Back to Fact Sheets

Voluntary Administration & Deeds of Company Arrangement

VOLUNTARY ADMINISTRATIONS

What is voluntary administration (VA)?

This is a process designed to assist companies that are unable to pay their debts, by ensuring that they can either:

(a) come to a formal arrangement with their creditors to pay those debts, or
(b) are quickly and inexpensively placed into liquidation.

The process is designed to maximize the chances of a company of continuing to exist, or to provide a better return to the company's creditors than would have been the case in an immediate winding up of the company.

Why choose voluntary administration?

A voluntary administration offers a cooperative approach to satisfying the company's debts. Because it restrains creditors from enforcing their claims, a voluntary administration can assist a company to trade out of short term difficulties caused by either short term cash flow restrictions or one-off financial problems. If appropriate, it can also provide a way to restructure the company.

What are the basic steps?

The company's directors appoint a voluntary administrator to control its affairs. The administrator convenes two meetings of creditors. At the second meeting (about 4 to 6 weeks after the appointment), creditors choose the option which they believe will best serve their interests. Usually the company will enter into liquidation or execute a deed of company arrangement.

How does a voluntary administration begin?

A voluntary administration begins when an appointment document is executed by either:

(i) the directors,
(ii) a liquidator, or
(iii) a secured creditor.

and the administrator consents to the appointment.

What is effect on unsecured creditors?

A moratorium is imposed on the unsecured creditors. They cannot enforce their claims, applications to wind up the company are usually adjourned, no provisional liquidator can be appointed to the company without the leave of the Court, and all proceedings or enforcement against the company's property are placed on hold.

What is the effect on secured creditors?

Secured creditors have 13 business days from the day of appointment to exercise their security. After that time they are bound by the moratorium for the duration of the voluntary administration period. This provision gives the administrator some certainty during the administration period.

What are the administrator's powers?

The administrator assumes control of all of the company's business, property and affairs. He or she may carry on that business, manage that property and those affairs and dispose of all or any part of the business or property as he or she thinks fit. The administrator assumes sole responsibility to perform all functions and exercise any and all powers that the company had or could exercise if the company was not under administration. The directors and other officers lose all of these powers.

What does the administrator do?

During the voluntary administration, the administrator will:

(a) take control of the company's assets;
(b) investigate the company's affairs;
(c) report any offenses to the ASIC;
(d) assist the directors form a proposal for a deed of company arrangement;
(e) report to creditors on which course of action commercially serves their interests best; and
(f) call the required meetings of creditors to decide the future of the company.

Does the administrator look at preferences etc.?

Look at? Yes, in a preliminary manner. Take recovery action? No.

The administrator is required to investigate potential voidable transactions, but only to carry out sufficient investigations to justify any recommendations that they may make in the report to creditors. The administrator has no powers to commence any recovery proceedings. These are solely the powers of a liquidator.

How does the voluntary administration affect retention of title clauses?

Retention of title clauses are bound by the moratorium imposed on creditors as a consequence of the voluntary administration. They cannot immediately collect their goods. An administrator cannot use or dispose of property if it is owned by another person, including under an ROT clause, unless:-

(a) they have the written consent of the ROT holder; or
(b) with leave of the Court.
(c) they account fully to the ROT holder for the costs of the stock

How does the voluntary administration affect a landlord?

A landlord is bound by the moratorium affecting all creditors. The administrator can occupy the property for up to seven days without paying rent, but has to pay rent for the remainder of the voluntary administration period. The administrator's liability ends at the end of the VA or when the premises is vacated. If the administrator does not have possession of the property, they will not be liable for rent. This provision does not stop the company's continuing liability for the rent.

How does a voluntary administration affect guarantees?

Creditors holding third party guarantees from directors are bound by the moratorium during the period of the administration. Guarantees can be enforced once the voluntary administration ends.

Can a voluntary administrator pay dividends?

No. A voluntary administrator does not have the authority to pay dividends.

What happens at the first creditors' meeting?

The first meeting is held within eight business days after the appointment. There are only two matters that the Corporations Act requires to be considered. The first is whether the creditors wish to replace the administrator with another administrator. The second is whether the creditors wish to elect a number of representatives to form a committee which will advise and assist the administrator.

What happens at the second creditors' meeting?

A second meeting of creditors is normally held between 20 to 30 business days after the appointment. It is at this meeting that the creditors will decide the future of the company. Prior to this meeting the administrator will issue a report detailing the results of investigations, offenses, and the viability and suitability of each of the options available to creditors.

How complete must a draft deed of company arrangement be?

It is not uncommon for the draft deed to be submitted to the administrator in summary form. This is usually not an acceptable format to be considered by creditors. It is preferable for a full draft deed to be tabled at the meeting of creditors, as the final deed will include many more provisions than the original proposal.

Creditors should insist on the full draft, or at least as near to the final draft as is practicable, before deciding upon it so that they are aware of all of the terms. The meeting can be adjourned to allow time for the production of a better draft.

What options are available to creditors?

The creditors can pass a resolution for one of the following courses of action:

1. accepting a proposed deed of company arrangement (if one is proposed),
2. ending the voluntary administration and passing the company back to the directors, or
3. liquidating the company.

