How does voluntary administration work?
Introduced into New Zealand company law on November 10, 2007, the process of ‘voluntary administration’ is a business rehabilitation scheme intended to be a short-term measure that freezes the company’s financial position while an appointed administrator and the company’s creditors determine the organisation’s future.
The focus of the voluntary administration regime is to allow companies that are insolvent – or appear likely to become insolvent in the near future – a better chance of surviving.
If it is not possible to save the company, then the objective of the administration is to receive a better return for creditors and shareholders than they would receive under immediate liquidation.
But what better way to understand the nature of voluntary administration than through a case study?
The road to recovery: how voluntary administration can help
The Company – a custom design and manufacturing company with more than 40 years’ hands-on experience in manufacturing equipment for the food and dairy industries – had been attempting to encourage investment to enable expansion.
The Company primarily made specialist equipment for the dairy industry, however, the Company was over capitalised and could not seek further bank funding.
Existing shareholders could not provide more funds, which means the Company could no longer be considered solvent. In a position of default, shareholders would not agree to voluntary liquidation. As the Company could not trade on without funding, the Director made the only reasonable decision left: to make the appointment of voluntary administrators. And this is where Gerry Rea Partners stepped into the picture.
As administrators, Gerry Rea had a responsibility to investigate all of the Company’s affairs and consider the different options available to remedy the situation, assembling the facts and presenting creditors with a proposal for the company to go forward. These terms, under which the company will carry on in business after 5 weeks, is set out in a Deed of Company Arrangement (DOCA), which the administrator submits to the creditors for approval at a Watershed Meeting.
Possible outcomes of a Watershed Meeting
There are three possible courses of action:
1) Reject the DOCA and return the company to the control of its directors.
2) Appoint a liquidator.
3) Accept the DOCA and rehabilitate the company.
The DOCA is typically used as a “restructure/save the company package” but, in this circumstance, a DOCA was not going to be put forward.
Fortunately, and unexpectedly, there was a great deal of interest from parties wishing to purchase the business — it was certainly viable if recapitalised. Several offers were made and the business was sold before the Watershed Meeting, which, in truth, is very rare; it could possibly be the first time in New Zealand.
The administrator has the right to sell before the Watershed meeting but only if it is in the best interests of the general body of creditors. In this case, it was a good offer and presented more value than a breakup.
Voluntary administration has benefits for both creditors and companies who find themselves in financial difficulties. To find out more about voluntary administration, please email Simon at email@example.com