Voluntary Administration Liability limited by a scheme approved under Professional Standards Legislation
Index 1 Introduction... 3 2 Voluntary Administrations... 4 General Comment... 4 Method of Appointment... 4 Powers and Duties... 5 Effect of Appointment on Directors and Creditors... 5 Description of Services... 6 Timetable... 8 After the deed has been entered into... 9 Voting... 9 Effect on Lenders... 10 3 Conclusion... 12 4 Acknowledgement... 13 Attachments Voluntary Administration Timetable... 14 2
1 Introduction Voluntary Administration is an insolvency procedure where the directors of a financially troubled company or a secured creditor with a charge over most of the company s assets, appoint an external administrator called a voluntary administrator. The role of the voluntary administrator is to investigate the company s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors. A voluntary administrator is usually appointed by a company s directors, after they decide that the company is insolvent or likely to become insolvent. Less commonly, a voluntary administrator may be appointed by a liquidator, provisional liquidator, or a secured creditor. Many company directors now seek the assistance of insolvency practitioners to place their company on a more secure financial basis Attitudes have changed markedly and people are often keen to share their financial/commercial problems with professionals. The result has been that more business turnarounds have been successful leading to an improved market environment. 3
2 Voluntary Administrations General Comment The Voluntary Administration Legislation has been designed to assist companies with liquidity problems and allows for the position of all creditors to be frozen for a short period until such time as a proper investigation can take place with regard to the company s affairs. Upon completion of that investigation either a plan of reconstruction is put in place or the company proceeds to liquidation. The intention is for:- speed and easy commencement; minimal costs; flexibility of action at key stages during the administration; and, ease to transfer into liquidation should an acceptable proposal not be possible. The object of the Voluntary Administration Legislation as outlined in Part 5.3A of the Corporations Act is to:- (a) Maximise the chances of the company, or as much as possible of its business, continuing in existence; or (b) If it is not possible for the company or its business to continue in existence - result in a better return for the company s creditors and members than would result from an immediate winding up of the company. Method of Appointment If a company is in financial difficulty or there are doubts about its solvency an Administrator can be appointed by:- (i) The board of directors of the company; (ii) A Liquidator or Provisional Liquidator; (iii) A charge holder over the whole or substantially the whole of the company's property. In a significant number of cases Administrators are appointed by the Directors of a company. Whilst the directors in so appointing have acted to initiate the appointment of a Voluntary Administrator it must be emphasised that the Administrator s role is to act for all of the creditors during the period of the administration. The Administrator is independent. The creditors are invited at any time to discuss with the Administrator and his staff any matter of concern that they may have and are particularly requested to provide the Administrator with any information they believe relevant to the financial affairs of the 4
company and the way in which the financial affairs of the company have been conducted by the directors. The Administrator must be a Registered Liquidator and various provisions apply to disqualify persons who have had a fiduciary or professional relationship with the company. Once an appointment of an Administrator is made, the appointment cannot be revoked. Once appointed by one party, the other parties cannot appoint another Administrator. They have only two options, apply to the Court for the removal of the Administrator, or seek his replacement at the first meeting of creditors. Powers and Duties The powers of the Administrator include:- to demand, collect and inspect books and records of the company to remove and appoint directors to seek directions from the Court to carry on the business of the company. Effect of Appointment on Directors and Creditors The appointment suspends the powers of the Directors and gives the Administrator total control over all of the assets of the company as well as a number of additional powers. The Administrator may perform any function and exercise any power that the company or any of its officers may exercise. Creditors' claims are frozen as at the date of appointment of the Administrator and no steps can be taken by any creditor to recover debts owing to it or to enforce any security which is not over the whole or substantially the whole of the property of the company. During the administration of the company, guarantees executed by Directors, spouses or relatives of Directors cannot be enforced except with the leave of the Court (Section 440J). However, as soon as the administration comes to an end, creditors are able to enforce guarantees which have been granted by Directors or their spouses or their relatives. These guarantees can be in the form of a Deed of Guarantee; Deed of Guarantee and Indemnity; an application for a trade account or a lease agreement. The moratorium initiated by the appointment of the Administrator operates until such time as either the appointment of the Administrator is terminated or the company and its creditors and the Administrator enter into a Deed of Company Arrangement or the company goes into liquidation. The appointment of an Administrator could have a significant impact on creditors who had previously relied on retention of title clauses to enable the recovery of goods delivered to the company which had not been paid for. The Administrator's powers extend to being able to deal with assets such as those belonging to a creditor claiming retention of title, in the ordinary course of business, or with the written consent of the owner or with the leave of the Court. It is considered that the Court will only give leave to a creditor to recover its goods if it is satisfied that the interests of such parties are not protected. 5