How is voting done at meetings?

A vote can be determined on the voices if there is a clear majority in number of those present at a meeting. In this case, each person (whether a creditor or a proxy) gets one vote.

If this is inconclusive, or if requested by creditors, the vote can be put to a poll. A poll is a vote which is determined on a majority in both numbers and value. In the event of a tie (e.g. majority of numbers voting in one direction and the majority of value voting for another), the administrator may (but is not required to) exercise a casting vote and make the final decision. Otherwise the resolution will fail.

Do creditors need to decide there and then?

No. The second meeting may be adjourned for up to sixty days for further investigations to be carried out, or for a proposed deed of company arrangement to be amended.

What does a voluntary administration cost?

There is no definite answer. Each administration is different and will therefore have a different cost dependent on the work performed. There are two types of work on insolvency files, statutory and variable.

Statutory work will appear on every file regardless of size, complexity or other matters involved in the file. It includes:

1. notifying the ASIC
2. issuing notification to creditors
3. issuing notification to utilities and statutory authorities (ATO etc.)
4. conducting the first meeting of creditors
5. dealing with creditors inquiries
6. conducting preliminary investigations into preferential payments, insolvent trading and other void transactions.
7. preparing a report to creditors
8. conducting the second meeting of creditors
9. notifying creditors and the ASIC of the results of the second meeting of creditors.

Variable matters may include the following tasks:

(i) trading the business during the period of the administration
(ii) dealing with secured creditors
(iii) dealing with finance companies
(iv) selling, collecting and selling some or all of the assets of the company or the business of the company
(v) more detailed investigations into potential recoveries, the ownership of assets and the viability of any proposal.

When does a voluntary administration end?

The VA ends when:

(a) a deed of company arrangement is fully executed;
(b) the creditors resolve to wind up the company;
(c) the creditors resolve that the voluntary administration should end;
(d) the Court orders that the administration is to end;
(e) the approved deed of company arrangement is not signed within 21 days of the second meeting;
(f) the period for calling the second meeting ends without the meeting having been called; or
(g) the Court appoints a liquidator to the company.

How should the company be described?

While in voluntary administration a company must advertise its status. For example, ABC Pty Ltd to whom an administrator is appointed should be described as ABC Pty Ltd (Administrator Appointed) on all public documents.

DEEDS OF COMPANY ARRANGEMENT

What is a deed of company arrangement (DOCA)?

A DOCA is a formal agreement between the company and its creditors and any other relevant third parties to satisfy company debts. The Deed will set out in its terms and conditions, warranties and indemnities, the extent or nature of obligations, and relationships between those persons party to it. The Deed binds all creditors, both secured (to the extent of their shortfalls) and unsecured, and releases the company from its debts at least to the extent provided for within its terms and conditions.

How long as a deed of company arrangement run for?

A DOCA runs for as long as is provided for in its terms. The deed must state the duration of its operation and the moratorium period. A deed which does not specify an end date or ending conditions is not valid.

Are secured creditors bound by the deed of company arrangement?

A secured creditor is only bound by a DOCA if they become a party to the deed or otherwise agree to be bound by it. The Court may make an Order which limits the rights of the secured creditor, but this is not common.

How does a deed of company arrangement affect guarantees from directors?

Creditors holding guarantees from directors are bound by the moratorium during the VA period. Guarantees can be enforced once a DOCA is signed or the company is wound up. The release of the company's debt under the terms of the Deed does not discharge a guarantor's liability for any shortfall.

Can creditors vary the deed of company arrangement after it has been executed?

Yes, creditors are able to vary or terminate the DOCA by resolution at a creditors' meeting. This meeting must be convened by the administrator at the request of not less than ten percent of the value of all creditors. Alternatively, the administrator may convene such a meeting of creditors at his own volition. Any amendment to the Deed must also have the consent of the company.

What happens to tax losses?

A company proposing a DOCA is likely to have carried forward tax losses. These losses usually can be offset against profits from future trading of the company. However, carried forward losses may be lost or reduced if a company fails to pay its creditors 100 cents in the dollar. Directors should seek tax advice before entering a DOCA that contemplates tax losses being available.

Can a deed administrator pay dividends?

Yes. A deed administrator's ultimate role is to pay a dividend to creditors.

How should the company be described?

While subject to a DOCA a company must advertise its status. For example, ABC Pty Ltd that is subject to a Deed of Company Arrangement should be described as ABC Pty Ltd (Subject to Deed of Company Arrangement) on all public documents.

When does a deed of company arrangement end?

The deed of company arrangement ends when its terms are fully completed and a final dividend has been paid to creditors.

What happens if the company does not comply with the deed of company arrangement?

If the terms of a DOCA are not satisfied, it will be considered to be in default. Usually a default notice will be issued within a few days after the default. If the default is not rectified within the period set out in the notice, the agreement will be breached and may be terminated by:

(i) the provisions of the agreement, automatically terminating the DOCA;
(ii) the passing of a resolution at a meeting of creditors, or
(iii) an application to the Court.

These options will usually result in the company being placed into liquidation at that time.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

 Back to Fact Sheets

Last Updated: 31.1.2008