Voluntary Administration - Guide

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This is a basic guide to voluntary administration and to how it works.

Voluntary Administration Topics

1     Legislation
2     The Aim/Goal
3     Proof of Debt & Risks
4     How a Voluntary Administration starts and ends
5     Role of the Administrator
6     Functions of the Administrator
7     Appointment of Administrator
8     Meetings of Creditors
9     Ending the appointment or administration
10    Protection of the Company’s Property during Administration.
11    Resources
12    Disputes we help with

1 The Legislation

1.1. The relevant legislation includes the following:

• Pt 5.3A of Corporations Act 2001 (Cth)
• Corporations Regulations 2001 (Cth) see: Ch 5 and Sch 8A
• Insolvency Practice Schedule (Corporations) i.e. Schedule 2 to CA
• Insolvency Practice Rules (Corporations) 2016 (Cth)
• Supreme Court (Corporations) Rules 1999 (NSW)
• Federal Court (Corporations) Rules 2000 (Cth)

2 The Aim/Goal

2.1. The goal is for: 

• company to continue; or
• to get better return for creditors (and members) than on a winding up.

3 Proof of Debt & Risks

3.1. There are some risks when lodging a Proof of debt.

3.2 Unless some preventative steps are taken, it is possible to lose the security held by lodging an unqualified proof of debt. 

4 How a Voluntary Administration starts and ends

4.1 It starts when administrator is appointed. 

4.2 It ends when: –

• a deed of company arrangement is executed (DOCA); or
• creditors resolve (or the court orders) the administration should end; or
• creditors resolve the company should be wound up.

5. Role of the Administrator

5.1 During administration, the administrator has control over the company and can: 

• can carry on and manage company’s business, property and affairs
• perform functions and powers of company and its officers.
• etc

5.2. There are some things that the administrator does not control such as property rented by the company. 

6. Functions of the Administrator

6.1. The administrator must investigate the company’s business, property and affairs and form an opinion about: –

• executing a deed of company arrangement;
• ending the administration;
• whether the company should be wound up.

6.2. The Directors have certain obligations such as:

• delivering all books;
• telling the administrator whether books can be located;
• etc.

6.3. If officers, directors or employees have been guilty of misconduct then the administrator must lodge a report with ASIC. 

7 Appointment of Administrator

7.1.Generally, if the board thinks company is

• insolvent
• likely to become insolvent

      … then company may appoint administrator.

7.2. Appointing an administrator may also amount to a defence where it is later alleged the directors traded whilst insolvent. 

7.3. Certain formal steps need to be taken in order to appoint an administrator including a notification to ASIC. 

8 Meetings of Creditors

8.1. The first meeting is usually held within 8 business days of the appointment of the administrator. The meeting notice will contain matters covering:

• the agenda
• the proof of debt form
• the proxy form
• etc.

8.2. Only creditors who lodged a valid proof of debt can vote.

8.3. Creditors need to decide whether to appoint a committee of creditors and, if so who they should be. Other decisions relate to whether another administrator should be appointed and if so whom. 

8.4. The second meeting of creditors is the most important and must be held during the convening period (usually 20 business days) but the time can be extended.

8.5. Critical decisions, based on the administrator's report, relate to whether: –

• a deed of company arrangement (DOCA) should be executed by the creditors; 
• administration should end; or
• company should be wound up

8.6 Voting is usually on the voices but is sometimes on the a poll. 

8.7 One difficulty with entering into a DOCA is where there is a need to pursue the directors for insolvent trading or claw back transactions that are voidable i.e. unfair preference claims etc.. In those instances it may be better to wind the company up so that the directors can be held accountable (or transactions can be set aside). 

8.8. A DOCA should contain certain things:

• who administrator is;
• property available to pay creditors claims;
• etc.

8.9. Generally, the creditors who had claims against the company before an administrator was appointed will be bound by the DOCA although there are some exceptions. 

