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What is voluntary administration?
![[icon] What you need to know.](./medicons/med_icon_needtoknow.gif "[icon] What you need to know.")
What you need to know
Voluntary Administration (VA) is designed to be employed by companies that are insolvent or likely to become insolvent and before liquidation becomes inevitable. It provides a company in financial distress with some breathing space from creditors to allow an appointed administrator to review and put a plan in place to rearrange the company’s affairs so that it can avoid liquidation.
Creditors are involved in the process through attendance at meetings held by the administrator and are given the opportunity to vote on the administrator’s proposed plan or Deed of Company Arrangement (DOCA). Creditors can vote to return the company into the control of its directors; vote in favour of the DOCA; or vote that the company be placed into liquidation.
Employing VA sooner rather than later will increase the likelihood that the company can be turned around and will increase the likely return to creditors in the event of restructure or liquidation.
FAQs
How does a Voluntary Administration begin?
How is an administrator appointed?
What does an administrator do once appointed?
When does the administration end?
Elements of a deed of company arrangement (DOCA)
How does a voluntary administration begin?
Voluntary Administration begins when an administrator is appointed. An administrator, like a liquidator, can be disqualified from being appointed an administrator by s280 of the Act. An administrator’s appointment and consent to act must be in writing.
How is an administrator appointed?
An administrator can be appointed to a company that is insolvent, or likely to become insolvent by one of the following methods:
- board resolution
- a liquidator
- a secured creditor having security over all, or substantially all, of the company’s assets where that security interest has become enforceable
- the High Court, on the application of a creditor, a liquidator or the Registrar of Companies.
What does an administrator do once appointed?
On appointment, the administrator assumes control of the company, its assets and affairs. An administrator is personally liable for any debts incurred during the period of the administration but is entitled to an indemnity out of the company’s assets. The administrator is not personally liable for debts that fall due during the administration under contracts that were entered into by the company prior to their appointment as administrator. The administrator’s fees and costs are indemnified out of the company’s assets.
An administrator is personally liable for wages that accrue during the administration unless they have given notice of termination of the employment contract within 14 days of appointment. An administrator is also personally liable for rent and other payments accruing by the company during the administration under rental agreements unless they issue a non-use notice in relation to leases or rented property within seven days after the administration begins.
Legislation prevents the appointment of an administrator more than 10 working days after the appointment of liquidator has been filed in Court by a creditor. This prevents a debtor-friendly administrator being appointed prior to liquidation proceedings being resolved.
A liquidator can appoint an administrator. If an administrator is appointed, the liquidator remains in office but the liquidation is suspended. It can be revived if the creditors choose to at the watershed meeting, or if the Deed of Company Arrangement is not executed in the prescribed time.
The moratorium
To assist the administrator in having the necessary time to investigate the affairs of the company and to determine if the company is capable of being rehabilitated, a moratorium (with certain exceptions) is imposed on creditors as from the Voluntary Administration’s (VA) commencement date. During the administration, creditors cannot commence or continue any proceedings, enforce any judgments or charges without the consent of the administrator or the Court. Creditors that hold a personal guarantee from the director (or their relative) of the company, cannot seek to enforce their debt during the life of the VA.
Exceptions to the moratorium
The moratorium in place during a Voluntary Administration is not binding on substantial secured creditors or creditors who have a security interest over all, or substantially all, of the company’s assets. Substantial secured creditors can appoint a receiver if they choose provided they do so within ten (10) working days of receiving notice of the appointment of an administrator. If the substantial secured creditor elects to appoint a receiver, the administration can continue over any of the company’s remaining unencumbered assets.
Other parties not bound by the moratorium include:
- secured creditors who have begun to enforce their security prior to the commencement of the administration (mere service of a demand will be insufficient evidence of commencing enforcement action)
- secured creditors who have a security interest over perishable property, irrespective of whether the security is enforced before or after the date of appointment
- owners or lessors of property used or in the possession of the company who have enforced a right to take possession prior to the date of appointment
- owners or lessors of perishable property.
