Voluntary administration is Australia’s primary business rescue regime. In this article, the second in a two-part series, we highlight the impact of voluntary administration on various stakeholders and the potential outcomes for a company in voluntary administration. It is not intended to be used as an exhaustive guide to Australia’s voluntary administration regime and its many nuances.
In Part 1, we provided an introductory overview of voluntary administration in Australia, explaining what it is, why entities might enter it and its processes.
Before placing a company into voluntary administration, it is important to consider the impact it will have on key company stakeholders and external parties. It is also important to consider the options available to an administrator to conclude an administration.
Impact on internal parties
Directors & officers
The powers of directors and officers are suspended during the administration (s 198G of the Corporations Act 2001 (Cth) (Act), with the administrator exercising management powers instead. During administration, directors are compelled to provide all information reasonably required by the administrator (s 438B of the Act). The administrator also has the power to remove or replace directors (s 442A of the Act).
Importantly, during voluntary administration, directors do not incur any personal liability for insolvent trading in respect of any debts incurred during the voluntary administration process.
Company members play no official role in voluntary administration, and any debts claimed by members (such as dividends or profits) are subordinate to creditors under s 563A of the Act. Members cannot transfer their shareholding during voluntary administration unless they have court or administrator approval (s 437F of the Act).
If there are unpaid or partly paid shares, a demand might be made for members holding such shares to pay the amount due.
Employment continues through administration, though the administrator may elect to terminate staff. If employees have outstanding entitlements, they become creditors in respect of the amounts they are owed. Such claims cannot (in effect) be compromised in a deed of company arrangement (DOCA) as per s 444DA of the Act.
Impact on external parties
Contracts, lessors & suppliers
Any contracts and leases are not automatically impacted by voluntary administration. Significantly, any contractual provisions in agreements executed after 1 July 2018, triggered upon a company entering administration, are not generally enforceable because s 451E of the Act prevents the enforceability of such ipso facto clauses. This said, there are certain exceptions to this rule, which are listed in regulation 5.3A.50 of the Corporations Regulations 2001 (Cth).
In any event, s 443B of the Act provides that an administrator becomes personally liable for amounts payable for property that someone else owns (eg rent) unless they give notice within 5 business days of their appointment to the payee, specifying that the company does not intend to use the property. In this respect, voluntary administration provides the capacity for distressed businesses to disclaim onerous contracts and leases. The 5 business-day notice period can be extended by the court under s 447A of the Act (see our article Can administrators avoid personal liability during the COVID-19 crisis?).
In addition to attaining and exercising management power throughout voluntary administration, the administrator receives a right of indemnity as a priority debt to cover reasonably incurred expenses and as remuneration for their function under s 443D and s 443E of the Act. This will, of course, deplete the pool of assets ultimately available to creditors in any eventual winding up.
As referred to above, the voluntary administrator can also incur liability for debts incurred by the company – this usually happens when the administrator decides to continue trading the company (often referred to as a ‘trade on’).
Unsecured creditors participate in creditor meetings and may be appointed to a committee of creditors (known as a ‘committee of inspection’) where necessary. Otherwise, they are subject to various moratoriums, severely limiting their enforcement power.
To cast a valid vote at creditors’ meetings, a creditor must lodge details of their debt in a ‘proof of debt’ form. The administrator will adjudicate on the proof of debt and decide whether to admit the proof of debt and for what amount. In this regard, the administrator has a significant influence on a creditor’s voting power at creditor meetings and thus the future direction of the company. An administrator’s decision to admit a creditor and its adjudication as to the creditor’s debt can be challenged in court.
Resolutions at a meeting of creditors are (broadly) passed where a majority of creditors holding a majority of the company’s debt vote in favour of the resolution.
Secured creditors can also participate in creditor meetings. Secured creditors benefit from a number of advantages during an administration:
- Secured creditors who control the whole, or substantially the whole of a company’s assets, may circumvent the various enforcement moratoriums if they act within the decision period or may place a company into voluntary administration to begin with.
- Secured creditors will not be (automatically) bound by a DOCA.
- A secured creditor may sell the property of the company in administration over which they have a possessory security interest under s 441EA of the Act.
- Where a security interest allows for such, a secured party may be allowed to appoint a receiver to manage assets of the distressed company, even during administration.
Exiting voluntary administration – outcomes
Voluntary administration is only a temporary process and not an end in itself. Depending on the vote at the second meeting of creditors, the company transitions to one of the following:
Deed of company arrangement (DOCA)
A DOCA is a compromise between a company and its creditors, who come to an agreement which allows the company to continue to operate in a different form, and (hopefully) provides creditors with a better return than would occur in a winding up. DOCAs are inherently flexible and might include:
- agreements to compromise or refinance debts;
- selling parts (or the whole) of a business, pool companies together; or
- engaging in debt for equity swaps (amongst others).
A DOCA binds the company, its officers and members, the administrator, and creditors, but not a dissenting secured creditor. The exact outcome of a DOCA is dependent on the deed itself, though the formal requirements for the instrument are set out in s 444A(4) of the Act. A DOCA may be challenged and set aside by the court under s 445D of the Act.
Administration ends – business resumes
Where voluntary administration has reorganised a company’s affairs so that insolvency is no longer a threat, the company is returned to its directors (or directors newly appointed by an administrator may have appointed) and continues operating.
In some circumstances, the administrator might recommend that the company be returned to the control of the directors even without any reorganisation if, after investigation, it does not consider the company is or is likely to become insolvent.
Creditors may resolve for a company to be wound up where it is insolvent, and a DOCA cannot save it. Business operations would cease, and assets would be liquidated.
The liquidator of the company will identify the company’s assets, liquidate them and then distribute the assets in accordance with the priorities in s 556 of the Act.
For a brief overview of Australia’s voluntary administration regime, see Part 1 of this Article.