The voluntary administration regime is a relatively new addition to New Zealand legislation.
The objects of the regime are to:
Provide for the business, property, and affairs of an insolvent company, or a company that may in future become insolvent, to be administered in a way that –
(a) maximises the chances of the company or as much as possible of its business continuing in existence;
(b) if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and shareholders than would result from an immediate liquidation of the company.
In practice, it provides protection from creditors of the company for a period of up to 5 weeks, while an appointed administrator assembles the facts and presents creditors with a proposal for the company to go forward. The terms under which the company will carry on in business after the 5 weeks are set out in a Deed of Company Arrangement (DOCA), prepared by the directors, which the administrator submits to the creditors for approval at a Watershed Meeting.
If 75% of the creditors attending the Watershed Meeting and voting approve the DOCA, it becomes binding on all creditors of the company. There are, however, special provisions to protect parties with securities registered over the company. If the creditors choose to reject the DOCA, their only choices remain:
a) giving control of the company back to the directors or
b) appointed a liquidator.
Effects of voluntary administration
Provided there are additional funds made available to the company or some debts are frozen, voluntary administration may provide a better outcome for creditors than liquidation. One advantage is that tax losses may be preserved in certain circumstances.
However, the company will likely emerge from the voluntary administration in a slimmed down form. This may still be a better outcome for creditors than an immediate liquidation.
Funding a voluntary administration
Because it is a statutory process, with two formal creditors meetings, the mailing of reports and a proposed DOCA, the process is potentially more expensive than immediate liquidation. Not only must the administrators costs be met, but the administrator may require that any trading losses during the 5 week period of the administration, are covered by an indemnity, prior to accepting appointment.
If you are wondering if voluntary administration could be an option for your business, book a free consultation with us by calling 0800 343 343.