The decision to enter voluntary administration: Timely strategy or last resort?

One of the options available to directors of financially distressed companies is to place their company into voluntary administration (VA). The decision to enter VA should enhance corporate governance because it allows for informed decision-making about a company's future, and ensures that administration of a company's affairs proceeds in an orderly manner. Once in VA, a company has a short 'breathing space' during which it can develop a strategy to address its insolvency. The strategic options available will be significantly affected by past performance and current financial position. If the company's position has deteriorated significantly, the VA process will merely delay an inevitable liquidation. Therefore, a timely decision about entering VA is critical to the effectiveness of the procedure. This paper attempts to shed some light on the timeliness of the decision to enter VA. It presents an exploratory empirical examination of the change in financial characteristics for a sample of listed public companies over the critical time immediately prior to VA. The analysis focuses on how the changes that are observed affect prospects for reorganisation. The results suggest that the sample companies' prospects for reorganisation were significantly diminished in the time prior to VA, and that directors should have taken more timely action.