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A Voluntary Administration enables directors to take advantage of a moratorium period during which an external administrator is in control of their company, to propose an arrangement for payment of debts for consideration by the company's creditors.
Click here for a brief summary of Voluntary Administration.
Contact us to discuss the specific details of your individual situation.
Note: All section references relate to the Corporations Act, 2001.
WHY APPOINT A VOLUNTARY ADMINISTRATOR?
The primary purpose of a voluntary administration is to provide a flexible procedure enabling a company time to attempt a compromise or arrangement with its creditors, which may save the company, the business and jobs while maximising the return to creditors.
Voluntary Administration is utilised to provide the company with a chance to trade out of its difficulties at a time when the company is unable to pay its debts, that is, it is insolvent.
If it transpires that the company cannot formulate a proposal acceptable to creditors, voluntary administration can be used to easily and inexpensively wind up the company.
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HOW DOES THE ADMINISTRATION BEGIN?
Appointment by the directors
Voluntary Administrators are normally appointed by the directors of the company. Appointment is initiated when the directors of the company resolve that the company is, or is likely to become insolvent (section 436A of the Corporations Act, 2001).
The directors simply have to be satisfied that there is a likelihood that the company will be insolvent at some future time.
Appointment by a liquidator or provisional liquidator
An administrator can be appointed by a liquidator or a provisional liquidator (s436B). The liquidator or provisional liquidator may act as the administrator provided that the Court's approval is obtained.
Appointment by Secured Creditors
A secured creditor who has a charge on "the whole, or substantially the whole, of a company's property" may also appoint an administrator: s436C.
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WHO CAN ACT AS ADMINISTRATOR?
An administrator must be a registered liquidator as required by the Corporations Act.
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WHAT HAPPENS ON THE APPOINTMENT OF AN ADMINISTRATOR?
The administrator takes control
On appointment, control of the company and its property, business and affairs is vested in the administrator. The administrator is therefore responsible for the company's affairs in the same way that the directors were prior to the administrator's appointment.
Notice of the appointment must be published in the newspaper within three business days after appointment. Before the end of the next business day after appointment, notice must also be given to any holder of a charge or charges on the whole, or substantially the whole, of the company's property: S 450A(3).
Where an administrator has been appointed by a secured creditor, the chargee must give written notice of the appointment to the company as soon as practicable but before the end of the next business day.
A moratorium is put in place
To give the company breathing space, as and from the commencement of the administration, a moratorium comes into effect preventing creditors from taking actions or proceedings against the company or its property during the administration without the administrator's written consent or the Court's leave.
Subject to the exceptions mentioned below, the moratorium also binds owners or lessors of property being used, occupied by or in the possession of the company. The administrator must not dispose of such property except:
- with the written consent of the owner; or
- in the ordinary course of the company's business; or
- with the leave of the court.
The moratorium also prevents a person enforcing a charge on property of the company during the administration except with the administrator's written consent or the court's leave: s440B.
Exceptions to the moratorium:
- Creditors who hold a charge or charges on "the whole, or substantially the whole, of the property of a company" are in a special position - they are not bound by the moratorium if the charge is enforced in respect of all of the secured property, either before the commencement of the administration or within 13 business days of being notified of the administrator's appointment.
- A secured creditor holding a charge over the company's property who has begun to enforce that charge prior to the commencement of the administration: s441B.
- A secured creditor who holds a charge over "perishable property" or an owner or lessor of such property.
- Owners or lessors of property used, occupied by or in the possession of the company who have enforced a right to take possession of the property prior to the administrator's appointment.
Directors' guarantees are unenforceable
A guarantee of a debt incurred by the company (usually given by a director or a relative of a director) cannot be enforced during the administration except with the Court's leave. That protection ends if the company goes into liquidation and will usually end if a Deed of Company Arrangement is entered into.
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THE ADMINISTRATOR'S PERSONAL LIABILITY
Personal liability
The administrator is personally liable for debts of the company incurred in the performance of the administrator's functions and powers, for services rendered, goods bought and property hired, leased, used or occupied by the company; but is entitled to a right of indemnity out of the company's property for that liability: ss443A and 443B.
