Demystifying the Administration Process

In this second instalment of the Demystifying Insolvency series, we focus on the company Administration process, which to many can seem confusing given the required steps in the process that are dictated by statute.

From 1 January 2021, a new regime will be in place that differentiates between ‘small businesses’ with debts below $1 million, and other businesses with debts above that level. Businesses that fall into the ‘small business’ category will have different options to restructure and liquidate, which we cover in our article Demystifying Small Business Insolvency.

Voluntary Administration is a process regulated by the Corporations Act 2001 (Cth) (Act), that can be utilised by directors where they believe a company is insolvent or likely to become insolvent as a result of an imminent event. The process provides a regime for an Administrator to take control of a company’s business, property and affairs to ensure that:

(a) the prospect of the continued operation of the business is maximised; and

(b) if at all possible a better return for stakeholders is achieved than if the company was immediately placed into liquidation.

Often when directors of a company are considering the merit of a Voluntary Administration, they will also consider whether the ‘safe harbour’ provisions of the Act may provide a preferable process for managing the financial position of the company. We do not intend to cover the considerations relevant to ‘safe harbour’ in this bulletin, but you can see commentary we have published on this topic here.

In this bulletin, we discuss the fundamental considerations in respect of the various stages of the Voluntary Administration process.

The Appointment

A company may be placed into Voluntary Administration if it is determined that the company is insolvent or is likely to become insolvent some time in the future. Generally, there are three classes of people who would seek to place a company into Administration, being:

  1. The directors;

  2. A creditor; or

  3. A liquidator.

Whilst a Liquidator may appoint an Administrator to the company, they can only appoint themselves (pursuant to section 436B(2)(f) of the Act) if:

(a) the creditors pass a resolution approving their appointment as Administrator; or

(b) the appointment is made with leave of the Court.

A key consideration for directors when determining whether to place a company into Administration is funding. If there is funding available within the company then this can be set aside for the Administrator’s costs. If not, then directors will generally need to be prepared to provide an agreed amount of funding to the Administrator so that the process can be implemented. In either case, the Administrator will generally require an indemnity from the directors in respect of their personal exposure for the Administration.

The First Meeting

The Administrator must convene two meetings of creditors. The Administrator must convene the first meeting of creditors within eight business days of their appointment. The purpose of the first meeting is to consider:

(a) whether or not to appoint a committee of creditors; and

(b) whether there is any motion to replace the Administrator.

The Report

Prior to the second meeting, the Administrator is required to prepare a comprehensive report to creditors (pursuant to subsection 439A(4) of the Act). This report, commonly called the “439A Report”, must contain the following:

(a) the results of the Administrator’s investigation into the business, property, affairs and financial circumstances of the company;

(b) the Administrator’s opinions, and reasons, on each of the alternative options available to be voted on;

(c) any other information that will enable creditors to make an informed decision in relation to the alternative options available to be voted on; and

(d) a statement setting out the details of any Deed of Company Arrangement (DOCA) that may have been put forward by the directors.

The DOCA Proposal

A DOCA is a binding agreement between the company and the creditors which allows the company to continue trading under specific terms in order to pay the company’s creditors, as opposed to being placed into liquidation. 

The DOCA will generally specify how the company’s affairs and assets are to be dealt with so that the business (or as much of it as possible) can be operational again. Therefore, entering into a DOCA is one of the best chances creditors have for recovery on their debts.

The DOCA proposal should include, at the minimum, the following information:

  1. Who the administrator is and what their role and powers are;

  2. The property of the Company and external funding (generally provided by owner directors) that is offered to pay the creditors some portion of their debts;

  3. The duration of the DOCA period and the moratorium period;

  4. To what extent the company will be released from its debts;

  5. The conditions under which the DOCA will come into effect and continue to remain in effect;

  6. The circumstances under which the DOCA terminates; and

  7. The cut-off date for creditors to make their claims, noting that this is usually no later than the day the Administration began, meaning any debts claimed after this date won’t be considered.

The Second Meeting

The second meeting is much more important than the first and is where the outcome of the Administration is determined by the creditors.

The second meeting must be convened within five business days before or after the end of the convening period. The convening period is usually twenty business days beginning on the day after the Administration began.

The administrator is required to attach a copy of the 439A Report to the notice for the second meeting.

In addition to the Report, the Administrator will provide the creditors with his or her opinion and recommendations in relation to the following:

(a) the estimated return to creditors if the company is placed into liquidation;

(b) any voidable transactions which may be recoverable;

(c) any DOCA proposals that have been received, including sufficient details to enable the creditors to understand the entire proposal. This should include:

(i) the estimated return to creditors;

(ii) the likely timing of any returns to creditors;

(iii) the identity of the deed administrator;

(iv) the likely remuneration payable to the deed administrator; and

(v) any relevant monitoring and reporting arrangements.

After the Administrator has provided the above information along with notice of the second meeting, the creditors will be required to vote on the future of the company. There are only three options available being:

  1. the company executes a DOCA; or

  2. the Administration should come to an end and the company be returned to the directors; or

  3. the Company be placed into liquidation.

A resolution of the creditors passes only when:

(a) At least half the creditors have voted for a resolution; and

(b) The creditors whose debts makes up at least half of the total debts of the company support that resolution. (See our article Insolvency Meetings - Casting a Shadow Over Voting Rights)

Administering the DOCA

If the creditors vote to enter into a DOCA, then they must also pass a resolution specifying the terms of the DOCA. These terms can be in addition to the terms proposed in the Second Meeting.

Importantly, the terms of the DOCA will bind all creditors, including unsecured creditors who may have voted against the entry into the DOCA.

Usually, the Administrator will be the deed administrator for the DOCA, unless the creditors choose to appoint someone else. Once the terms of the DOCA and the identity of the deed administrator are clear, the deed administrator will then prepare the instrument containing all the terms of the DOCA agreed to in the resolution.

The company must sign the instrument within fifteen business days of the Second Meeting, unless an extension is sought and granted by the Court. The ­ administrator must also execute the instrument as soon as practicable. Failure of these things to occur may result in the company being placed into liquidation, with the Administrator becoming the liquidator.

Once the company complies with its obligations under the DOCA, it will then be released from the debts proved in the Administration.  At this point, the deed administrator will cease monitoring the performance of the DOCA and the company will be handed back to the directors to continue to trade subject to all the usual rules and obligations that apply to companies in Australia.

Author: Nabil Mustafiz, Gavin Stuart & Adam Cutri

See also: Demystifying Insolvency: what you need to know