Voluntary Administration

Part 5.3A Corporations Act 2001 – Administration of a Company’s Affairs to execute a Deed of Company Arrangement

A company that executes a Deed of Company Arrangement (DOCA) is a company that was in voluntary administration.

Voluntary administration was implemented to provide an alternative option for creditors for dealing with a financially troubled company.

The outcomes available under the procedure are:

• the company will resume operations but with a deferred or reduced debt under a DOCA approved by its creditor;
• a secured creditor will exercise its rights to appoint a receiver to obtain repayment of its debt by disposal of company assets and who will effectively displace the administrator while doing so;
• The creditors will vote to put the company into liquidation.

Under any option, shareholders and directors will be displaced in favour of creditors and the receiver, administrator or liquidator. This displacement may be permanent or temporary, depending on the course of action taken. Voluntary administration does not require court approval.

The procedure seeks to maximize the chances of an insolvent company or as much as possible of the business surviving or, if it cannot be saved, to achieve a better return for the creditors and members than would result from the immediate winding up of the company.[1]

Voluntary administration is usually initiated by the company itself when directors resolve that:

• in their opinion, the company is insolvent or likely to become insolvent; and
• an administrator of the company should be appointed.[2]

Under the Act, a company is insolvent if, and only if, it cannot pay all of its debts as and when they become payable.[3] The test of solvency looks at the company’s cash flow rather than the balance between its assets and liabilities.

While the company is in voluntary administration, the administrator controls the company’s property and business.[4] The powers of other corporate officers, including directors, are suspended during the administration and may not be exercised except with written approval by the administrator.[1]

If Directors continue to incur debts while insolvent, they may be personally liable for losses sustained to creditors.[2] Such potential liabilities are a strong incentive for Directors to appoint an administrator if in doubt of the company’s solvency. Voluntary administration offers the Directors a safe haven from future insolvent trading but with the loss of control of company affairs, property and operations. [3] The administrator may be appointed by a person who is entitled to enforce a security interest in the whole, or substantially the whole, of the company’s property (the secured creditor).[4]

As soon as practicable, the administrator must investigate the company’s business, property and financial circumstances and call two creditors meetings.[5]

Within 5 business days from the appointment, the administrator must call a meeting for the company’s creditors to decide:

• whether to appoint a committee of creditors to consult with the administrator,[6]
• At this stage, creditors may also replace the administrator with a qualified person of their choosing.[7]

Within 21 days of appointment, the administrator must convene a second creditors meeting to decide the company’s future.[8] At the second creditors meeting, the creditors may resolve that:

• the company execute a deed of company arrangement specified in the resolution
• the administration should end and the company returned to the control of the director; or
• The company is wound up.[9]

If creditors vote for a proposal that the company enter a DOCA, the company must sign the Deed within 15 business days of the creditors meeting, unless the court allows a longer time. If this does not happen, the company may go into liquidation, with the voluntary administrator becoming the liquidator.

If the creditors agree to accept a Deed of company arrangement, the administrator draws up the Deed within 21 days of the resolution.[10]

“Safe Harbour” provisions of the law came into effect in September 2017, to provide directors, in certain circumstances, with time to develop and implement a strategy and program for a better outcome for creditors other than immediately placing the company into administrations. Implemented correctly, the safe harbour program protects directors from personal liability for insolvent trading.  See section 588GA of the Corporations Act 2001 (Cth).

[1] Corporations Act 2001 s 436A(1)

[2] s 436A(1)

[3] s 95A(1)

[4] s 437A

[5] s 437C(1)

[6] s 588G

[7] ss 437A-437D

[8] s 436C

[9] s 438A

[10] s 436E-436F

[11] s 436E(4)

[12] s 439A

[13] s 439C

[14] ss 444A – 444B.