Voluntary administration (VA) / Deed of company arrangement (DoCA)

Objective of voluntary administration

The primary objective of a VA is to maximise the chances of a company (or as much as possible of its business), being able to continue to trade. If that is not possible, the secondary objective of a VA is to achieve a better return for the company's creditors than would likely be achieved if the company had been immediately wound up.¹

Voluntary administration procedures

The VA procedure:

• facilitates the appointment of an independent administrator (who has consented to act as such and is a registered liquidator) to take control of the company and its business²
• provides for the administrator to run that business;³ and
• requires the administrator to assess the three options available for the future conduct of the company's business; namely:

• deed of company arrangement (DoCA);

• liquidation;

• return of control of the company to its directors; and

and to recommend to the company's creditors which of these options is best suited to their interests.⁴

The typical timeline for the conduct of a voluntary administration is as follows:

Appointment of voluntary administrator

A voluntary administrator may be appointed by:

• a resolution of the directors of the company who must also resolve that, in their opinion, the company is either insolvent or likely to become insolvent at some future time;^{5 or}
• a secured creditor with a charge over the whole or substantially the whole of the company's property provided that the charge is enforceable;⁶ or
• a liquidator;⁷

In the case of a secured creditor, the option of appointing a voluntary administrator provides an alternative means to receivership to enforce its security. It is valuable when, for example the secured creditor in order to recover its debt, assesses that it needs to sell the business of the company as a going concern and requires the protections conferred by the VA procedure to preserve the business until the sale is completed.

If liquidators identify the possibility of restructuring a company's business and maintaining it as a going concern, they can invoke the VA procedure to enable that possibility to be further assessed and for it to be considered by the company's creditors. In this context, liquidators have the power to continue to conduct the business of a company for only so long as is necessary for either its beneficial disposal or its winding-up.⁸

Powers of voluntary administrators

The administrator has plenary power to run the company's business to the exclusion of its directors.⁹   In the ordinary course it would not be expected that the administrator would sell the business or the company's assets other than as part of its usual trading activity. However, if a sale proves necessary, e.g. to protect the value of that business, the administrator can sell it.¹⁰

The administrator can sell assets, such as stock-in-trade, which are subject to security interests provided that the sale is in the ordinary course of the company's business¹¹. Otherwise, such property may only be sold either with the secured creditor's written consent or the leave of the court. ¹² The ability to seek leave of the court can be particularly useful where a secured creditor is under-secured, i.e. that the amount of its claim is greater than the value of its security, but it is demanding repayment of its debt in full as a condition of releasing its security. The administrator is also entitled to recover the costs of maintaining and selling assets which are subject to a security from the proceeds of sale.

Liability of voluntary administrators

Administrators are personally liable for the debts they incur during the course of an administration on account of, among other things, conducting the company's business.¹³ The policy underpinning the imposition of that liability is that it will cause administrators to give early attention to the viability of continuing the operation of the company's business.

The court has been prepared to excuse administrators from that liability where, prior to incurring the debt, the prospective creditor was informed that the administrator would not have personal liability for the debt and that it would have to rely on the assets of the company for the recovery of its claim, albeit that claim would enjoy priority over the other costs and expenses of the administration.¹⁴

The personal liability of administrators includes liability on account of borrowings made in the course of the administration as well as interest on those borrowings. While there is no "debtor-in-possession" financing in Australia, any borrowing by the administrator enjoys priority for repayment as a cost and expense of the administration. Moreover, the repayment is supported by both the right which administrators have to be indemnified out of the assets of the company and the lien which they have over those assets (see below).

Administrators can also be personally liable for the rent accruing under pre-administration leases. That liability is limited to the period commencing five business days after the administration began and during which, in the course of the administration, the company continued to use the property.¹⁵ However, the administrators may be relieved of that liability if, within that five business day period, they give notice to the owner of the property that the company does not propose to use it.¹⁶ The court may also exercise its power to excuse administrators from personal liability in respect of the use of the property beyond the five business day period.¹⁷

The administrator is entitled to be indemnified out of the property of the company for debts and liabilities incurred in the course of the administration.¹⁸   That right of indemnity is secured by a lien over the assets of the company.¹⁹ That lien enjoys priority in respect of any assets which are not subject to security. Additionally, it enjoys priority in respect of property that is the subject of either a floating charge or a circulating security interest, but only:

(a) if the security was not enforced before the administrator was appointed; and

(b) in respect of debts incurred before the administrator was notified by the secured creditor of the enforcement action.²⁰

In the ordinary course, such a lien will not have priority over assets that are subject to a secured creditor's non-circulating or fixed charge.

