How can Voluntary Administration save my business?

Voluntary Administration is a less known alternative to liquidation.

How does it work?

1. The board of directors resolves to put the company into administration.
2. Administrators take control of the company.
3. Creditors rights to pursue the pre-administration debt freezes for a five-week period (potentially extended by the court).
4. An initial meeting of creditors is held, where the Administrator puts the plan for the Administration to creditors and they vote on whether to confirm his appointment or replace him/her.
5. A 4-week period is set down during which time the Administrator reviews the position of the company and reports to creditors on his recommendation for its future.
6. A “Watershed Meeting” is held where creditors vote on the future for the company. Creditors, by majority, can choose;
   1. Liquidation
   2. Return the company to its directors (pre-administration state)
   3. Enter into a Deed of Company Arrangement (“DOCA”)

What is a DOCA?

A DOCA is an arrangement put to creditors where they swap their existing rights against the company for the rights under the Deed. The Deed can offer any proposal the directors see fit, however, it is important to note that creditors (majority in number representing 75% in value) have to accept the proposal, otherwise liquidation is the likely outcome.

If a DOCA is accepted, the Administrator will become the Deed Administrator and tasked with ensuring the company’s obligations under the deed are met.

For an Administrator to recommend a DOCA, the outcome for creditors should be better than the likely outcome in liquidation.

What can be proposed to creditors in a DOCA?

Depending on the circumstances the following types of proposals have, historically, been accepted:

• Where an otherwise profitable business has too much debt, creditors can be offered a percentage of the trading profits over a set period; and/or
• Directors/shareholders can personally advance additional funds to enable creditors to receive a portion of their debt now with the rest written off or a combination of this and 1.
• Directors/shareholders can agree to waive rights to secured/unsecured loans due to them from the company to increase the funds available for creditors.

Technically the proposal can be anything, however, the proposal must be accepted by the creditors, and in our experience, creditors are likely to be unwilling to accept a proposal unless it’s a better outcome for them.

Does a DOCA have to be proposed?

No.  If, during the administration, it becomes clear that a DOCA won’t be successful, then a DOCA need not be presented to creditors.  That typically means the creditors place the company into liquidation at the Watershed meeting.

That’s not necessarily a bad thing.  We have experience, in a couple of situations, where an offer was received to buy a business during the course of the administration.  The offer, being far more than the creditors would otherwise receive, represented the best option available.  In those circumstances, the Administrators can sell the business and ask the creditors at the Watershed meeting to place the company in liquidation to allow the proceeds of sale to be distributed.

Summary

Ever situation is different. Voluntary Administration is a tool which may help save some businesses, but it’s not a magic bullet. If you think Voluntary Administration may be of help to you or your client please feel free to call us on 0800 343 343 for a free consultation.

BEN FRANCIS
Senior Manager
021 042 6991
bfrancis@gerryrea.co.nz