Voluntary administration

William Black, NZ Lawyer, 22 September 2006

 

In this article, examples show that voluntary administration is already a part of New Zealand's insolvency landscape.

As previously covered in Financial Services Quarterly, voluntary administration is a feature of New Zealand's revised insolvency laws. Briefly, voluntary administration is the process whereby a company appoints its own administrators who, in collaboration with the creditors, take necessary measures to give the highest possible return to creditors. This may mean trading for a while longer or providing working capital to the company, as opposed to immediate liquidation.

In Australia, voluntary administration is already an alternative to liquidation. Two proceedings involving New Zealand companies that are subsidiaries of Australian companies are summarised by the author as follows.

First example

A New Zealand company supplied wheels to two major vehicle manufacturers. The company was profitable but it was rendered insolvent by virtue of its exposure under cross guarantees.

The administrators negotiated a "stand-still" agreement with the creditors, pursuant to which creditors agreed not to enforce their guarantees and to freeze their position as at the date of administration. In return, agreements were put in place subordinating the Australian creditors to the New Zealand trade creditors, which enabled the New Zealand company to continue trading in New Zealand.

When the main New Zealand supplier demanded cash on delivery, the administrators supplied $10 million of working capital to maintain operations at a profitable level.

The expected outcome is that New Zealand creditors will get 100 cents in the dollar and that there will be a substantial surplus for the Australian creditors.

Second example

An Australian mining and civil engineering company put itself into voluntary administration in Australia. The New Zealand branch of the company was directly subject to the voluntary administration process by virtue of its incorporation as an overseas branch.

The administrators closed the unprofitable Australian units and continued trading in New Zealand and in the profitable Australian units while preparing the business for sale.

Under a Deed of Company Arrangement (which all New Zealand and Australian creditors voted on) each creditor should receive 75 cents in the dollar. If the company had been liquidated, it is expected that each creditor would only have received 10 cents in the dollar.

Conclusion

The author's conclusion is that there is obvious economic benefit in making the restructure of distressed companies easier and quicker.

Enquiries and information

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