What Is Voluntary Administration?

The point of the voluntary administration regime is to give companies that are insolvent or look likely to become insolvent in the near future a better chance of surviving – and the sooner an Administrator is appointed, the better it will often be for the company’s chances.  If it is not possible to rescue the company then the objective of the Administration is to get a better return for creditors and shareholders than they would receive under immediate liquidation.

What Does An Administrator Do?

An Administrator controls your Company’s business, property and other affairs, and can basically do anything that the company or any of its officers could do before the Voluntary Administration period began.  The Administrator can carry on the business of the company as well as terminate it, or any part of it.

The Administrator has to investigate all of the company’s affairs and consider the different options available to remedy the situation – and needs enough time to be able to do this without having to simultaneously fight creditors off.  For this reason, a moratorium is imposed on creditors of the company from the beginning of the Administration period.  With some exceptions, creditors cannot enforce any debts without the consent of the Administrator or the Court.

Certain parties are not bound by this moratorium; for example substantial secured creditors who enforce their security within 10 working days, secured creditors who had begun to enforce their security before the beginning of the Administration period, or owners/lessors of perishable property. 

The Administrator will:

• Investigate the company’s affairs.
• Hold a meeting with the company’s creditors within 8 working days of being appointed to decide whether to appoint a creditors’ committee and whether to replace the Administrator.
• Hold a second meeting with creditors within 25 working days of appointment (unless this time frame is extended) to decide on the future of the company.

Possible Outcomes

There are three possible courses of action:

1. Rejecting the Deed of Company Arrangement (DOCA) and returning the company to the control of its directors.
2. Executing the DOCA and rehabilitating the company.
3. Appointing a liquidator.

Deed Of Company Arrangement

This is a proposal which should:

• Enable the company to trade on while still managing its debts;
• Offer creditors a better return than they would get upon immediate liquidation;
• Provide for secured creditors (keeping in mind that they may rely on their own remedies once the administration period is over);
• Set out the company property which is available to creditors, the extent to which the company will be released from its debts, the likely expected return for each class of creditor and their order of priority;
• Set out the conditions, if any, for the Deed to come into operation and the circumstances in which it will terminate.

In order to be passed, the Deed needs to have the majority support of creditors in number representing at least 75% in value of the creditors or class of creditors voting.  If the Deed is executed the company will come out of its Voluntary Administration status.  All creditors will be bound by the Deed except for secured creditors who voted against it (these creditors being free to enforce their own security) and creditors who obtained a guarantee in respect of the company’s debts (these creditors being free to enforce their guarantee).

An example of this can be seen in a recent case we dealt with where a creditor wanted to pursue a guarantor for recovery of a debtor company’s debts.  The guarantor also happened to be the company’s director.  The company in question had utilised the new Voluntary Administration regime and subsequently entered into a Deed of Company Arrangement.  While the creditor in question was unable to enforce their guarantee while the company was in Administration they were able to enforce the guarantee following execution of the Deed of Company Arrangement. 

Conclusion

The new voluntary Administration regime has benefits for both creditors and companies who find themselves in financial difficulties.  In the event that you find yourself considering this option or trying to recover a debt from a company in Voluntary Administration you should seek early legal advice.