When financial difficulties strike it can seem like everyone needs answers all at once.
If you have a company in financial trouble and need to buy some critical decision-making time to deal with your creditors, shareholders, and the IRD, you can place your company into voluntary administration.
The aim of voluntary administration is a short-term freeze on your company’s financial position while an administrator and your creditors determine the future of your business. It’s a relatively new corporate rescue measure introduced through changes to the Companies Act (1993) in 2007.
Voluntary administration: getting started
To start voluntary administration proceedings, an administrator can be appointed by the board of directors, a liquidator, or by applying to the High Court. The administrator is then given full control of the business, and acting independently of the company and creditors tries to work out a way to either save the company, or get a better return for creditors than they would have received from liquidation proceedings.
After the short voluntary administration period, control of your company is either returned to the directors, is placed in liquidation, or enters into a company arrangement to prevent liquidation proceedings.
While your company is under voluntary administration, it cannot be placed into liquidation and creditors cannot take action against you to recover debts. Your business premises or company property also cannot be seized or reclaimed. Essentially, voluntary administration grants time to find a way forward for your business.
Since 2007, very few businesses have opted for voluntary administration as it does come with some downsides. It’s an expensive process, and while the business may survive, shareholders have almost certainly lost their investment while the IRD gains preferential creditor status.
What to expect during voluntary administration
After voluntary administration is declared, the first creditors’ meeting must be called within eight working days, followed by a watershed meeting usually within 20 working days.
At the first meeting the administrator will declare any conflicts of interest, and their relationship, if any, with the company in administration. At this stage the creditors can vote to replace the administrator. The directors’ must hand over all relevant financial information, and cooperate with the administrator as they investigate the company’s activities. Depending on the number of creditors, they can choose whether to appoint a creditor’s committee to consult with the administrator in an effort to simplify the reporting process.
The administrator can make recommendations, restructure the company or make changes as they see fit if they believe it will make the business more profitable and give a better return to creditors.
The watershed meeting is for creditors to decide the future of the company. Depending on the administrator’s findings and feedback creditors can vote to:
- - Give control back to the directors and end the administration.
- - Organise a company arrangement, to ensure certain debts are repaid.
- - Appoint a liquidator.
If your company is struggling and creditors are demanding answers, your best option is to seek independent advice and learn about all your options. At McDonald Vague we can advise whether voluntary administration is right for your situation, or whether another course of action is better for you.
For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.