Effect of voluntary administration on creditors

During the course of a VA and pending the decision of its creditors about which of the available options they wish to approve for its future conduct (being a DoCA, liquidation or return of control of the company to its directors), there is a moratorium on claims against the company. That moratorium applies not only to unsecured creditors such as trade creditors or the supplier of services but also to both the secured creditors and the lessors of property to the company. However, the restrictions imposed by the moratorium can be varied or lifted either with the voluntary administrator’s consent or the leave of the court.²¹

There are two key exceptions to the moratorium:

• a secured creditor with an enforceable charge over the whole or substantially the whole of the company's property may elect to enforce that charge within 13 business days of the day on which that creditor receives notice of the administrator's appointment²²; or
• in the circumstance that either a secured creditor or a lessor of property to the company has commenced enforcement action in respect of its security or lease before the administrator is appointed, though the court can restrain them from continuing with their enforcement action, provided that it is satisfied that the administrator has proposed arrangements which protect their interests.²³

Secured creditors

As noted above, a secured creditor with a charge over the whole or substantially the whole of the company's property can elect to enforce its security within 13 business days of receiving notice of the administrator's appointment.²⁴   This is an exception to the moratorium on creditors pursuing their claims after the commencement of a VA. It has the unusual consequence that there can be two concurrent external administrations of the company; a VA and, if the secured creditor adopts the relevant enforcement option, a receivership. In such circumstance, and subject to the terms of the receiver's appointment, that appointment takes priority, in terms of control of the company's assets, over the VA^25.

Employees and contracts

The appointment of a voluntary administrator does not terminate contracts of employment or other contracts which the company has entered into.

In the case of employees, it will be a matter for the voluntary administrator to determine whether to continue any employment contract, having regard to the requirements of the administration, including the continued operation of the company's business.

So far as directors of the company are concerned, the voluntary administrator may remove them from office and appoint other people, either instead of the existing directors or in addition to them.²⁶

As to the company's contracts more generally, the voluntary administrator can decide whether to adopt them (and thereby incur personal liability in respect of their continuing operation) or repudiate them. In the latter case, the counterparty will have a claim in damages only, unless the contract can be specifically enforced or there is some other equitable remedy.

Effect of voluntary administration outside Australia

Where the company has conducted its business outside Australia and, in particular, has assets or business interests in another jurisdiction, it will be necessary to apply to the relevant court or courts to obtain orders for the recognition of the VA and its effect in that jurisdiction.

Effect of voluntary administration on members

Given that, at least most often, a voluntary administrator will be appointed only to a company which is insolvent, its shareholders will have no economic interest in the company. The consequence is that shareholders may not exercise any influence on the conduct of the administration. In particular, their approval is not required for a sale of the assets of the company by reason of the provisions of either the ASX Listing Rules (where relevant) or the company's constitution.

Deeds of company arrangement

DoCAs are one of three possible outcomes of the VA procedure.

A DoCA, most often, will provide the terms upon which the creditors of a company (but usually only its unsecured creditors) agree to compromise their claims against the company. As such, it will usually involve a financial restructure of a company's affairs. However, it may also provide for or facilitate an operational restructure of the company. So, it might merely provide for a continuation of the moratorium on proceeding with claims against the company, thereby providing it with time to reorganise its business.

It can also provide for discriminatory treatment of creditors with the result that creditors with which the company wishes to continue to trade will be given more favourable treatment than other creditors. For creditors who are to receive less favourable treatment, since the alternative to a DoCA will typically be the liquidation of the company, they must receive no less favourable treatment than they could have expected to receive if the company had been wound up.

In short, the range of commercial proposals which can be embodied in a DoCA is extremely wide and that range is limited only by the constraints that the relevant proposal cannot be oppressive, unfairly prejudicial or unfairly discriminatory against one or more of the company's creditors; or be contrary to the interests of the its creditors as a whole.

Voting on DoCAs

For a DoCA to be approved and if a poll is demanded, it must be agreed by a majority in number representing a majority in value of the creditors attending and voting at the meeting held to consider the proposed DoCA.²⁷

In the event of a “deadlock” (eg there is a majority in number of creditors supporting the proposal, but it is opposed by a majority in value of the creditors), the voluntary administrator has a casting vote which may be used to break the deadlock.²⁸ There are no strict rules which guide the exercise of that vote. Rather, administrators must vote having regard to their own assessment of the best interests of creditors.

Unlike schemes of arrangement, there is no express limitation on those shareholders with claims as creditors arising from a breach by the company of its continuous disclosure obligations (“shareholder creditors”) voting on a proposal for a DoCA. Nor is there a provision for the subordination of their claims when proving under a DoCA (see the discussion in relation to the corresponding circumstance for schemes of arrangement).

