Voluntary Administration Advanced By Directors


A Voluntary Administration (“VA”) is advanced where the company is cash flow insolvent or likely to become insolvent in the near future. No Court application is required to advance a VA. The Board of directors can appoint an Administrator by resolution (the Court, a liquidator or interim liquidator or a secured creditor can also appoint). If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).

A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support. If VA is used for an ulterior motive, the court may terminate it.

A VA prevents proceedings commencing or continuing.  It also gives a secured creditor only a 10 working day decision period to enforce its security or not.  An owner or lessor of property that is used or is occupied by, or is in the possession of, the company must not take possession of the property or recover it except with the permission of the Administrator or Court. 

Objective of VA

The objective of a VA is to maximise the chance of the company, or as much as possible of its business, continuing in existence. If this is not possible, then the objective is to provide a better return to the company’s creditors and shareholders than would result from the immediate liquidation of the company.

A VA has its advantages and can provide a temporary breathing space. It preserves the company goodwill and gives a chance for control to be regained. There is a moratorium on personal guarantee liability during the Administration (up until when the Deed of Company Arrangement “DOCA” is approved). Creditors cannot apply for liquidation during the DOCA.

Directors Responsibilities

Directors must provide a statement of affairs within five working days of appointment of the administrator and provide information as required. The directors can only be involved in the company’s affairs to the extent the administrator approves or allows.

The VA process

Typically VA lasts for 28 days (but this can be extended by the Court). The outcome of the VA process is often a DOCA or liquidation.

The administrator may carry on the business of the company and also has the power to terminate or dispose of all or part of the business or property, to take, defend or continue proceedings and employ agents to do the things that the administrator has power to do. An administrator is an agent of the company.

A first meeting is held to confirm/replace Administrators and to appoint a creditors committee. The Administrator on appointment must as soon as practicable investigate affairs and consider options and form an opinion.

A second meeting, the watershed meeting, is convened within 21 working days of appointment and held within 5 working days of the convening period. The Court can extend the time. At the watershed meeting creditors vote on whether to approve a DOCA or appoint a liquidator or hand the business back to the directors.

The Administration lasts until a DOCA is executed, or not. If the company fails to execute a DOCA, then the administrator must apply for liquidation. At the watershed meeting creditors can resolve to appoint a liquidator or to approve the DOCA. The Court can also order to terminate the administration. If at the watershed meeting creditors resolve to appoint a liquidator then the administrators by default become the liquidators.

Deed of Company Arrangement “DOCA”

A DOCA’s purpose is to bind creditors to an adjustment of their contractual rights (such as a lesser sum, an extended payment plan etc..). The DOCA often freezes or reduces claims and provides for the release of funds or the injection of funds to continue trading. The continued trading is often with a view to trade out or to sell the business. The Deed has the effect of binding all creditors in respect to claims at the cut off date. Secured creditors are bound only to the extent the Deed provides and only if they voted on it.

A DOCA comes to an end for four possible reasons:

1. The terms of the DOCA are met in full by the company (creditors are paid per the terms);
2. It is terminated under the terms of the DOCA due to a default;
3. The creditors resolve to terminate the DOCA due to a default; or
4. The Court makes orders that the DOCA be terminated due to a default or any other reason.

Summary

Voluntary Administration can be an expensive option due to the requisite meetings, notices of meetings and advertising costs. An alternative to VA is the Company Compromise which is less expensive but has no moratorium period.

It is important that directors seek proper professional advice on the appropriate actions to take. The earlier action is taken the better the likely return to creditors and shareholders.

Links:  

Creditor Compromises

What Are The Ingredients Of A Successful Creditor Compromise


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