Voluntary administration is a new process. It was introduced from 1 November 2007.
The objectives of voluntary administration are to:
maximise the chances of the company or its business continuing in existence or, if that is not possible, and
for the company or its business to be administered with a better return to creditors and shareholders than from immediate liquidation.
Benefits of voluntary administration
An independent qualified professional administrator takes control of the company.
It may protect directors from future personal liability, including liability for reckless trading.
Administrators work with the company and creditors to make decisions as to the future viability of the company.
Administrators act in the interests of all the creditors, not just the secured creditors.
A moratorium period prevents the enforcement of charges, taking possession of property, court proceedings, enforcement proceedings or the making of demands under a guarantee during the period of the voluntary administration. This moratorium period facilitates restructuring.
Administrators are required to report misconduct by past or present director(s), officer(s) or shareholder(s) (directors must be aware that the administrators have no duty or responsibility for the personal interests of directors).
The ultimate benefit of voluntary administration is to provide the company the opportunity to restructure its debt and ultimately trade out of difficulty.
Who may appoint a voluntary administrator?
A voluntary administrator may be appointed to a company by:
the company’s directors
if the company is in liquidation, the liquidator or the interim liquidator
a secured creditor holding a charge over the whole, or substantially the whole, of the company’s property, or
the High Court.
What does voluntary admininstration mean for creditors?
During the period of the voluntary administration a moratorium prevents the enforcement of charges, taking possession of property, court proceedings, enforcement proceedings or the making of demands under a guarantee. The moratorium applies to unsecured creditors, owners and lessors and secured creditors (subject to a ten working day exception for GSA holders).
Prior to any voluntary administration, as a creditor you should:
review your PPSR registrations to check they are up to date and complete, and
where you are a retention of title supplier consider whether you should include in your security agreement a provision providing that the debtor’s right to sell the goods you have supplied is revoked upon the appointment of an administrator to the debtor company.
As a creditor of a company which has been placed in voluntary administration it is important that you seek proper professional advice on the appropriate actions to take. The earlier you provide the administrators with a copy of your security agreement evidencing your security interest and priority position and commence dialogue with the administrators the better.
What can I do as a GSA holder?
Creditors with a charge over the whole, or substantially the whole, of the property of a company in administration may enforce their security interest during the ten working day period following the appointment of an administrator. This is known as the Decision Period. After the Decision Period the GSA holder may not take any enforcement action during the moratorium period, except with the leave of the High Court.
Immediately following the appointment of an administrator, a GSA holder should contact the administrator, and provide the administrator with a copy of the security agreement that has granted a security interest in favour of the creditor. It is important to commence dialogue at an early stage with the administrator.
What can I do if I am a Retention of Title Creditor?
As a retention of title creditor the moratorium period prevents you repossessing the goods you have supplied but have not yet been paid for (without the administrators written consent or the permission of the courts). The moratorium period however does not give administrators a mandate to sell your goods.
Administrators may continue to sell retention of title creditors goods in the ordinary course of business if the contract between the retention of title supplier and the company allows it. As a retention of title creditor you may want to consider revoking authority for the administrator to sell the goods you have supplied if you do not want the sales to occur.
It is important that at an early stage you contact the administrators and provide them with a copy of your security agreement and any other necessary evidence of your security interest and priority position. As a retention of title creditor you may only have priority ahead of a GSA holder where you have perfected your security in terms of the PPSA and in any event only in respect of:
inventory supplied after the date of your PMSI registration on the PPSR, and
collateral, other than inventory, where the PMSI registration on the PPSR occurs not later than 10 working days after the date on which the debtor, or another person at the request of the debtor, obtained possession of the collateral.
You should then seek to negotiate with the administrators the terms on which the administrators might sell any inventory.
Issues for directors
Signs your company may have a solvency problem:
Debts are overdue, or you are frequently negotiating special repayment and deferral arrangements with creditors.
The management team and directors are regularly spending more time “fire fighting” than running the business.
The company has cashflow problems – especially if it cannot service PAYE and/ or GST obligations.
The company is generally struggling to service its debts.
The company has received a formal demand for payment from a creditor.
If your company is showing indications that it may have a solvency problem, it is critical that you seek professional advice before it is too late.
Duties of directors
Today’s modern business environment demands high standards from directors and the management team of companies. The Companies Act 1993 (Act) regards a director as not only someone who is appointed as a director but also includes a person who directs or has the power to direct the actions of the appointed director(s) – otherwise known as shadow directors.
The Act prescribes a number of duties of directors and penalties if these duties are not fulfilled adequately. These include:
How can a director reduce the likelihood of a claim for reckless or insolvent trading?
If you believe your company may be trading while insolvent, then you need to immediately contact an insolvency specialist to advise you on the appropriate action. As a director of an insolvent company you could:
agree a compromise arrangement with creditors
appoint a liquidator to the company
request a secured creditor appoint a receiver to the company, or
appoint a voluntary administrator to the company.
As a director of a company showing indications of solvency problems, it is important that your first step is to seek proper professional advice on the appropriate actions to take. The earlier you act the better the likely return to creditors and shareholders and the less likely an action will be brought against you for not fulfilling your duties as a director.
For more information on any of the topics in this article, please contact your usual Chapman Tripp adviser or one of the lawyers featured.