Voluntary administration - when it finally happens, will we be ready?

Murray Tingey, Partner, Bell Gully. The Independent, June 2007

In this article, Murray Tingey summarises the key aspects of the new voluntary administration regime and considers its impact on financial institutions and secured creditors.

Background

Amendments to the Companies Act 1993 (the Act) to introduce voluntary administration were passed in November last year. Despite a lengthy gestation, it is not expected that the changes will come into force until the end of this year at the earliest.

The introduction of voluntary administration will impact on those who deal with companies facing financial uncertainty, particularly financial institutions and secured creditors. These groups should take the opportunity now to implement procedures for dealing with voluntary administration.

Currently, the only rehabilitative insolvency regime for viable companies is the compromise regime in Part XIV of the Act. In practice, it has been difficult for companies to get the votes required to pass a compromise while fighting off creditors.

The new regime and its impact

Under the new regime, the administration of a company begins when an administrator is appointed. This is usually by board resolution but it can be done by a liquidator or a secured party. The appointment of an administrator has three main consequences:

1. control of the company's business is vested in the administrator;
2. the administrator is obliged to hold creditors' meetings to try to seek a consensus on the company's future; and
3. a stay is imposed on certain creditor actions.

While a company is in administration, in the absence of administrator consent or a court order, a transaction or dealing that affects the company's property is void. Significantly, a person may not enforce a charge over the company's property or commence or continue court proceedings against a company in administration.

In addition, the owner or lessor of property occupied or used by a company in administration may not repossess that property.

More controversially, in the absence of a court order, a lender may not enforce a guarantee given in respect of a company in administration's liabilities by a director or their spouse or relative.

It is important to note that these general prohibitions do not apply to a secured creditor with a security interest over all of the company's property who begins enforcing its security within 10 days after receiving notice of the administration.

Creditors who do not have security, or who do not have security over all of the company's property, must understand that the administration process may compromise their position. Most importantly, if a deed of company arrangement is approved by the requisite creditors (a majority in number and 75 percent by value of those voting), it will bind all of the creditors. In addition, if a company in administration borrows money, the liability for repayment of that debt has priority over the company's existing unsecured creditors.

Required action

Many contracts provide for receivership or liquidation to be events of default. These clauses will often not extend to administration, and should be amended to do so. Indeed, all standard form documentation should be amended to ensure that administration is included as an event of default.

Creditors who typically take "all present and after-acquired assets" security will need to ensure they are in a position to make enforcement decisions within the 10 working day "decision period". For this purpose, secured lenders will need to ensure that they have in place appropriate internal systems to ensure any notice of administration received is promptly directed to the appropriate person so that a decision as to whether or not to enforce their security can be made.

Creditors who typically take security over specific assets of a company will need to appreciate that they are at a relative disadvantage to creditors who take security over all assets of a company. In order to adequately protect their interests, such creditors may wish to consider requiring security over all of a company's assets.

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