Many businesses struggle through the holiday season, either due to a forced shutdown or unexpectedly low sales.
When the 15th of January comes around and the taxes are due, many companies find it difficult to pay their bills. Is a Voluntary Administration the magic bullet solution for the problem?
Simply put: No.
So what is a Voluntary Administration (VA)?
The VA regime was introduced by the Companies Amendment Act 2006. The main parts of the legislation are in Part 15A of the Companies Act 1993. There are similar pieces of legislation in the UK, the USA, Canada and Australia. Australia has had a VA regime for 12 years longer than New Zealand.
Essentially, the basic premise of a VA is to allow a company some breathing space to sort out its issues. The legislation itself refers to the objective of: maximising the chances of the company or as much as possible of its business to continue in existence (paraphrased).
Administrator duties
The administrator (or administrators) is appointed typically by the board of directors, although they can be appointed by a liquidator, interim liquidator, a secured creditor or the High Court (on application of a creditor or the Registrar of companies).
The administrator’s role is to control and run the business for a set period of time (five weeks). In that time, the key objective is to try to negotiate a recovery plan. This plan is put forward to creditors in the form of a Deed of Company Arrangement (DOCA) at the watershed meeting of creditors, which must be held within five weeks of the appointment.
The administrator(s) must investigate the affairs of the company and form an opinion about its future during this five week period. The administrator can choose to cease trading all, or part, of the business, but they can also choose to sell all, or part, of the business before the watershed meeting if (and only if) any sale is clearly in the best interests of the creditors.
One major advantage of a VA is the ability for the administrator(s) to commence, continue, defend or discontinue any legal actions. If the company is being sued and needs time to restructure its affairs, this can help.
The role of creditors
The creditors get to choose to adopt the DOCA and give control back to the directors — or to appoint a liquidator.
What are the advantages of a VA?
- Creditors debts can be compromised or deferred payment plans agreed.
- Legal actions can be stayed, giving the time necessary for the restructure.
- The business can continue trading while a restructure package is resolved.
- Part or all of the business can be sold, either by the administrator prior to the watershed meeting of creditors, or as part of the DOCA with the creditors agreement.
When can a VA be used?
Any time the directors feel it is necessary, but they must be prepared and fully understand the ramifications of using a VA.
A DOCA can contain, literally, any proposal the directors feel is appropriate. However, just because the directors feel it’s a good idea does not mean the creditors will.
Don’t forget: it’s the creditors, and not the directors or administrator, that decide the fate of the company. Any proposal must be sensible, well structured and have the support of the main creditors, or the company will end up in liquidation.
Sometimes, liquidation is the goal. We have had a situation where a company was clearly insolvent and the sensible approach was to liquidate. However, the independent shareholders could not agree on liquidation leaving the director with little choice but to appoint Administrators. A DOCA was not put forward and the creditors were asked to place the company in liquidation.
What about the bank or other secured creditors?
If a VA is planned, it is always sensible to discuss the intention with a company’s secured creditors. They will need to support the proposal or it will never succeed.
Also, it is important to note that if the secured creditor has the right to appoint receivers over the property of the company that right does not go away. In fact, a VA places the secured creditor under pressure as they must decide if they will appoint a receiver within 15 days or they lose the right to do so.
Therefore, having support from the company’s secured creditors is essential.
My client’s business is struggling
If your client’s company is considering VA and you have questions about their unique situation, please feel free to contact us. Voluntary administration is still relatively new to New Zealand and it is important to consider all the nuances of a case, as well as seek out a second opinion if the way forward is unclear.
If you have any further questions about VA, please contact Simon Dalton at sdalton@gerryrea.co.nz.