What is administration?
Voluntary Administration provides a flexible setting that enables 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 a period for a company to negotiate with the creditors; however, if it is unable to come to agreement, it also provides an easy transition into liquidation or another winding up procedure.
Why appoint an administrator?
When an insolvent company enters voluntary administration:
- Unsecured creditors cannot begin, continue or enforce their claims against the company without the administrator’s consent or the court’s permission.
- Those who either own a property that is leased or occupied by the insolvent company are prevented from automatically recovering their property for a period of time.
- Secured creditors cannot typically enforce their security interest in the company’s assets.
- A creditor holding a personal guarantee from the company’s director or other person can’t act under the personal guarantee without the court’s consent.
How does voluntary administration begin?
Administrators can be appointed by:
- The directors.
- A liquidator or provisional liquidator.
- Appointment by secured creditors.
Appointment by directors
A director appointment is the most common way for an administrator to be assigned to an insolvent company. Appointment is initiated when the directors of the company resolve that the company is, or is likely to become, insolvent, under section 436A of the Corporations Act 2001 (Cth).
Appointment by a liquidator or provisional liquidator
An administrator can be appointed by a liquidator or a provisional liquidator if they believe that a company is either insolvent or likely to become insolvent at some future time.
The liquidator or provisional liquidator may act as the administrator provided that the Court’s approval is obtained. However, under the Act a liquidator cannot appoint themselves, especially if they:
- Are a partner or employee of the partnership.
- Work for the insolvent company.
- Are an employer within the insolvent company.
- Are a director, secretary, employee or senior manager of the insolvent company.
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. 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.
What happens upon the appointment of an administrator?
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 on the Australian Securities & Investment Commission’s (ASIC) public notice website within two business days after appointment. Before the end of the next business day after appointment the public notice must be posted on ASIC public notices.
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 voluntary administration process, 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 leave of court.
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.
- In the ordinary course of the company’s business
- With the leave of the court.
The moratorium also prevents a person enforcing a charge on property of the company during the voluntary administration except with the administrator’s written consent or the court’s leave.
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 voluntary 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 voluntary administration.
- 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.
The administrator’s personal liability
The role of administrator is important and can incur expenses depending on the size and complexity of the investigation. Debts that arise from the administrator include purchasing goods or services, or hiring, leasing, using or occupying property.
These debts are paid from the available assets of the company as costs of the voluntary administration. However, the administrator is personally liable for debts incurred in the performance of the administrator’s functions if the company has insufficient funds available from asset sales to cover these costs.
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.
Within five business days after their appointment, the administrator must notify the owner of property whether they intend to continue to occupy or use the property and, if they do not intend to continue to occupy or use the property, the location of that property (if known). If the administrator decides to continue to occupy or use the property, they will be personally liable for any rent or amounts payable arising after the end of the five business days.
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.
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.
Powers and duties of an administrator
During the voluntary administration process the administrator is the liaison between the company and its creditors. An administrator is usually appointed by the company itself, although can be appointed by liquidators or secured creditors.
The directors powers are normally suspended during administration, so the administrator acts as an agent of the company. It is their job to act impartially and ethically in order to investigate and report to creditors on the company’s business, property, affairs and financial circumstances.
The overall job is to determine the most effective and beneficial options for creditors.
The options include:
- Winding up the company and appointing a liquidator.
- Ending the voluntary administration and returning the company to the directors’ control.
- Approving a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts.
To come to any of these conclusions for the benefit of creditors, the voluntary administrator must try to work out the best solution to the company’s problems, assess any proposals put forward by others for the company’s future and compare the possible outcomes of the proposals.
Upon commencement of the administration process, the administrators must call a meeting of creditors to be held within eight 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.
After the first meeting 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).
The administrator is then responsible for calling 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.
So the creditors have accepted 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.
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.
The administrator of a DOCA (as opposed to the administrator of a company) is not made personally liable by the Corporations Act 2001 (Cth) 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; however, the Court has the power, upon 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.
The moratorium may, however, remain in place where a charge holder votes for a deed that, in its terms, restricts the charge holder from taking action to enforce the charge.
Creditor voting at the first and second creditors’ meeting
The voluntary administration process is a collaboration. Creditors can vote on the necessary courses of action in order to come to resolutions that best serve the whole.
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% 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.
- If the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total 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. This includes orders setting aside the resolution and reconvening the meeting.
Particular reasons for a secured creditor to support Voluntary Administration
However, the ‘floating charge’ element of the charge may be depleted during the Voluntary Administration, as the administrator has an indemnity for remuneration and debts incurred during the Voluntary Administration that outrank the company’s unsecured and secured debts in priority.
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 and the administrator has investigative powers that are superior to those of 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 (all of 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 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 Voluntary 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 2001 (Cth), if the company were to undergo liquidation. As the administrator does not have the power to challenge voidable transactions, it may therefore 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 that could bring liability on a secured creditor or the Receiver & Manager.
Ending the Voluntary Administration process
Voluntary Administration will end when:
- A Deed of Company Arrangement is executed.
- The creditors resolve that the Voluntary Administration should end.
- The creditors resolve that the company be wound up.
- The Court, on application of the company, orders that the Voluntary Administration end.
- The time period for calling a meeting of creditors as prescribed under the Corporations Act 2001 (Cth) 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 Voluntary Administration begins.
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