Moratorium and Voluntary Administration Process
The moratorium in Voluntary Administration is waht makes the difference. Calling in the Administrator provides a much-needed respite for companies facing liquidation
The voluntary administration process in New Zealand allows the directors of a company or its Board the chance to slow down what is often the rapid chain of events that is liquidation. Here, we take a look at what can (and can’t) happen during the Voluntary Administration moratorium.
There is nothing quite as uncomfortable as dealing with the issues impacting a company when it enters an existence-threatening zone. Creditors are grumpy and demanding, funders are nervous, suppliers are cautious, and service providers have made crippling decisions. Perhaps the most unpleasant is when relationships turn sour, and the integrity of the Board is called into question.
As a company faces the possibility of liquidation, the Board strives to deal with these issues with depleted resources and reduced capability. Customers grow increasingly dissatisfied, compliance requirements are deferred, and a dark cloud of inevitability becomes ever-present.
Recalibration is the only way out of this situation. To achieve that, claimants would have to sit on their hands while the Board takes steps to work on the problems. The reality is, though – this will not occur. From the claimant’s perspective they are in a race to get out of the risk zone, and being conciliatory or sympathetic, is not going to help them get paid.
How the moratorium helps
Protecting the property and future of the company is precisely what the moratorium in Voluntary Administration is intended to achieve. The claimants are forced into a freeze position so that the Administrator can assess the affairs of the company and come up with a recovery plan.
The moratorium provides a chance to take a breath. During this time, secured creditors can exercise their rights, but:
- landlords cannot terminate,
- suppliers cannot recover (with some exceptions),
- and contracts cannot be terminated.
This means that if the secured creditors support the survival of the business, it can carry on in the hands of the Administrator while a recovery plan is being worked out.
The moratorium commences upon the appointment of an Administrator. The immediate benefit of the stay is that the Administrator acts as a protective shield over the business. In addition, the costs of running the business become a cost to the Administrator personally during this first phase of the Administration. That commitment protects creditors for supply during the Administration and frees up previously stuck supply lines.
The Voluntary Administration Process
The appointment of an Administrator triggers the convening period. The moratorium runs for the period of the convening period and for the further five working days that are required to provide notice of the Watershed Meeting. The model structured by the law is framed by the following key date milestones.
- Director appoints Administrator
Triggers moratorium - Day one (working days)
Notify Registrar of Companies and secured creditors - Day three (working days)
Public Notice and notice to all creditors convening the First Meeting - Day seven (calendar days)
Make an election regarding leasehold interests - Day eight (calendar days)
Conduct first meeting of creditors
Confirm Administrator - Day twenty (working days)
End of Convening period
Provide Administrators report and notice of Watershed meeting - Day twenty-five (working days)
Conduct Watershed Meeting to determine the future of the company
The duration of the convening period is not set in stone. Twenty working days is just not enough time for the Administrator to get to know the business, keep everything going and build a plan for reconstructing the affairs of the company so that the creditors can make an informed decision.
The Convening Period can be extended with an application to the court, which is a common event. Although the court must be mindful of freezing creditors’ rights without good cause, it often finds that a period greater than 20 working days is required. After all, Administration benefits the creditors in the first instance, so having a process that has potential for success is paramount. It is common to achieve a further three weeks, and extensions have been granted for up to six months.
The moratorium afforded by Voluntary Administration is key to a successful administration. It prevents the smash, grab and run action of creditors. The appointment of a professional Administrator softens harsh views, frees supply lines to allow the business to get rolling again and stays creditors’ rights against guarantors. The object of VA is to see whether the company or the business can continue. The law is designed to achieve that objective, and the moratorium is critical to its achievement.
Read more about the Voluntary Administration process here.