Corporate Administration
Businesses today operate in an increasingly dynamic and competitive
environment. Slowing growth patterns, increased competition and
an uncertain economic outlook all present threats to performance
and viability.
A company can face unexpected cash flow problems, even if it is
trading profitably. Often it can trade out of temporary cash flow
problems without external assistance. However, if this cannot be
achieved, voluntary administration provides a framework for a company
and its creditors to negotiate a compromise, whilst protecting the
key stakeholders.
A Voluntary Administration is an invaluable tool available to companies
facing financial stress. At times, it will be the only avenue available
to a company to address its short term financial problems and return
it to a position of financial strength.
Symptoms of insolvency
The presence of any of the following may flag solvency problems
that need to be addressed through voluntary administration:
- Ongoing losses;
- Bouncing cheques;
- Exceeding overdraft limits;
- COD terms from suppliers;
- Debt recovery action;
- Asset sales to fund trading;
- Falling stock levels;
- High staff turnover; or
- Postponement of essential maintenance to save money.
Protecting stakeholders
Voluntary administration addresses the critical needs of stakeholders
in three important ways:
1. It removes creditor pressure from the business, allowing a focus
on trading, rather than juggling the competing demands of creditors.
2. Assets and operations are protected by placing them under the
supervision of an independent person, the administrator.
3. It provides a statutory framework for negotiation with creditors,
assisted by the preparation of a report by the administrator.
Critically, a compromise can be put in place if agreed to by a
majority of creditors – it can not be unreasonably blocked
by a minority.
Initiating administration
Voluntary administration can be quickly and inexpensively implemented
by a resolution of directors. Secured lenders may also appoint an
administrator, but this occurs infrequently in practice.
The diagram below sets out an overview of the process of voluntary
administration.
Immediate protection
Voluntary administration is designed to keep a business together
until the administrator has had the opportunity to assess the position
and prepare a report.
To assist the process, recovery action by creditors is frozen.
Except with permission of the court or the administrator:
- Leased and hired equipment cannot be repossessed;
- Reservation of title stock cannot be removed;
- Contracts such as franchise agreements can not be terminated;
- The business can not be forced to vacate leasehold premises;
- Secured lenders cannot enforce their security except in limited
circumstances.
Deeds of Company Arrangement
A proposal for a Deed of Company Arrangement (DOCA) can be put to creditors by the Voluntary Administrator. The Voluntary Administrator must recommend whether the DOCA is in the best interests of creditors. The test for any DOCA proposal is whether creditors will receive a higher dividend under the proposed DOCA compared to liquidation. Creditors must first approve the proposal for a DOCA at the second meeting of creditors (which is at the end of the Voluntary Administration process). If the DOCA is approved by at least 50% of the creditors, it then becomes legally binding on all unsecured creditors once executed by the company and the Deed Administrator (who will then administer the DOCA). A DOCA proposal can be extremely flexible. A few examples of a DOCA proposal may be as follows:
- An immediate one off payment (usually a third party contribution made by a director or shareholder) to creditors in full and final settlement of their claims.
- An immediate payment to creditors (usually a third party contribution made by a director or shareholder) with the possibility of a further payment to be made from the proceeds of litigation or through the realisation of assets.
- A series of payments to be made from the profits of ongoing trading for a specified period, conducted under the supervision of the deed administrator.
*Please remember all proposals for a DOCA must put creditors in a better position than if the company was simply liquidated.
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