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Non-liquidation step to survival
If you think that your company is insolvent or likely to become insolvent, and you are concerned to avoid giving rise to a director’s liability for insolvent trading (i.e. personal liability for the debts of the company), then you may consider placing your company into voluntary administration (as opposed to a liquidation).
This will give the company in financial distress an opportunity to explore alternative payment arrangements with its creditors under the safety of a statutory process designed to give the company a fresh start by permitting the extinguishment of creditor claims and an opportunity for the company to continue trading and restored to financial health.
Even if it is not possible for the company to continue in existence, a voluntary administration may result in a better return for the creditors and members than would result from an immediate winding up of the company. It is no surprise perhaps that voluntary administrations have seen an increase in popularity over the recent years.
What is a voluntary administration?
Unlike the receivership of a company, which usually occurs at the behest of a secured creditor when the company fails to comply with the terms of a loan instrument, a company is typically placed into voluntary administration by the board of the company in circumstances where in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time (i.e. the company is unable, or will not be able to, pay its debts as and when they fall due).
The essence of a voluntary administration is to rescue a financially distressed company from liquidation by convening meetings with the creditors to see whether the creditors would agree to have the debts of the company restructured in a way to allow the business of the company to continue and the creditors to be paid in full or as otherwise agreed over a period of time.
The other object of course of a voluntary administration is to give the directors protection from the possibility of incurring personal liability for the debts of the company as a result of engaging in insolvent trading. A defence to an insolvent trading claim includes as an aspect of the defence that the director took prompt steps to put the company into voluntary administration.
Once the company is placed into voluntary administration, an external administrator is appointed by the company to carry out the administration. The administrator is a registered liquidator who will assume control of the company’s affairs with a view to arranging for the company and the creditors to enter a formal debt agreement known as a deed of company arrangement (“DOCA“).
The administrator must act in the best interests of the company’s creditors as a whole.
As soon as practicable after the administration of a company begins, the administrator must investigate the company’s business, property, affairs and financial circumstances and form an opinion about each of the following matters:
- whether it would be in the interests of the company’s creditors for the company to execute a DOCA;
- whether it would be in the creditors’ interests for the administration to end;
- whether it would be in the creditors’ interests for the company to be wound up.
If the company and creditors cannot agree to terms of a DOCA or if given the financial condition of the business, a DOCA is just not feasible, then the company may be placed into liquidation. The procedure and the consequences for placing a company into voluntary administration are set out in the legislation known as the Corporations Act 2001 (Cth), as supplemented by the Corporations Regulations 2001 (Cth).
It is therefore important to seek advice from a suitably qualified insolvency practitioner or lawyer before proceeding to place a company into voluntary administration.
What is the general effect of a voluntary administration?
As soon as the administrator accepts the appointment:
- the administrator has control of the company’s business, property and affairs;
- the administrator may carry on that business and manage that property and those affairs;
- the administrator may terminate or dispose of all or part of that business, and may dispose of any of that property;
- the administrator may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration;
- the administrator is taken to be acting as the company’s agent;
- a transfer of shares in the company by its members during the administration is void, save in certain circumstances;
- during the term of the administration, the company is protected from legal action by creditors, including any action to wind up the company (save and except with the leave of the Court).
What are the general steps in a voluntary administration?
On the appointment of the administrator, the administrator must:
- before the end of the next business day, lodge a notice of appointment with the Australian Securities and Investments Commission (“ASIC“);
- within 3 business days of the appointment, cause a notice of appointment to be published on ASIC’s publications website;
- within 3 business days of the appointment, issue a notice on the creditors of the company notifying the date and time of the first creditors’ meeting (at which meeting the creditors will determine whether to appoint a committee of inspection, and if so, who are to be the committee’s members, and whether the administrator ought to be removed and replaced with another administrator);
- within 8 business day of the appointment, hold the first creditors’ meeting;
- within 5 business days before, or within 5 business days after, the end of the convening period (which ends either 20 business days, or 25 business days, after the day on which the administration begins, depending on the time of year it is), hold the second creditors’ meeting (at which meeting the creditors will resolve to either execute a DOCA, or end the voluntary administration, or resolve that the company be wound up.)
When does a voluntary administration begin?
The voluntary administration of a company begins when an administrator is appointed by the company itself in writing, a liquidator appointed over the company or a secured party whose security interest in the whole, or substantially the whole, of the company has become, and remains, enforceable.
When does a voluntary administration end?
A voluntary administration will continue until it is ended by one of the following events:
- a deed of company arrangement (“DOCA“) is executed by the company and the deed’s administrator (but noting that the execution of a DOCA will lead to another and separate administration of the company governed by the terms of the DOCA);
- the company’s creditors resolve that the voluntary administration should end;
- the company’s creditors resolve that the company should be wound up;
- the Court orders, usually on application, the end of the administration;
- a meeting of creditors is not convened within the time limitation period;
- the creditors fail to pass a resolution at the creditors meetings;
- the company fails to execute a deed of company arrangement; or
- the Court appoints a provisional liquidator or orders a winding up of the company.
If you need legal advice or assistance in relation to the voluntary administration of a company, please contact AdviiLaw today to speak to one of our experienced lawyers.
Contact us on 07 3088 7937 or email us at [email protected].
This commentary is of a general nature only, containing some general information for the reader. It is not intended to be legal advice, nor can it be relied upon as legal advice, as each case will depend upon its own specific facts, matters and circumstances.
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