Creditors have the opportunity to nominate a committee to advise the Administrator and can therefore take an active role in the progress of the administration if they wish to do so. Description of Services The Administrator is liable for debts incurred for services rendered, goods purchased or property hired, leased, used or occupied, however, he or she has a right of indemnity out of the assets of the company. In addition, the Administrator has to decide within 7 days if he or she wishes to continue to use property which is owned or leased by a third party. Rent or other costs thereafter become the liability of the Administrator if no notice is given to the owner or lessor that the Administrator does not intend to use the property. The Voluntary Administration provisions provide greater potential to creditors for: restructuring and trading out of problems; a higher financial return to creditors than in a Liquidation. Day One Appointment The role of the Voluntary Administrator is to take control of a company whilst an investigation is undertaken as to its future viability and then to either propose a plan for the consideration of creditors or recommend that control of the company be returned to the Directors or the company be wound up. A strict timetable is outlined in Part 5.3A of the Corporations Act which must be followed by the Voluntary Administrator. It is possible however for this timetable to be varied in the first instance by agreement with creditors and/or with leave of the Court. The Administrator s powers supersede those of the Directors and other officers of the company. Creditors claims against the company are stayed whilst the company is under administration or during what is called the moratorium period. There are certain exceptions to this, including claims of a secured creditor who has begun to enforce a charge prior to the commencement of the administration, or has commenced action during the decision period. (Refer to day two). The moratorium period is the period between the commencement of the administration and until it is terminated, which is either with the acceptance of a Deed of Company Arrangement or the winding up of the company at the second creditors meeting. As will be outlined later the second creditors meeting must be held within 25 business days but may be adjourned for up to 45 business days or longer if sanctioned by the court. Day One (This has special relevance to a Secured Creditor) In accordance with section 450A(3) of the Corporations Act the Voluntary Administrator is required to give notice of his appointment to holders of a charge on the whole or substantially the whole of the company s property. The forwarding of this notice is very important to a secured creditor as it will place 6
him on notice of the commencement of a critical period as the decision period. This allows a secured creditor 10 business days from the date of the notice being given for a decision to be made whether to enforce a charge or not. If the secured creditor does not take up that option he is then precluded from taking any action until the end of the moratorium period. First Creditors Meeting Within 8 business days of the appointment the first creditors meeting must be held. It is important that creditors including the secured creditor are aware that the director s choice of Administrator can be changed at that meeting. There is no other business of significance at this meeting other than to consider the appointment of a creditors committee. Report to Creditors Within 20 business days after appointment, the Administrator is required to give notice for the second meeting of creditors which is to be held within 5 business days before or after the end of a convening period. The notice of meeting will be accompanied by a report prepared by the Administrator regarding the company s business, property affairs and financial circumstances and a statement setting out the Administrator s opinion about:- 1. whether the administration should come to an end 2. whether it would be in the interest of the company s creditors to execute a Deed of Company Arrangement 3. whether it would be in the creditors interest for the company to be wound up. Second Meeting of Creditors Within 5 business days before or after the end of the convening period, the second creditors meeting is required to be held to decide the company s future. By agreement the creditors can extend this for up to 45 business days from the date of the meeting. It is possible to extend the period further with the approval of the Court. 7
