a business whose main problem is IRD debt. Here’s how the two compare, and where funding fits beside them.

What is voluntary administration?

In a voluntary administration, the company’s board appoints an administrator, who must be a licensed insolvency practitioner (Companies Register). The administrator:

• takes control of the company’s affairs;
• investigates its finances;
• reports to creditors; and
• recommends what should happen at a watershed meeting.

There are at least two creditor meetings: a first meeting, which can appoint a creditors’ committee, and the watershed meeting, where creditors vote.

What can happen at the watershed meeting?

Creditors choose one of three outcomes:

1. Return the company to the directors.
2. Put the company into liquidation.
3. Accept a deed of company arrangement (DOCA), a binding plan for dealing with debts so the company can continue. Once a DOCA is filed, the company’s status returns to “Registered”.

How does administration compare with liquidation?

	Voluntary administration	Liquidation
Purpose	Find the best outcome, possibly saving the business	End the company
Who appoints	The board	Shareholders, creditors (after VA) or the court
Practitioner	Licensed administrator	Licensed liquidator
Directors’ control	Suspended while administrator is in charge	Ended
Creditors’ role	Vote at the watershed meeting	Receive reports and distributions
Possible outcomes	Return, DOCA or liquidation	Removal from the register
Professional costs	Yes	Yes

Where does IRD fit in an administration?

IRD is usually a significant creditor when tax debt is the trigger, so its vote can matter a great deal at the watershed meeting. A DOCA that doesn’t work for IRD may struggle to pass. That’s one reason to talk to IRD early and to consider whether paying IRD in full, through funding, would remove the need for a formal process altogether.

Considering administration because of IRD? First check whether IRD can simply be paid. Talk to a funder, with no credit check to enquire.

When does administration make sense?

When a business has a viable core but a debt problem that needs a structured, binding solution involving several creditors, and when there’s time for the process to run. It can also protect the business from creditor action while a plan is developed.

When might funding be better?

When IRD is the main creditor, the business is viable, and there’s property equity or steady turnover. Paying IRD in full keeps the directors in control, avoids the administrator’s costs, and avoids the uncertainty of a creditor vote. Property-secured loans run from $20,000 to $5,000,000; cash-flow options are typically $5,000 to $500,000. See alternatives to liquidation.

What about a creditor compromise instead?

A Part 14 compromise is another way to reach a binding agreement with creditors, without handing control to an administrator. It needs majority support in number and value from each class of creditor. See creditor compromise.

How do you choose an administrator?

Check the practitioner’s licence on the Companies Office register, ask for a written fee estimate and the basis of charging, and ask what they think the realistic outcomes are. Since licensing became mandatory in September 2021, administrations must be run by licensed practitioners (RITANZ). Our choosing an adviser page and adviser questions checklist help.

An illustrative example

Illustrative only. Not a real client and not an offer.

A Wellington hospitality group with three venues owed IRD about $420,000 and two landlords about $150,000. One venue was losing money. An administrator was appointed, closed the loss-making venue, and proposed a DOCA paying creditors over two years. At the watershed meeting, creditors approved it. In a simpler case with IRD as the only major creditor and a director’s property available, a loan might have avoided the process entirely.

What happens to directors during administration?

Directors stay in office but can’t exercise their powers without the administrator’s consent. They must help the administrator, provide information and records, and may be asked about how the company got into difficulty. Personal guarantees aren’t cancelled by the administration itself, so a guaranteed creditor may still pursue a director depending on the guarantee’s terms and the outcome.

What questions should you ask before choosing administration?

• What’s the realistic outcome? Ask the practitioner how likely a DOCA is, and what it would need to offer IRD and other creditors.
• What will it cost, and who pays? Get the estimate and basis of charging in writing.
• What happens to staff and contracts while the administrator is in control?
• What happens to my guarantees under each possible outcome?
• What if creditors vote for liquidation? Will the same practitioner act as liquidator, and on what terms?
• Have you looked at paying IRD in full? If IRD is the main creditor and funding is available, a formal process may not be needed.

Is administration a way to buy time from IRD?

It can pause creditor action while the administration runs, but it isn’t a free pause. Control passes to the administrator, the costs come first from the company’s resources, and the outcome depends on a creditor vote you can’t guarantee. If what you really need is time, compare it with an instalment arrangement or a loan, both of which keep you in charge.

Weigh it up with a funder in the room

If you’re considering voluntary administration because of IRD debt, talk to us before you decide. Enquiring doesn’t touch your credit file, your details aren’t passed around to other lenders, and a real person will tell you honestly whether funding could make a formal process unnecessary. Please describe your debts and any property as accurately as you can.