Voluntary Administration is the legal process used to rescue companies facing financial difficulties. The aim is to prevent liquidation. The process begins when an independent administrator is appointed by the company’s directors. The administrator manages the affairs of the company so that the best possible outcome is achieved for everyone with an interest in the business.
Understanding Voluntary Administration
When companies get into trouble
The directors must find a way of dealing with the situation. In the past, the only options were liquidation or fighting it out with impatient creditors. There had to be a middle ground where companies that could survive, and were given an opportunity to do so. Voluntary Administration, or VA as it is commonly known, is that opportunity. Voluntary Administration came into force in New Zealand on 1 November 2007. It is now widely accepted as being an alternative to liquidation.
A company experiencing financial difficulties
Is backed up against a wall. Its options diminish as the situation gets worse. Business activity starts to drown in a torrent of creditor demands. Voluntary Administration puts an immediate and effective stop to all those demands. The creditors understand their position in the company, and the company gets breathing space to organise a recovery plan for creditors to consider.
How VA can help companies in financial distress
Considering VA as an option
Voluntary Administration cannot create viability
But it can liberate it. The company has inherent value and is still viable. The company may have suffered an event, like a single project loss. Or it has a cost burden that if freed from would return it to profitability. Voluntary Administration is not magical though. Like everything in life, it requires commitment, fortitude and skills. All three must be applied to a commercial activity that has the potential to recover.
The VA model
The Voluntary Administration process is made up of three separate parts: the initiation phase, the investigation phase and the decision phase.
The initiation phase starts with the appointment of the administrator. This is normally a simple document executed by the directors. This phase ends on day eight when the first meeting of creditors is convened, and the administrator’s appointment is affirmed by the creditors.
The investigation phase involves the administrator engaging in the affairs of the company so they can gain a better understanding of the business. A proposal for rehabilitation and recovery is drawn up to be submitted to creditors.
The final phase is the decision phase. This starts on day 20 when the administrator’s report is provided. It ends on day 25 when the watershed meeting is held.
Some important facts to know:
The administrator becomes heavily involved in the affairs of the company from day one.
The day count is for working days only. For example, statutory holidays are excluded from the count of days.
The directors remain in office but are not entitled to speak or contract in the name of the company without authority.
The administrator is personally liable for all the obligations of the company during the period of the administration.
The administration is only for a short period so that the outcome can be determined quickly.
During the period of the administration creditors’ rights are severely curtailed. For example, the landlord cannot re-enter, suppliers cannot recover product and guarantors cannot be called upon to meet the company’s obligation.
An application can be made to adjourn court proceedings for liquidation until the end of the administration.
The duration of the administration can be extended by consent of the court. This often happens in complex commercial situations where 20 working days is not enough to get a thorough understanding of the business and prepare a report for the creditors.
For voting purposes, shareholders who have contributed funds to the company are probably creditors and have equal footing to third party creditors.
The watershed meeting
The watershed meeting is held on day 25. It is called a watershed meeting because it is a watershed event in the life of the company.
VA is an alternative to liquidation. The law is very clear that the purpose of Voluntary Administration is to administer a company’s affairs in a way that maximises the opportunity of the company’s continued existence. The administrator’s mission is to achieve that outcome. How this will be done is unique to each different company, and will be covered fully in the administrator’s report.
At the watershed meeting the ultimate decision around the company’s future rests with the creditors. It is highly likely that the creditors have a bigger stake in the company than its shareholders.
The rights to decide, though, are restricted to three options as shown in the diagram below. The administrator’s report, delivered to creditors before the watershed meeting, will have a recommendation that is designed to bring about the best possible outcome for both creditors and shareholders. The ultimate outcome is that the creditors support a deed of company arrangement.
The deed of company arrangement
Often called a DoCA, this document is the basis of the agreement reached between the company and its creditors. It is the deal that has been struck to ensure that the company can continue to trade. There will be standard terms involved – but at the heart of the document are the arrangements made to ensure the company survives and that liquidation is avoided.
If a DoCA is recommended its terms will be spelt out in the administrator’s report. If approved by the creditors at the watershed meeting, the administrator will prepare the DoCA and ensure it is executed within 15 working days.
Some important points about the DoCA:
When the DoCA is signed the Administration comes to an end and the period of the DoCA commences.
The DoCA’s period can be two or three years. Often it will take this length of time for the rehabilitation of the business.
The administrator will become the deed administrator and will now have a cooperative role with the directors of the company.
Creditors that were owed money before the commencement of the administration are subordinated so that the company can meet its current obligations. The deal will often include payment of the frozen amounts across time from future profits earned.
The DoCA will include many points that are important to the shareholders. A term that is frequently included is that creditors are prevented from pursuing guarantors while the DoCA is in force.
Starting Voluntary Administration
Starting the VA process is very simple. All that is required is the resolution of the directors to appoint an administrator. There are other ways for the VA to begin (secured creditor, court, liquidator), but resolution of the directors is by far the most common way.
Starting the VA process is effectively a statement by the directors that they have run out of options to deal with the affairs of the company. The company needs the protection of the VA process to see if liquidation can be avoided.
However, there is an important time limitation regarding the directors’ right to start the process. If a creditor has started liquidation proceedings against the company, the directors have only ten working days to make an appointment, or their right to do so is lost.
Costs of VA
The costs of administration is an obligation of the company making the appointment, not the shareholders or directors. There should be open discussion on this topic before VA starts to ensure all parties know what is expected of them. VA is first and foremost an activity designed to restore the business back to good health. The costs of running the process cannot be so great that rehabilitation can’t be achieved because of the cost burden.
Selection of administrator
Choosing the right administrator is vital. The Voluntary Administration process is a major event in the company’s life and the person chosen to run that process will have significant impact on the outcome.
Preventing liquidation by way of Voluntary Administration is not an easy task. The start of the process disrupts normal business – there is a flurry as everyone comes to grips with what has happened and how it will affect them. This is a time when a cool head counts, and experience is essential.
VA brings heavy time demands to meet the requirements of an organisation that has been impacted by a major event. Dealing with difficult issues requires dedication and commitment from both the administrator and directors.
The establishment of the business that is now faltering will most likely have been created with many years of hard work, self-denial and financial commitment. The situation that it is now in will not have occurred overnight and cannot be repaired instantly. Can it be done? Should it be done? These are big questions to be answered. But they should be asked because liquidation is final. Often all that is required is some breathing space to recreate the business in better terms.
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