The meeting of creditors
An administrator’s primary task is to gather and analyse information about the company’s affairs. Their findings need to be presented to creditors at meetings held within eight (8) and 25 working days of appointment so that decisions about the future of the company can be made. These two meetings are conducted in accordance with the provisions governing the operation of ordinary creditors’ meetings.
The first meeting
Within eight (8) working days of appointment, the administrator must convene a meeting of the company’s creditors. The administrator must give notice of the meeting to as many creditors as possible, in writing not less than five (5) working days prior to the meeting. The meeting must also be advertised. Creditors have the opportunity to replace the administrator and to appoint a committee of creditors. The administrator must table the director’s statement of the company’s position which contains details of the company’s business, assets, affairs and financial position. The administrator must also table an ‘interests statement’ which discloses whether the administrator or their firm has a relationship (whether professional, business, or personal) with the company or any of its officers, shareholders or creditors.
The meeting is conducted in accordance with the rules for a creditors’ meeting except that resolutions must be passed with a majority in number and a 75% majority in value of creditors.
The second or ‘watershed’ meeting
Within 25 working days of appointment, the administrator must convene a further meeting of creditors, referred to as the ‘watershed meeting’, at which creditors will decide the fate of the company in administration. The convening period can be extended by the Court following an application by the administrator. The administrator may wish to extend the period between the first and second meeting to provide more time to finish their report, to prepare the Deed of Company Arrangement (DOCA), to continue negotiations for the sale of the business or to discuss the draft DOCA with the creditor’s committee so as to increase the chances of acceptance.
The administrator must send a notice to all creditors advising them of the meeting at least five (5) working days prior to the meeting. The notice must contain:
- a report on the company’s affairs
- a copy of the proposed DOCA
- the administrator’s opinion on the three possible alternatives for the company:
- reject the DOCA and return the company to the control of its directors
- appointing a liquidator
- executing the DOCA and rehabilitating the company.
This watershed meeting can be adjourned for up to sixty days. Like the first meeting, the watershed meeting is conducted in the same manner as a normal creditors’ meeting. Creditors can pass resolutions by a majority in number and a 75% majority in value.
When does the administration end?
The administration of a company ends when a Deed of Company Arrangement (DOCA) is entered into, when the statutory timeframe expires without a DOCA being agreed to or when the company is placed into liquidation. In the case of the latter, the company reverts back to the control of its directors; however, creditors can resolve to appoint a liquidator at the watershed meeting following their rejection of the proposed DOCA. If a DOCA is approved but not executed by the company or the administrator within 15 working days of the watershed meeting, the administrator must apply to the Court to have a liquidator appointed.
Elements of a deed of company arrangement (DOCA)
The Deed of Company Arrangement (DOCA) is a proposal for the rehabilitation of the company and should offer creditors a better return than if the company were placed into liquidation. It should also offer something to secured creditors as they can choose not to vote in favour of the DOCA and rely on their own remedies once the administration period ends. A deed administrator, usually the original administrator, will be appointed to carry out the restructuring or rehabilitative plan. The rehabilitation of a company in distress may take a number of years.
Prescribed provisions of a DOCA (unless expressly excluded) include:
- deed administrator’s details
- company property available to creditors
- the likely return expected to each class of creditor
- the conditions, if any, for the deed to come into operation
- order of priority of debts
- circumstances in which the DOCA will terminate.
Termination of a DOCA
If a Deed of Company Arrangement (DOCA) is accepted by creditors at this watershed meeting and properly executed by the company and the administrator within working days, it binds all creditors of the company arising on or before the day specified in the DOCA. Secured creditors that did not vote in favour of the DOCA are not bound by it and are free to exercise any rights they may have under their security agreement(s).
Once in place, a DOCA can only be terminated by one of the following:
- by court order
- by creditors’ resolution at a meeting convened by the deed administrator or requested by 10% of more of creditors in value
- automatically by occurrence of an event specified in the DOCA.
The above is a brief overview of voluntary administration. Should you have specific questions about voluntary administration, please seek professional advice.
Voluntary administration life cycle
Voluntary Administration is a corporate rehabilitative procedure designed to be employed by companies that are insolvent or likely to become insolvent and before liquidation becomes inevitable.