The Voluntary Administration process is regulated by the Corporations Act 2001 (Cth) (“the Act”) and provides for the business, property and affairs of an insolvent company to be administered in a way that:

• maximises the chances of the company continuing in existence, or
• results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

Pursuant to Section 436A of the Act, an Administrator, who must be a registered Liquidator, can be appointed by:

• the majority of the company’s Directors, or
• a Liquidator of the company, or
• a person holding a security interest in the whole or substantially the whole of a company’s property.

An appointment by the company’s directors, can be quickly and easily made, for all they need do is pass a resolution that the company is insolvent or will likely become insolvent.

During the period of the Administration, there is a general stay of proceedings against the company or its property except with the Administrator’s consent or with leave of the Court. There are exceptions for secured creditors, holding a security interest in the whole or substantially the whole of the company’s property, who have thirteen days after receipt of notice in which to exercise powers contained in their security document.

The appointment of an Administrator sets in train a sequence of events, namely:

• The convening of a first meeting of creditors to be held within eight business days after the Administration begins so that creditors can consider whether or not to appoint a Committee of Creditors or to replace the Administrator.
• The preparation of a detailed report to creditors in accordance with Section 439A(4) of the Act that details the business, property, affairs and financial circumstances of the insolvent company, together with the Administrator’s opinions on each of the alternative courses of action as set out in the Act and the reasons for those opinions. These alternative courses of action are as follows:

1. that the company execute a Deed of Company Arrangement, or
2. that the Administration should end, or
3. that the company be wound up, in which case, the Administration converts to a Creditors Voluntary Liquidation.

• the convening of a second meeting of creditors to decide the future of the company, such meeting to be held within five business days before or five business days after the end of the convening period, which is normally 20 days beginning on the next business day after the Administration commenced. Attached to the notice of meeting will be a copy of the Administrator’s Section 439A report. At this meeting, creditors resolve for the company to adopt one of the alternative courses of action set out above. If creditors resolve to wind up the company, then they have the option of replacing the appointee. Alternatively, creditors can resolve to adjourn the meeting from time to time for a period not to exceed 45 business days from the date on which the second meeting was originally held.

The advantages of Voluntary Administration are:

• allows immediate action to be taken and sets a fixed time frame for dealing with the issues,
• control of the company is given to an independent person,
• prevents unsecured creditors, owners and lessors of property from taking action which may adversely affect the value of the business and assets,
• allows a company and its creditors to consider the merits of a compromise arrangement which may maximise the return to creditors, and
• enables directors in certain circumstances to avoid personal liability for company debts except for debts that have been personally guaranteed.

It should be noted that directors of companies that are insolvent or are likely to become insolvent should seek immediate professional advice in relation to their specific circumstances. The procedure normally requires consultation and certain investigative work before implementation, particularly when a secured creditor is involved.

The above information is by necessity, general in nature and its brevity could lead to misunderstanding. For further information, you are invited to contact O’Brien Palmer.

A Deed of Company Arrangement is the mechanism under the Voluntary Administration regime, which allows for a company to enter into a compromise arrangement with its creditors. The arrangement can take many forms and may include the following:

• The continuation of the company’s business or part thereof with responsibility for trading resting with either the Directors or the Deed Administrator.
• The injection of capital or the sale of certain assets.
• The payment to creditors of a fixed sum, or specified rate in the dollar or a percentage of profits payable in a lump sum or by way of instalments over a period of time.
  
  

The passing of the resolution to accept a Deed binds all unsecured creditors, even if they did not vote in favour. Secured creditors, owners and lessors of property will only be bound if they vote in favour. The Administrator usually becomes the Deed Administrator, however creditors can resolve to appoint an alternate Deed Administrator.

If the company defaults on the terms of the Deed, the Deed Administrator may call a meeting of creditors to terminate the Deed and place the company into liquidation. Conversely, where the company satisfies all of the requirements of the Deed, it will no longer be subject to administration.

A creditor holding a security interest in property of a company may appoint a Receiver (or Receiver & Manager), to assume control of the assets the subject of the security. The Receiver, who must be a registered Liquidator, will then proceed to realise those assets in order to satisfy the debt due to the secured creditor.

The powers of the Receiver are usually contained within the security agreement and the instrument appointing the Receiver. For companies, the specified powers are supplemented by the statutory powers contained in the Act and the application of relevant case law. Generally, a Receiver will be given full powers to carry on the business, receive income and realise assets.

A Receiver usually acts as agent for the company. Whilst generally personally liable for debts incurred for services rendered, goods purchased or property hired, leased, used or occupied, the Receiver has a right of indemnity against the assets of the company subject to the mortgage. The Receiver is not required to pay any debts due to creditors by the company that relate to the period prior to the appointment, nor is he required to declare dividends to unsecured creditors or call for Proofs of Debt.

Where a company, over which the creditor has security, is placed into Voluntary Administration, and provided that the secured creditor has an enforceable security interest over the whole or substantially the whole of the company’s assets, it may, within thirteen business days of being notified of the Voluntary Administrator’s appointment, elect to appoint a Receiver in respect of its security. Alternatively, the secured creditor may allow the Administrator to remain in control of the company’s assets.

A Receiver may also be appointed by the Court in a variety of circumstances. The most frequent type of Court appointment is in respect of a partnership where, for example, the partnership is insolvent or the partners are in serious dispute. A Court appointed Receiver must act in accordance with the terms of the Court Order by which he or she was appointed. The Receiver will usually have powers to realise or at least manage the assets, the subject of the Receivership.

As a variation on a theme, a secured creditor may appoint a person, normally a registered Liquidator, to act as its agent whilst it is in possession of the property the subject of a mortgage. The mortgagee is able to direct their appointed agent to a greater degree than is possible under a Receivership, with the usual purpose of managing the property and realising the asset.

A Members’ Voluntary Liquidation is the process for winding up a solvent company. A company is solvent if it can pay its debts as and when they fall due. The objectives of this process are to:

• realise the assets of the company,
• distribute the proceeds to the shareholders in accordance with their rights after satisfying any creditor claims, and
• free shareholders of a corporate structure that they no longer require.

In a members’ voluntary winding up, the person to be appointed need not be a registered Liquidator if the company is an exempt proprietary company or a subsidiary of a public company. But in practice, a registered Liquidator is often chosen.

In order for a Liquidator to be appointed, a directors’ meeting is held to execute a Declaration of Solvency, stating that the company will be able to pay all its debts within 12 months. Attached to this declaration is a Statement of Assets and Liabilities. A general meeting of shareholders is then convened.

As the resolution for winding up is a special resolution, at least 21 days notice of the meeting is required to be given. However, this period can be shortened if 95% of shareholders consent to short notice.