Receivership is where a Receiver is appointed to realise the assets or manage the business of a company for the benefit of the secured creditors.

The primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Receivership can result in the rescue of viable parts of a business. It can lead to the sale of certain assets or the sale of the whole of the business. It can also lead to the business ceasing to trade and company liquidation.

Receivership differs from liquidation in that the assets are realised for the benefit of the one secured creditor who appointed the Receiver. In liquidation the assets are realised for the benefit of all creditors in a specific order of priority (secured creditors and preferential creditors such as employees and IRD get their money before unsecured creditors). 

1 Read here for an article on the role of a Receiver
2 Click here for a Receivership Life Cycle chart 
3 Download our free guide to Receiverships 

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

What is a Shareholder Current Account?

During the life of the company, funds taken out or put into the company by the shareholders is recorded to the shareholder current account. Usually at the start of a company, working capital is introduced. This balance is usually the opening balance of the shareholder current account. This is separate to the funds paid for share capital.

A shareholder current account is a record of the net balance of funds introduced and withdrawn by the shareholder. This moving balance is recorded on the balance sheet and may fluctuate from being an asset of the company to a liability of the company. Drawings are recorded as deductions from the current account. Drawings are where you draw down funds (and are not paying PAYE on the money that you are taking out of the company) to pay your personal expenses.

Overdrawn Current Accounts

An overdrawn current account is recorded as an asset in the balance sheet of the company (ie if called up it creates cash). An overdrawn current account is where the shareholders have taken more out of the company than they have put into the company and therefore owe the company. This balance if recorded as an asset is recoverable by the company from the shareholder on liquidation. This balance if recorded as a liability, is a claim the shareholder has against the company on liquidation. That claim can be unsecured or secured if proper documentation has been completed.

Managing Current Accounts and Protecting Advances made

It is advisable for any shareholder advancing funds personally to a company to prepare security documentation and loan documentation and to register securities on the PPSR to protect advances made. On liquidation this can improve a shareholder’s standing for recovery of that sum.

It is also advisable for shareholders taking drawings to ensure they manage their current account position so it is not grossly overdrawn. Often it is better for a shareholder employee to take a wage/salary and pay PAYE. An overdrawn current account is an easy target for a liquidator.

Overdrawn Current Accounts in Liquidation

The principle duty of a liquidator is to take possession of, protect, realise and distribute the assets or the proceeds of the realisation of the assets, of the company to its creditors.

On liquidation an overdrawn current account is called up by a liquidator. Shareholders are obliged to refund the net drawings taken. Most Accountants will ensure that at end of each financial year the shareholders declare a salary personally and also minute what a fair salary may be for the ensuing year. The salary is recorded as a credit against the Current Account in the balance sheet. A salary therefore reduces the current account debit balance and can return it to a credit balance or reduce the debt owing by the shareholders to the company. The individual then pays personal income tax on the salary in their personal tax return. A salary is declared if the company has earned a profit.

Other common options to fix an overdrawn current account are for the shareholder to advance more funds or for a dividend to be declared.

Current Accounts are often targets of liquidators. Liquidators will look at:

• Combined current accounts and if certain shareholders have debit balances to pursue;
• Insolvent Transactions – entries clearing the current account immediately prior to liquidation;
• Transactions at inadequate consideration or for excessive consideration;
• Journal entries covering up insolvent trading;
• Setoff of shareholder loans with current accounts;
• Significant withdrawals after the last prepared financial accounts
• Unapproved salaries (no solvency certificate or certificate of fairness recorded)

If a transaction is deemed to be unfair it may be required to be refunded. Transactions between a company and its directors need to be disclosed and a certificate of fair value completed for remuneration and loans.

A liquidator will call up an overdrawn current account. This may lead to an agreed repayment arrangement, a settlement for a lesser sum subject to a statement of financial position or worst case proceedings being filed. Each case is different.