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

Photo courtesy of Thomas Angermann
 

Give your client another option to consider

 
We bet you’re wondering: “Why would a company choose to undergo a solvent liquidation? How would a company even find itself in this position?”

Essentially, a solvent liquidation is a liquidation where the directors declare their organisation will be able to pay all of its debts. Liquidators are appointed in the usual way, by shareholder resolution. Liquidators have the same powers and obligations and creditors must also make a claim in the usual way.

The point of difference: directors declare the company to be solvent and sign a certificate of solvency.

What’s the catch?

A director who signs a certificate of solvency is providing a personal guarantee that the company will be able to pay its debts. If, in fact, the company cannot pay it debts, the director becomes personally liable to pay.

Why would a director choose personal liability?

So, why would any director choose to sign such a document? What are the advantages?

1) The biggest advantage is time.

Usually, in a liquidation, creditors receive approximately one month to make a claim in the liquidation. Before making any distributions to creditors or shareholders, the liquidator must wait, even if the company appears to be solvent and a distribution to shareholders is likely.

Let’s assume you, or your client, are the director and sole shareholder of a company and that you have just sold the business assets in an effort to cash up. For arguments sake, let’s also assume the assets included a commercial property which sold with a large capital gain — and there are no known creditors. If you declare the company solvent, a liquidator would be more willing to make an immediate capital distribution to shareholders rather than wait for creditors to make a claim.

2) The other key advantage:
 
If a liquidator makes a distribution of capital during the course of a liquidation, it will not incur income tax. Whereas, a distribution declared prior to liquidation could be deemed as taxable income by the IRD.

When would it be a bad idea for a director to take on personal liability?

Simply put: the director is not sure the company is solvent. Perhaps, there is a contingent liability they are not certain about; or perhaps, the shareholders are simply not in a hurry to get paid.

If in doubt, a director should not sign a declaration of solvency.

What’s next?

If your client is facing financial trouble, or looking for the best short- or long-term exit solutions, then difficult decisions lay ahead.

Gerry Rea Partners is always here to help you provide the right guidance. If you have a client with unusual circumstances that require further consideration, please contact us and we will discuss the next steps.

If you have further questions about solvent liquidations, please contact Simon Dalton at sdalton@gerryrea.co.nz.