Timetable In order to speed up the process of the administration, there is a very tight time schedule which the Administrator must adhere to which is as follows:- Within one business day - Notify Australian Securities & Investments Commission - Notify secured creditor over whole or substantially the whole of the property Within 3 business days - Administrator must convene a preliminary meeting of creditors and advertise notice of meeting. Within 5 business days - The Administrator must give notice that he does not propose to exercise rights in relation to property, leased, used or occupied. Within 8 business days - The preliminary meeting must take place - the purpose of the preliminary meeting being to enable creditors to appoint their own Administrator if they wish to do so and nominate a committee to act on behalf of creditors generally. Within 20 business days (or 25 business days if appointed in December) - The Administrator must convene a meeting of creditors to discuss a proposed scheme. Prior to the meeting creditors must receive a large volume of information concerning the state of the company's financial position and details of the proposed scheme and a statement setting out the Administrator's opinion as to the benefit creditors would receive and what is in the best interest of creditors. NOTE: The meeting can be adjourned by creditors for a period not exceeding 45 business days or the Court may extend the convening period on application by the Administrator within the convening period. Within 5 business days after convening the end of the meeting - Hold the meeting of creditors. Within 15 business days of the meeting - Where the creditors resolve to accept the Administrator s proposal to enter into a Deed of Company Arrangement, the company and the administration must execute the deed. 8
The information to be provided to creditors by an Administrator at the first meeting is likely to include the following: Declaration of independence, relevant relationships and indemnities A broad outline of the company's current position Details of secured creditors likely to exercise their option to appoint a Receiver The nature of the options available The need for a committee of creditors At the second meeting, which 'decides the company's future', the creditors consider whether or not the proposal is accepted. The creditors may also resolve that the administration should end or that the company be wound up. It is essential if an administration is to result in a successful deed of company arrangement that there be an open and frank discussion and disclosure of information between the Directors and creditors. Where the creditors resolve that the company be wound up the Administrator becomes the Liquidator and the company is deemed to be wound up. It is clear from the above timetable that substantial preliminary work needs to be done in advance to comply with statutory requirements. After the deed has been entered into If the creditors vote by simple majority to accept a deed of company arrangement then the company and the Administrator of the scheme (who may be the Administrator) must sign the Deed, which must contain prescribed information, within 15 business days of the meeting at which the Deed is approved. Voting Voting on issues at both the first and second meeting is carried out by simple resolution. Any creditor can vote at the meeting who has lodged a proof of debt which has been admitted by the Administrator. If a poll is demanded the vote requires the majority of creditors in number and in value voting in favour of the resolution to be greater than 50% of the creditors present and entitled to vote. Where the voting results in a tied decision, for example the number of creditors is in favour of the resolution but in value the creditors are against the resolution, the Chairman is required to exercise a casting vote to determine the issue. 9
Effect on Lenders Secured Creditor s Position There are a number of matters which a secured creditor should be mindful of when faced with a Voluntary Administrator being appointed to a company in which they have a charge on the whole or substantially the whole of the company s property. The major matters to consider are as follows:- Appointment of Receiver and Manager Upon the appointment of a Voluntary Administrator to a company it is possible for a secured creditor to enforce his security so long as that option is taken within the decision period. The decision period is defined under the Corporations Act as the period beginning on the day when notice is given pursuant to section 450A(3) of the Corporations Act and ending at the end of the tenth business day after that day. If the option is not taken to enforce the security prior or during that decision period then the secured creditor is prevented from doing so during the period of the administration. This period may well extend up to 88/95 days from the date of the appointment of the Voluntary Administrator and beyond if sanctioned by the Court. It is therefore critical that a secured lender is mindful of his rights being deferred if he does not take up the option to enforce possession during that decision period. It should be remembered that a Voluntary Administrator is required to make decisions on behalf of all creditors and therefore a secured lender s interests may not necessarily be the same as the unsecured creditors of a company. The Voluntary Administrator s Costs A Voluntary Administrator is entitled to be indemnified out of the company s property for debts incurred and for his fees (section 443D). The right to this indemnity has priority over debts secured by floating charge with exception of where a secured creditor has entered into possession or a receiver is appointed before the administration began or within the decision period (section 443E). This right of indemnity is secured by the Administrator having a lien on the company s property. This lien has a priority over a charge if a secured lender has not taken action to enforce his charge before or within the decision period (section 443F). A slow decision may be a costly one. Accordingly, from a secured lender s point of view, he must consider whether the benefits of the Voluntary Administration outweigh the fact that control of charged assets is temporarily lost whilst the Voluntary Administration is conducted. It may well be that the charged assets are dissipated by trading expenses and the Voluntary Administrator s fees if a course of action is taken by the Voluntary Administrator which is contrary to the best interests of the secured lender. Each case should be looked at on its merits and the secured lender should have confidence in the experience and expertise of the Voluntary Administrator to deal with assets which are subject to his charge. 10
