Creditors - Voluntary administration
Voluntary administration is an insolvency procedure where the directors of a financially troubled company or a secured creditor with a charge over most of the company’s assets appoint an external administrator called a ‘voluntary administrator’.
The role of the voluntary administrator is to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.
A voluntary administrator is usually appointed by a company’s directors, after they decide that the company is insolvent or likely to become insolvent. Less commonly, a voluntary administrator may be appointed by a liquidator, provisional liquidator, or a secured creditor.
*Unless the court allows an extension of time.
The effect of the appointment of a voluntary administrator is to provide the company with ‘breathing space’ while the company’s future is resolved. While the company is in voluntary administration:
- unsecured creditors can’t begin, continue or enforce their claims against the company without the administrator’s consent or the court’s permission
- owners of property (other than perishable property) used or occupied by the company, or people who lease such property to the company, can’t recover their property
- except in limited circumstances, secured creditors can’t enforce their charge over company property
- a court application to put the company in liquidation can’t be commenced, and
- a creditor holding a personal guarantee from the company’s director or other person can’t act under the personal guarantee without the court’s consent.
Any debts that arise from the voluntary administrator purchasing goods or services, or hiring, leasing, using or occupying property, are paid from the available assets as costs of the voluntary administration. If there are insufficient funds available from asset realisations to pay these costs, the voluntary administrator is personally liable for the shortfall. To have the benefit of this protection, you should ensure you receive a purchase order authorised in the manner advised by the voluntary administrator.
The voluntary administrator must also decide whether to continue to use or occupy property owned by another party that is held or occupied by the company at the time of their appointment.
Within five business days after their appointment, the voluntary administrator must notify the owner of property whether they intend to continue to occupy or use the property. If the voluntary administrator decides to continue to do so, they will be personally liable for any rent or amounts payable arising after the end of the five business days.
Amounts that become due to employees after the date of the appointment of the voluntary administrator have a priority claim against the company’s assets as a cost of the administration. However, the voluntary administrator does not become personally liable for such amounts unless the voluntary administrator adopts employees’ contracts of employment or enters into new employment contracts with them.
Two meetings of creditors must be held during the voluntary administration:
First creditors’ meeting
The voluntary administrator must call the first creditors’ meeting within eight business days after the voluntary administration begins.
The purpose of the first meeting is for creditors to decide two questions:
- whether they want to form a committee of creditors, and, if so, who will be on the committee, and
- whether they want the existing voluntary administrator to be removed and replaced by a voluntary administrator of their choice.
A creditor who wishes to nominate an alternative voluntary administrator must approach a registered liquidator before the meeting and get a written consent from that person that they would be prepared to act as voluntary administrator. The voluntary administrator will only be replaced if the resolution to replace them is passed by the creditors at the meeting.
To be eligible to vote at this meeting, you must lodge details of your debt or claim with the voluntary administrator.
Second creditors’ meeting (to decide the company’s future)
After investigating the affairs of the company and forming an opinion on each of the three options available to creditors, including an opinion as to which option is in the best interests of creditors, the administrator must call a second creditors’ meeting. At this meeting, creditors are given the opportunity to decide the company’s future.
This meeting is usually held about five weeks after the company goes into voluntary administration (six weeks at Christmas and Easter).
In preparation for the second meeting, the voluntary administrator must send creditors the following documents at least five business days before the meeting:
- a notice of meeting
- the voluntary administrator’s report, and
- a statement about any proposals for a deed of company arrangement.
These will be accompanied by:
- a claim form (usually a ‘proof of debt’ form), and
- a proxy voting form.
Creditors can make a claim in a voluntary administration by completing a form called a ‘proof of debt’. This is usually done to notify the voluntary administrator of your claim and enable you to vote at creditors' meetings. You can obtain a proof of debt from the voluntary administrator. You should attach copies of any relevant invoices or other supporting documents to the claim form.
Creditors will not receive payment of their outstanding claim during a voluntary administration. If there are sufficient funds available for unsecured creditors, dividends to creditors will generally be paid during either a deed of company arrangement or a liquidation, depending on the decision reached at the second creditors' meeting about the company's future. For more information, see ‘How will I get paid in a DOCA?’ and ‘How will I get paid in a liquidation?’
The voluntary administrator will notify you of the voluntary administration and the first meeting of creditors within days of the appointment.
The voluntary administrator then investigates and reports to creditors on the company’s business, property, affairs and financial circumstances, and on the three options available to creditors. These are:
- end the voluntary administration and return the company to the directors’ control
- approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or
- wind up the company and appoint a liquidator.
The voluntary administrator must give an opinion on each option and recommend which option is in the best interests of creditors.
To vote at any creditors’ meeting, you must lodge details of your debt or claim with the voluntary administrator. Usually, the voluntary administrator will provide you with a form called a ‘proof of debt’ to be completed and returned before the meeting.
You may appoint a proxy to attend and vote at a meeting on your behalf.
You can specify on the proxy form how the proxy is to vote on a particular resolution and the proxy must vote in accordance with that instruction. This is called a ‘special proxy’. Alternatively, you can leave it to the proxy to decide how to vote on each of the resolutions put before the meeting. This is called a ‘general proxy’.
You can appoint the chairperson to represent you either through a special or general proxy.
How you vote at the second creditors' meeting on the three possible options, including any competing proposals for a deed of company arrangement, is a commercial decision based on your assessment of the company and its future prospects, and your personal circumstances. The information provided by the voluntary administrator, including opinions expressed, will assist you. However, you are not obliged to accept the administrator’s recommendation.
If you do not consider that you have been given enough information to decide how to vote, and particularly whether to vote for any deed proposal, you can ask for a resolution to be put to creditors that the meeting be adjourned (up to a maximum of 45 business days in total) and for the administrator to provide more information. You must make this request before a vote on the company’s future. This resolution must be passed for the adjournment to take place.
Creditors also have the right when a deed of company arrangement is proposed and considered at the meeting to negotiate specific requirements into the terms of the deed, including, for example, how the deed administrator is to report to them on the progress of the deed.
The chairperson must prepare minutes of each meeting and a record of those who were present at each meeting.
The minutes must be lodged with ASIC within 14 days of the meeting. A copy may be obtained from any ASIC Business Centre on payment of the relevant fee.
A creditors' committee may be formed, following a vote of creditors, to consult with the voluntary administrator or deed administrator and receive reports on the conduct of their administration. A creditors’ committee can also approve the administrator’s fees.
In a voluntary administration, this committee is called a ‘committee of creditors’ and may be formed at the first creditors’ meeting. While the company is under a deed of company arrangement, it is called a ‘committee of inspection’.
All creditors, including a representative of the company’s employees, are entitled to stand for committee membership to represent the interests of all creditors. However, to operate efficiently, the committee should not be too large.
If a creditor is a company, the creditor can nominate a director or employee to represent it on the committee.