The administrator will therefore need to be satisfied that the company has sufficient free assets out of which to meet the statutory indemnity and/or has an agreement with the principal creditors to the effect that the administrator's liabilities will be met.
The administrator is not taken to have adopted existing agreements. Suppliers of essential services (electricity, gas, water or a telecommunication service) are specifically prohibited from insisting on the payment of arrears as a condition of further supply: s600F.
Where the company entered into an agreement prior to the administration, to use the property of which someone else is the owner or lessor, the administrator has five business days within which to decide whether or not to continue to use the property. Unless the administrator gives a notice to the owner or lessor of the property within five business days after the beginning of the administration, the administrator will be personally liable for amounts due under the agreement while he uses or keeps possession of the property or goods.
Indemnity
The administrator is entitled to an indemnity out of the company's property for remuneration and personal liabilities incurred during the administration. The indemnity has priority over debts of the company secured by a floating charge on property, unless the chargee has either commenced enforcement of or actually enforced the charge before the administration began.
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POWERS AND DUTIES OF AN ADMINISTRATOR
The administrator acts as an agent of the company. The directors powers are suspended, but in practice, if the company continues to trade, the directors will often be retained to manage the day to day operations of the company and are accountable to the administrators.
The administrators must call a meeting of creditors to be held within 8 business days of appointment. At that meeting, creditors are allowed to replace the administrator and appoint a committee of creditors, who act to assist the administrator in the performance of his or her duties.
The administrator must call a second meeting of creditors to be held within 25 business days of appointment. This period is often extended by application to the Court in large or complex administrations.
Prior to the second meeting of creditors, the Administrator must investigate the affairs of the company and report the results of his/her investigations to the creditors and Australian Securities and Investment Commission ("ASIC").
During this period the administrator will also liaise with the directors to formulate a proposal, where possible, for the company to enter into a Deed of Company Arrangement ("DOCA"). The purpose of the proposal is to put to the creditors a plan to save the company and maximise the return to creditors, thereby preventing the winding up of the company.
Once a proposal has been formulated, the administrator will prepare a report to creditors, detailing his investigations and recommendation on whether he thinks the creditors should accept or reject the proposal. Creditors will then be asked to decide whether to accept the proposal at the second meeting.
The options available to creditors at the second meeting are:
- That the directors' proposal is accepted and the company enter into a DOCA,
- That the director's proposal be rejected and the company wound up, or
- That the Administration end and control of the company returned to the directors.
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SO THE CREDITORS ACCEPT A DOCA PROPOSAL - WHAT NOW?
If the creditors resolve that the company should execute a Deed of Company Arrangement, then the administrator of the company will become the administrator of the DOCA unless the creditors resolve otherwise: s444A.
The DOCA must be executed by the company within 15 business days after the second creditors' meeting. The administrator must execute it before or as soon as practicable after the company executes it.
All pre-deed creditors are bound by the deed irrespective of whether they voted in favour of the deed: s444D.
The administrator of a DOCA (as opposed to the administrator of a company) is not made personally liable by the Corporations Act for debts incurred by the company during the operation of the DOCA.
The position of secured creditors and owners or lessors of property under a DOCA.
The moratorium on the enforcement of rights is lifted once the DOCA is executed; but the Court has a power, on the application of the Deed administrator, to restrain a secured creditor from realising its security or otherwise dealing with the security, or to restrain an owner or lessor from repossessing property, except as the Court permits.
The moratorium may however, remain in place where a charge holder votes for a deed, the terms of which restrict the charge holder from taking action to enforce the charge.