Deed of Company Arrangement Upon the completion of his investigation into the affairs of the company one of the alternatives for the Voluntary Administrator is to recommend that the company enters into a Deed of Company Arrangement (DOCA) with its creditors based on a proposal put forward by the Director(s) of the Company. Creditors may consider the proposal and amend it or reject it. A secured creditor s rights may be affected by a Deed if it so provides and if the secured creditor voted in favour of the resolution and the company executed the Deed. (section 444D(2)). Also the Deed Administrator may apply to the Court to restrain a secured creditor from realising its security. This will only apply in situations where the charge holder has not enforced his security either prior to the commencement of the Administration or during the decision period. The Court would only agree to such an application if it were satisfied that should the secured creditor enforce his security there would be a material adverse affect on the purpose of the Deed. (section 444F(3)) and the Court is satisfied that the secured creditor s interests are adequately protected. Voting Rights Prior to a secured creditor attending any meetings relating to a Voluntary Administration he/she should be mindful of his/her voting rights. Regulation 5.6.24 of the Corporations Act, which normally has general application, requires secured creditors to surrender their security if they wish to vote and permits them to vote only in respect of the balance owing if they retain their security. It is important to note that this regulation does not apply to meetings under Part 5.3A which therefore allows a secured creditor to be involved in voting at the various creditor meetings. However, a secured creditor may be bound in the normal course by a Deed of Company Arrangement if he/she votes in favour of a resolution of a Deed which affects his/her rights under the charge. The freeze on any actions by creditors during the period of the Voluntary Administration has certain exceptions: A secured creditor who has commenced enforcement proceedings; A secured creditor who is secured over all, or nearly all, of the Company's assets can commence enforcement action within 10 business days of the notification of the appointment of an Administrator; The holder of security over perishable goods. Thus the effect of the appointment of an Administrator upon a lender depends upon two factors, firstly, the scope of the charge and secondly, whether the lender has taken steps to enforce the charge before or during the 'decision period'. Where the lender has a charge over the whole or substantially the whole of the property of the company, and before or during the decision period the secured creditor enforces the charge in relation to all the property of the company the receiver appointed can act outside of the administration. If the secured creditor fails to act until after the decision period he is bound by the moratorium unless he obtains the consent of the Administrator or the leave of the Court to enforce its security. The decision period is defined in Section 9, as the period beginning on the day when any notice required to be given to the secured creditor is given or the day when the administration begins, and ending at the end of the tenth business day after that day. 11
3 Conclusion Voluntary Administrations are not without their problems, but are a large improvement on what we previously had. At least we now have a process whereby creditors can reach some commercial arrangements with companies in difficulties. We ask that you sign the following acknowledgement. If you require further information or clarification please contact: Peter Macks Email: pmacks@macksadvisory.com.au Mobile: 0419 804 612 Ian Burford Email: iburford@macksadvisory.com.au Mobile: 0439 818 950 12
4 Acknowledgement I/We acknowledge that I/we have received and read the Macks Advisory Voluntary Administrations Information Package. Name/s: Signature/s: Date: 13
Voluntary Administration Timetable Day Number 1 3 8 6-10 20 Business 25 Business Within 2 Business Days Within 3 Business Days Within 8 Business Days End of Convening Period Second Meeting of Creditors Lodge Appointment Notice of first meeting of creditors given by advertisement and letters to creditors First meeting of Creditors: consider appointment of a committee of creditors, and; consider removal and replacement of Administrator Administrator convenes second meeting of creditors Administrator provides creditors with: a report on his/her investigations Creditors to resolve that: Deed of Company Arrangement be executed; or company be wound up and Administrator becomes Liquidator a statement as to the Administrators opinion details of the Deed of Company Arrangement Administration should end and control revert to Directors 14