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

The Government on the 3^rd of April proposed some legislative changes to the Companies Act in order to support business that are struggling due to the COVID-19 lockdown.

One of the more interesting changes was the proposal to allow business to place their debts into hibernation.

So, what is “Business Debt Hibernation”?

Exact details aren’t known at this stage, but the intention of the regime is to;

• Encourage directors to talk to their creditors with the view and intent to place the business into hibernation.
• Allow the directors to retain control of the company rather than passing control to an insolvency practitioner.
• Provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue trading with entities in Business Debt Hibernation.
• Be easy to implement so businesses can apply it to their own situation without the need for legal advice.

So, how do you place your business debt in hibernation?

Well, the regime appears to need to allow creditors to vote, one assumes in a similar way to, for example, a DOCA (Deed of Company Arrangement) in a Voluntary Administration.

However, a company only needs 50% of their creditors to approve a debt hibernation (by number and value) which makes it easier to obtain the relief.  All creditors will have one month to make up their mind.

So, how long does it last?

Once the creditors are notified of the intention to place the business debt in hibernation, none of the creditors can seek to enforce their debts for one month.

If the proposal is accepted, then the company gets a further 6 months where creditors cannot enforce their debts.

Its also binding on all creditors, even those that voted against it or didn’t vote at all. However, it isn’t binding on the businesses employees and is subject to any conditions the creditors insist on.

Can the company continue trading?

Yes, but subject to any restrictions placed on it by its creditors.

In fact, in order to encourage other companies to trade with it, it is proposed that any further payments made by the company to its creditors on new trading debts, be exempt from the voidable transaction regime.  While this exemption wouldn’t extend to related parties, it would give comfort to new creditors that a liquidation, if one is appointed later, wouldn’t be able to claw back the funds they’d received.

It should be noted that related party debts are not included in this exemption.

My business isn’t a limited liability company.  Is that a problem?

No, any entity can seek to place its debts into hibernation under this scheme unless you are a licenced insurer, a registered bank or a non-bank deposit taker, or a sole trader.

What about directors’ duties?

The whole concept about this is to provide businesses with, what the Government is calling, a safe harbour.  There is a specific exclusion to sections 135 and 136 of the Companies Act 1993 for any director who is allowed to take advantage of these benefits.

What’s the catch?

The business must have been solvent at 31^st December 2019 and the directors would be wise to ensure that’s the case.  The directors must also consider that, in good faith, that the business will be able to pay its debts as they fall due within 18 months and believe the issues being faced now, or in the next 6 months, are as a result of the impact of COVID-19.

If it is proved, at a later date, that the above criteria are not met, then the directors may still be liable for breach of directors’ duties.

Summary

This is an interesting regime that may provide benefit to some businesses.  Will many businesses be able to take advantage of it and will it provide a benefit when it only gives a 6-month breathing space?  Only time will tell.

There are a few unanswered questions though.  For example;

• Do different creditor classes have to vote separately and, if so, what happens if one class of creditor votes against the proposal? It would be unfortunate, for example, if secured creditors lose their rights via this process but also unfair if one class of creditor can dictate the process.
• What happens if directors fail to notify a creditor? Are they bound by the voting outcome?
• The concept appears to be that the debts are frozen at a point in time, but it is unclear exactly what that time is. One assumes it will be at the date the proposal is put forward.

There seems to be significant risk falling on the directors.  If they make a mistake during the process, for example, fail to notify a creditor or miss a creditor from the list entirely, they may find themselves in a difficult position.

While the process is intended to be manageable by the directors themselves, it may prove sensible for them to take appropriate independent advice from an accredited insolvency practitioner.

Any business considering this option should also look at the other statutory options available and weigh up the pros and cons of each.  Each option has its own unique advantages and disadvantages. Choosing the right option for your business is vital.

SIMON DALTON
Managing Partner
021 023 50682
sdalton@gerryrea.co.nz

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 sdalton@gerryrea.co.nz