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CREDITOR VOTING AT THE FIRST AND SECOND CREDITORS' MEETINGS
- The administrator or his nominee must chair the meeting;
- Creditors may participate in meetings by telephone where telephone facilities are available and the chairperson considers it appropriate;
- A resolution put to the vote of a meeting must be decided by majority on the voices unless a poll is demanded by the chairperson, by two or more creditors present and entitled to vote at the meeting, by a person present in person, by proxy or by attorney and representing not less than 10 per cent of the total voting rights of all the persons entitled to vote at the meeting;
- Where a poll is taken, a resolution is carried if:
- a majority in number of the creditors vote in favour; and
- the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors participating in the poll.
- If a vote results in a deadlock, the chairperson may resolve the deadlock by exercising a casting vote.
- Where the outcome is determined by the exercise of the chairperson's casting vote, any creditor may apply to the court for a review of the outcome and appropriate order.
- Secured creditors may vote at creditors' meetings in respect of their debts without forfeiting their security.
- If a creditor believes that the outcome of a meeting has been influenced by the votes of creditors who are associated entities of the company the creditor may apply to the court for an appropriate order, including orders setting aside the resolution and reconvening the meeting.
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PARTICULAR REASONS FOR A SECURED CREDITOR TO SUPPORT AN ADMINISTRATION
Where there is a doubt as to whether enforcement of the security would realise sufficient sums to repay the secured debt, putting together a Deed of Company arrangement with the co-operation of the directors and the other creditors may result in a better outcome for the secured creditor.
However, the floating charge element of the charge may be depleted during the administration as the administrator has an indemnity for remuneration and debts incurred during the administration which rank in priority to the company's unsecured and secured debts.
Some reasons why a secured creditor might support a Voluntary Administration:
- The secured creditor may want the affairs of the company or the directors examined. The administrator has investigative powers better than a Receiver & Manager.
- There may be an advantage in an administrator running a business to overcome potential problems with parties such as a landlord who has rental arrears, lessors of property who want to take possession, retention of title creditors etc which a receiver would otherwise have to deal with.
- The assets covered by the security may be such that it makes no difference to a secured creditor as to whether they are recovered for the secured creditor by a Receiver & Manager or Voluntary Administrator.
- If the secured creditor is satisfied with the capabilities and integrity of the person to be appointed administrator, the secured creditor may be prepared to allow the administration to proceed.
- Transactions between the company and the secured creditor could be liable to challenge pursuant to the voidable transaction provisions of the Corporations Act if the company was to go into liquidation. The administrator does not have the power to challenge voidable transactions. It may therefore sometimes be in a secured creditor's interests to keep the company out of liquidation.
- The secured creditor may prefer to allow the company to appoint an administrator to avoid unwanted publicity.
- The chargee may decide to allow an administrator to be appointed where there are ongoing problems with assets which could bring liability on a secured creditor or the Receiver & Manager.
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WHY SHOULD AN UNSECURED CREDITOR SUPPORT AN ADMINISTRATION?
- An administration leading to the execution of a Deed of Company Arrangement may enable a higher level of dividends to be paid to unsecured creditors in comparison to the alternatives.
- An administration arrangement could have taxation advantages over a liquidation. For example, any tax losses of the company may be able to be preserved and used, which may ultimately result in a higher return to creditors.
- The administrator of a company or of a deed of company arrangement does not have the power to challenge voidable transactions. So if a creditor has received a preferential payment, it may choose to support a Deed of Company Arrangement.
- An administrator has the benefit of the statutory moratorium and is able to carry on the company's business in an orderly manner whilst formulating a company arrangement. In many cases this can maintain asset values and produce a better result for unsecured creditors.
- An administration may allow the company to continue to trade into the future, and thereby provide further trade with the unsecured creditors.
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ENDING AN ADMINISTRATION
An administration will end when:
- a Deed of Company Arrangement is executed; or
- the creditors resolve that the administration should end; or
- the creditors resolve that the company be wound up; or
- the Court, on application of the company, orders that the administration end; or
- the time period for calling a meeting of creditors as prescribed under the Corporations Act has not been met.
REMOVAL OF AN ADMINISTRATOR
The administrator of a company may be removed by resolution of the creditors at the first meeting of creditors. This meeting must be held within eight business days after the administration begins.
Contact us to discuss the specific details of your individual situation.
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