However, the voluntary administrator of a company has been relieved of the administrative burden of notifying those creditors on an individual basis of the meetings to be held during the course of the VA. Moreover, s 600H of the Corporations Act 2001 (Cth)(CA) has been construed as applying to VAs. Accordingly, shareholder creditors may vote on the proposal for a DoCA only if the court so orders.²⁹   It can be expected that, if shareholder creditors receive no dividend on the liquidation of the company, and the DoCA provides both that they receive no dividend and that their claims against the company be extinguished, then the court will not grant them leave to vote. To do otherwise may put them in position to veto the DoCA, notwithstanding they have no economic interest in the company.

Powers of administrator of a DoCA

The powers of a DoCA administrator, for the most part, will be stipulated by the deed. One important power which is conferred by the CA is the power of the administrator of the DoCA to sell the shares of the company's members either with their consent or the leave of the court if consent is not provided.³⁰   Additionally, if the proponent of a DoCA wants certainty that the company's shares will be transferred to it in the event that the DoCA is agreed, the court can approve the voluntary administrator's agreement to the sale of those shares subject to the DoCA being agreed.³¹   Furthermore, if the company is insolvent, with the result that the shareholders have no economic or commercial interest in the shares, they may be transferred without consideration. Where there is value to be gained from keeping the corporate structure, this could be a particular advantage to be gained from using the VA/DoCA procedure.

Effect of DoCA

Generally, a DoCA will bind its administrator and:

• the company;³²
• its directors and other officers;
• its shareholders; and
• its unsecured creditors.³³

In the case of unsecured creditors, the DoCA can bind those who enjoy preferential entitlement, such as employees. However, those preferential entitlements are required to be preserved by the DoCA.³⁴ For other categories of creditors who would be entitled to preferential treatment in the event of the company's liquidation, their only protection, in the event that the DoCA provided that they lose their preferential status, would be to apply to the court for the DoCA to be terminated on the basis that it was "unfairly prejudicial". That would require those creditors to prove that they will receive less under the DoCA than they would receive if they were able to prove their claims in the company's liquidation.

As to both secured creditors and creditors who are the owners or lessors of property which is in the possession of the company, they are bound by the DoCA only if they voted in favour of it.³⁵

However, the court, on the application of the DoCA's administrator, may restrain both secured creditors and lessors of property from exercising their rights provided that the court is satisfied that the interests of those creditors are adequately protected.³⁶

The identification of those interests involves an assessment of the interests of those creditors under their contracts with the company. This can be advantageous in the context of either a financial or an operational restructure of a company because the interests to be protected are those which exist under, e.g., the lease between the creditor and the company. So, let's take the example of a lease under which the rent is A$5,000 per month. The right that is to be protected is the right to receive that rent, even if the creditor could lease the premises to another tenant for A$10,000 per month. So, for so long as the court is satisfied that the company can discharge its obligations to pay A$5,000 per month, it can issue an order restraining the creditor from terminating the lease even if there has been a breach and notwithstanding the lessor could get a higher rent from another tenant.

Effect of DoCAs outside Australia

As with a VA, a DoCA will not have extraterritorial effect and, accordingly, will not shield the company’s assets or other business interests in jurisdictions outside Australia, unless court orders are obtained which have the effect of recognising the DoCA in those jurisdictions.

Advantages and disadvantages of VAs/DoCAs

The VA/DoCA option has a number of advantages:

(a) ease and cost of implementation;

(b) the VA automatically applies a general moratorium on actions and proceedings against the company and its property (subject to exceptions for certain secured creditors and property owners);

(c) DoCA restructuring is flexible and can achieve a wide variety of outcomes, such as debt-for-equity swaps, equity transfers, balance sheet restructuring;

(d) approval of the DoCA requires only a majority in number representing a majority in value of the creditors who vote and the administrator has a casting vote in the event of a “deadlock”;

(e) the DoCA can discriminate between creditors without the need for separate meetings, for so long as the discrimination is not “unfairly prejudicial” (in the sense that the relevant creditors would have received less than would be the case had the company beenliquidated);

(f) the DoCA can be varied by a resolution passed at a meeting of creditors; and

(g) the court can terminate a DoCA.

The disadvantages are:

(a) a DoCA cannot compromise or release claims against third parties, such as guarantors of the company’s liabilities, or against the company itself;

(b) a DoCA cannot bind a class of the company’s creditors such as, say, its lenders;

(c) a DoCA cannot bind either the secured creditors of a company or the owners and lessors of property in its possession for the purpose of accepting a compromise or arrangement of their claims; and

(d) if the company is a public listed company whose shareholders have claims as creditors because the company has breached its continuous disclosure obligations, those claims aren’t expressly subordinated to the claims of other creditors, though it has been held that s 600H of the CA applies to their claims with the result that they need the leave of the court to vote on a proposal for a DoCA .

A typical timeline of the DoCA implementation process is as follows: