Voluntary Administration

Voluntary Administration “VA” is new legislation introduced to New Zealand in 2007, aimed to assist help get businesses back on track, retaining jobs, rather than closing the business down for good. It is governed by Part 15A of the Companies Act 1993. A voluntary Administrator may be appointed to a company by the directors of the company, a liquidator of the company, a secured creditor holding a charge over the whole or substantially the whole of the company’s property, or the Court.

Section 4 of the Companies Act 1993 determines the “test” of a company’s solvency. That test has two limbs, (1) can the company pay its debts as they fall due; and (2) has your company more debt than the combined value of all its assets. If either is the worst case, your company is technically insolvent and you need to seek professional advice immediately.

The objectives of voluntary administration are to maximise the chances of the company or its business continuing in existence or, if that is not possible, for the company or its business to be administered with a better return to creditors and shareholder’s than from immediate liquidation.

The VA regime specifically suits businesses which may otherwise be viable, apart from some identifiable past trading problem or event having occurred, being that it is or was trading profitably, but due to the amassed level of debt, makes the company insolvent.  Generally a company most suitable for the VA regime has a profitable “core” business.

In some cases, businesses with a future “potential” that is yet to be reached or realised, may also gain the support of creditors. However, the essence of a VA proposal is for unsecured creditors to be persuaded to write off a portion of their debt so the company can trade on. Generally the success of continuing to trade on is entirely dependent on the availability of the necessary cash flow to meet monthly fixed costs (rent, power, wages etc) with any remaining profit being set aside for distribution to creditors.

The effect of VA is to place the troubled company in the hands of an Administrator who has very similar powers to that of a Liquidator, except that an Administrator attempts to save the company. When a company enters voluntary administration, legal action against the company is suspended for the duration of the VA unless agreed to by the Administrator, or permitted by the Court.

Personal guarantees given on behalf of the company by its shareholders or director’s, cannot be pursued or enforced by creditors during the period that the company is in administration.

From the date of administration, the debts of the company are effectively “frozen”. The Administrator may continue to trade the business, although the risk for the Administrator is that he or she may be personally liable for most of the company’s costs and expenses during the period of administration. The Administrator’s main focus is on investigating the company’s affairs and determining what is in the best course of action in the interests of the creditors and the company, and establishing a Deed of Company Arrangement (DOCA) that proposes how the company will continue to trade, and how the creditors will be repaid. The DOCA must be agreed to by the creditors (75% by value and 50% by number for each class of creditor) and by special resolution of the company directors / shareholders. If agreement cannot be reached over the terms of the proposal, and without any other alternatives, the company must go into liquidation.

There are Five Stages of a Voluntary Administration

  1. Appointment of an administrator:
    The company completes a special resolution appointing the Administrator, although it is also possible by a Court or creditor in rare cases.
  2. First Creditors Meeting:
    A meeting is called within 8 working days after the appointment of the Administrator, to confirm or change the appointed Administrator.
  3. Administration begins:
    The Administrator takes control of the business with the purpose of identifying the issues of the business, and may continue to trade the business.
  4. Watershed Creditors Meeting:
    Within 25 days from the appointment of the Administrator, the Administrator must prepare and present to a second creditors meeting for acceptance, a Deed of Company Agreement “DOCA” on how the company will continue to trade, and how the creditors will be repaid. If not, or the DOCA  is not passed, the Administrator’s only course is to recommend the liquidation of the company.
  5. Deed of Company Agreement – Or Liquidation?
    The company shareholders have 15 days to consent to the DOCA, and upon consent the company moves from being in Voluntary Administration to being administered by the DOCA. The DOCA is administered by the Deed Administrator – normally the Voluntary Administrator, and the DOCA expires at a set time or once events specified in the Deed are achieved, i.e., once the creditors are paid or after a specific time frame etc.

However, the VA regime has not to date been that successful in New Zealand. A significant difficulty is that a company seeking the VA regime must gain the support of secured creditors, and particularly the IRD.