News
Voluntary administration: when it finally happens will we be ready?
First published in The Independent, 13 June 2007.
After over eight years in the making, the amendments to the Companies Act to introduce voluntary administration were finally passed in November last year. Despite the lengthy gestation, the changes are not yet in force and no date has been set for this to happen. It is now expected they will not be in place until the end of this year at the earliest.
Practitioners are becoming frustrated by the delays and the lack of any official word about timing. The uncertainty of the timing may explain why there appears to be little general understanding of what the changes will mean for the business community.
The introduction of voluntary administration will impact those who deal with companies facing financial uncertainty, particularly financial institutions and secured creditors. Those groups should now take the opportunity to ensure they implement practices and procedures for dealing with voluntary administration.
Under current law, the only rehabilitative insolvency regime for viable companies is the compromise regime in Part XIV of the Companies Act. In practice, it has been difficult for companies to obtain the votes required to pass a compromise while fighting off creditors. This explains why it has seldom been invoked. The most recent high profile example has been by the directors of Wall Group Limited (formerly Pacific Retail Group Limited). The Government has adopted the voluntary administration model adopted by Australia in 1992 (with minor changes) as a more user friendly business rehabilitation regime. Under the voluntary administration regime, the administration of a company begins when an administrator is appointed. This is usually by board resolution, but it can be made by a liquidator or a chargeholder.
The appointment of an administrator has three main consequences. First, it vests control of the company's business in the administrator. Secondly, it triggers obligations on the administrator to hold creditors' meetings to try to seek a consensus on the future of the company. Thirdly, it imposes a stay on certain creditor actions.
While a company remains 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.
A further key advantage, which is not enjoyed by a secured creditor who appoints a receiver, is the owner or lessor of property occupied or used by the company 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 the company's liabilities by a director or their spouse or relative. These general prohibitions do not apply to a chargeholder with a charge over all of the company's property who begins enforcing the charge within 10 days after notice of the administration.
Any creditor who does not hold security in relation to a company in administration will need to understand that the administration process may compromise their position. Most significantly, if a deed of company arrangement is approved by the requisite creditors (a majority in number and 75% by value of those voting), it will bind all creditors. A further example is if a company in administration borrows money, the liability for repayment of that debt has priority over the company's existing unsecured creditors.
Many contracts contain clauses which make it a default event allowing for termination by the other party if a company goes into receivership or liquidation. These clauses will often not extend to the appointment of an administrator. Contractors will need to check their standard form documentation to ensure that, if their borrower/counterparty is put into administration, an event of default arises.
Lenders that 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". There is an obligation on a voluntary administrator to notify chargeholders with a charge over the company's property that the company has been placed into administration not later than the next working day after his or her appointment. Secured lenders will need to ensure that appropriate internal systems are in place to ensure any notice received is promptly directed to the appropriate person or department so that a decision whether to enforce any security held can be made.
Lenders that typically take security over only certain assets of their borrower/counterparty will need to appreciate they are at a relative disadvantage to "all present and after acquired assets" secured creditors. In order to protect their interests, financial institutions and others may require borrowers and other counterparties to provide them with more extensive security than would otherwise have been sought. For example, a creditor who lends funds to purchase an asset will need to consider whether its interests are sufficiently protected if it simply takes a charge over the asset purchased. It may instead be appropriate to insist on a charge over all of the borrower’s assets. For those who do not obtain more extensive security, given the stay on their rights during administration, the Act encourages enforcement action to be taken earlier than might otherwise be the case.
The effectiveness of the voluntary administration regime will depend to a large extent on how well it is understood by the business community and lenders. It has the potential to produce positive results for all.
