Voluntary Administrations (“VAs”) offer a unique opportunity to rehabilitate company directors who may not be financially savvy or comprehend the intricate knowledge needed to manage their businesses. This opportunity to add value should not be viewed as the scarlet letter of the business world. The number of actively trading businesses, which have increased to 2,121,235 in June 2015 from June 2014, may become undone not of their own volition but of circumstance – including but not limited to under capitalisation, poor management of accounts receivables, industry restructuring or increased competition.
Whether your business is Arrium Limited or Mr Smith, an Aussie battler trading Smith Pty Ltd from the suburbs of Sydney, the opportunities afforded under a VA far outweighs an immediate liquidation. With the right tools and experience, a specialised insolvency accountant can rehabilitate the Company under a Deed of Company Arrangement (“DOCA”) of which can turnaround businesses with the ideals of getting the Company back on its feet.
But why a VA or a DOCA?
Under a VA, proceedings relating to the Company, including creditor claims against guarantors, are stayed pursuant to Sections 440D and 440J of the Corporations Act 2001 (“the Act”) except with the consent of the Administrators or leave of the Court. 443A of the Act also stipulates that unsecured claims are frozen as at date of appointment. This in effect allows the Administrator and the Director breathing space to come up with a strategy that may well be the much needed curat for the Company.
Subsequent to a VA, if a Director puts forward a DOCA that is passed by creditors at the meeting pursuant to 439A of the Act – it allows for a binding arrangement between a Company and its creditors governing how the Company’s affairs will be dealt with. Once executed, the agreements made specific under the DOCA will also bind the company, its officers, members and the deed administrators. As per 444D of the Act this includes claims against the Company arising on or before the day specified in the DOCA. Ideally, this is an opportunity to restructure and trade out the financial difficulties originally faced and provide directors the powers of hindsight in their renewed endeavours. It is also noteworthy that any claims the voluntary administered companies had with debtors may very well remain intact as the entity is a going concern and not immediately liquidated allowing for any action to remain afoot.
Below are case studies that reinforce this value add benefit of VAs and DOCAs:
- XYZ Pty Ltd was issued with a statement of claim by a creditor and faced difficulties in realising accounts receivables with a substantial debtor. Creditor claims were advised to be $378,896 of which $14,430 was with respect to superannuation. By entering a Voluntary Administration and executing a subsequent DOCA, debts owing to the Company amounting to $120,488 remain realisable and employee superannuation is provided for as opposed to an immediate liquidation. Moreover, the director was not marred by the brush of being an officer of a liquidated company and is wiser from this experience.
- The Australian Taxation Office filed an application to wind up ABC Pty Ltd for failure to pay tax debts. The Company’s previous external accountant misappropriated funds and the unknown tax debt was not discovered until a new accountant was engaged. In light of this, the Director immediately sought assistance to remedy the situation. A license agreement was entered to serve government contracts and minimise operational costs. Further, a creditor’s trust was put forward such that the Company would no longer be in a potential breach of a covenant in its contractual arrangement (that being in external administration) with the client who had reserved their right to terminate. A fruitful outcome was had where it is expected that employee creditors will be paid in full and unsecured creditors will receive a 9.72c/$ dividend of which is better than an immediate wind up.