8.10. Eligible employees will be given priority under the DOCA. 

8.11. Guarantors are unlikely to escape liability even in respect of debts that are released. 

8.12. Those who are bound by a DOCA cannot then turn around and proceed to wind the company up. 

8.13. In some instances a DOCA can be terminated by the court. 

9. Ending Administration

9.1. Once an administrator is appointed it cannot be rescinded 

9.2. Usually an administration ends upon:

• execution of DOCA;
• creditors resolve it should end;
• creditors resolve company be wound up.

9.3. An Administrator can be removed by:

• ASIC
• a liquidator/provisional liquidator under which the administrator was appointed
• a creditor

      .... if there are grounds for the removal such as for a lack of impartiality (although there are other grounds too). 

10. Protection of the Company’s Property during Administration

10.1. The appointment of an administrator by itself does not mean that the company intends to renege on its contracts. Contracts that permit a contracting party to end the relationship with the company in administration could fall foul of the ipso facto provisions. 

10.2. The appointment of an administrator has certain consequences for members who want to transfer shares in that such transfers may be void unless approved by the court. 

10.3. During administration there is a creditor freeze (unless an exception applies) that affects the ability of creditors to exercise their rights. 

11. Resources

11.1. Other resources to consider include:

• Voluntary administration: A guide for creditors

• Voluntary administration: A guide for employees

• Flowchart 5: Administrator in a voluntary administration

• External administration

12. Disputes we help with

12.1. We assist with court applications concerning voluntary administration:

• contest the validity of the resolution to appoint - whether the resolution to appoint an administrator was valid or not
• liquidator wanting to appoint him or herself - an application by a liquidator to appoint himself as an administrator
• purchaser wanting to validate a transaction - an application by a purchaser to validate a transaction entered into before or after administration began
• share transfers and changes to membership - an application to authorise a transfer of shares (or change to membership), or set aside administrator's conditions to such a transfer, and after administration began
• administrator forcing compliance - proceedings by an administrator to force compliance with any legal obligations to produce company books, provide a director's report or attend upon the administrator and give information etc.
• forcing an administrator to lodge a report - court application to force an administrator to lodge a report with ASIC where there is evidence of misconduct, money being misapplied, negligence or breach of duty in relation to a company
• extending time for meetings - an application to extend time for convening the 2nd creditor's meeting (or to extend the time for an adjourned meeting)
• contesting a creditor's resolution - an application to set aside a resolution made by creditors (or where a casting vote was exercised)
• adjourning a winding up - an application to adjourn winding up proceedings (or oppose the appointment of a provisional liquidator)
• enforcing a lien - an application by a secured party, or holder of lien or person in possession of property pledged by the company for leave to enforce a charge against company property
• administrator limiting the powers of secured parties - an application by an administrator to limit the powers of certain secured parties or owners or lessors to exercise their rights in defined circumstances
• administrator want to deal with property - an application by an administrator for leave to deal with certain encumbered property
• enforcing a judgement - an application by a judgement creditor to seek leave to enforce a judgement
• enforcing a guarantee - an application by a creditor, who has a guarantee, for leave to enforce it.
• excuse from liability - an application by an administrator seeking to be excused from the liability attached to using or occupying a property.
• extending time for a DOCA - an application by an administrator to extend the time for executing a DOCA
• doing something inconsistent with the DOCA – an application to the court, before the DOCA executed, to do something inconsistent with its proposed terms
• limiting the rights of a secured creditor or property owner whislt company under DOCA - an application to the court to limit the exercise of by a secured creditor or property owner of its rights where a DOCA has been executed
• transferring shares - an application to the court by a deed administrator to transfer shares in a company subject to a DOCA
• Misconduct on the part of the administrator - an application that the administrator ceases to be the administrator and that some other registered liquidator be appointed. 
• Setting or reviewing remuneration - an application to set or otherwise review the remuneration of an administrator
• etc.

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