Voluntary Administration and Deeds of Company Arrangement

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Who would be interested in these types of mechanism?

This is a formal procedure for insolvent companies under the Corporations Act whose directors want to save the company or the business or both.

This procedure is also for directors who are keen to avoid breaching the insolvent trading provisions of the Corporations Act.

What is meant by being insolvent?

Nearly every business at some time or another will experience some form of cashflow problem, and be unable to pay its debts as and when they fall due or in other words it will be insolvent. The first signs of insolvency may be :-

  1. Creditors constantly harassing for payments
  2. Suppliers placing you on COD terms
  3. Creditors issuing you with court proceedings
  4. Ongoing losses
  5. Bouncing cheques
  6. Exceeding your overdraft limit
  7. Falling stock levels
  8. Visits from the sheriff
  9. Being unable to pay any debt due to the Australian Taxation Office
  10. Being served with a Form 509H, Creditors Demand
  11. Commencement of winding up proceedings against the company
  12. Not being able to stay up to date with payments of superannuation
  13. Being issued with a Section 222AOE or 222AOB Notices to Directors by the Australian Taxation Office making them personally liable.

What Voluntary Administration can do for you?

Before embarking upon a detailed discussion of how Voluntary Administration and Deeds of Company Arrangement works you should know how it can help you.

  1. It will prevent exposure of the directors personal assets. This occurs as the appointment of a Voluntary Administrator immediately stops the directors incurring any further credit in the name of the company thereby removing the personal liability exposure for breaching the Insolvent Trading provisions of the Corporations Act. The insolvent trading provisions puts on them a strong obligation to make sure a company does not continue to incur credit if the company finds itself in an insolvent position. These provisions are found at Section 588G of the Corporations Act. If they are found to breach the provisions there is the risk of the directors exposing their personal assets. The Australian Securities and Investments Commission has also shown it is determined to make sure that directors breaching these provisions receive criminal prosecution.
  2. There is an immediate statutory moratorium where nobody but a creditor holding a charge over all or substantially all of the assets can take any action against the company.
  3. Where credibility and trust have gone the VA process puts a third party (the Voluntary Administrator) in control of the operations, which provides a chance of restoring some credibility for the company.
  4. Where the company no longer has any credit, under a VA the Voluntary Administrator is personally liable for all debts incurred which more often than not frees up supplies.
  5. The moratorium period whilst short gives an opportunity for directors of the company to consider their options and where appropriate put up a deal for the consideration of creditors as to sorting out the company’s position.
  6. Generally unless there is a hidden agenda any deal put up with a good likelihood of success and is better than what would be the likely outcome on liquidation for creditors it is more than likely to be accepted. When the creditors vote on the proposal it is decided on a majority in number representing a majority in value of creditors attending and voting at the meeting. This means that if the vote is successful it also binds those creditors who may not like the proposal or did not attend.

What exactly is Voluntary Administration?

Voluntary Administration is designed to enable an independent party, “the Administrator”, the opportunity to assess the position of the company and the opportunity to continue to trade the business in an effort to maximise the best possible return to creditors. Voluntary Administration provides a framework for a company and its creditors to negotiate a compromise, whilst protecting the key stakeholders, the Directors/Shareholders & Creditors. A brief summary of the steps in the voluntary administration process are:

  1. The appointment of a Voluntary Administrator can occur in one of three ways(a) By a meeting of directors resolving the company is insolvent or likely to become insolvent and that an administrator is to be appointed and signing an instrument of appointment.
    (b) By a secured creditor holding all or substantially all the assets of the company under its security.
    (c) By a Liquidator or Provisional Liquidator
  2. The Administrator then enters into possession of the business and assets and assesses the viability of the business.
  3. The Administrator implements controls over the trading
  4. There must be a first meeting of creditors held within 5 business days of the appointment to decide on whether the creditors wish to appoint a committee of their number to assist the administrator and to consider the suitability of the appointment of that particular administrator and whether or not they wish to replace him or her.
  5. The Administrator must investigate the affairs of the company and analyse the likely outcome for creditors if the company was wound up.
  6. The Administrator then negotiates with directors on a proposal for a deal which is called a Deed of Company Arrangement if accepted by creditors. The administrator must also conduct a comparison of the proposal made to liquidation and provide his or her recommendation to creditors as to what would be the best course of action available for the company as it affects creditors.
  7. A further meeting of creditors must be held within 28 days of the appointment ( unless the appointment occurs around Christmas time otherwise there is an extra week provided) of the Administrator to discuss a comprehensive report provided by the administrator and to allow creditors to make a decision as to the fate of the company.
  8. On signing a Deed of Company Arrangement generally the company is handed back to the directors. You should see the next section of this brochure for a guide as to the various possibilities for a Deed of Company Arrangement.

What is a Deed of Company Arrangement?

A Deed of Company Arrangement (“DOCA”) is a document usually signed by the Administrator and the Directors. This is the end result of the acceptance by creditors of the proposal put to them.

The DOCA is binding on the company and all unsecured creditors that were in existence prior to the appointment of the Administrator. It is administered by a “Deed Administrator” who is usually, but not necessarily, the person who previously acted as Administrator.

A DOCA can be tailored to meet the specific requirements of both the creditors and the business. Examples of what a DOCA proposal could entail include:-

  1. An immediate one off payment to creditors in full and final settlement of their claims. This payment may come from a third party, the Directors or any other source and compared to the likely liquidation scenario normally need not be 100 cents in the dollar for it to be acceptable by creditors.
  2. An immediate payment to creditors with the possibility of a further payment to be made from the proceeds of litigation, the sale of surplus assets or trading profits over time or a combination of any of these.
  3. A series of payments to be made from the ongoing profits of the business over a specific period, conducted under the supervision of the Deed Administrator. Keeping in mind creditors don’t have to be paid in full the main purpose of the DOCA is to enable the company to continue to exist and for creditors to receive a better return on their debts then what they would receive on a liquidation.
  4. The business can be sold with the proceeds to go to payment of creditors.
  5. It should be noted that any combination of these could be used in proposals where circumstances warrant it.

What you should do if you find yourself in Difficulties?

Collect what information you can about the financial position of your company. Organise to meet with a specialist in the field to discuss your options.

Do not delay taking such action as the longer you wait the less positive options you will have and the less likely it will be you can save your business.

Why Clout & Associates?

We are business recovery and insolvency specialists so one meeting will provide you with your choices as this is all we do.

With our office in Coffs Harbour we operate in your region and can be there for you when the problems arise. Go to the city firms and the personal nature of business in the regions is forgotten let alone your own logistical problems in getting there and the cost.

Our record in saving companies and businesses is second to none.

Our fees have been adjusted to cater for the size of businesses in the regions and the lower overhead structure we all operate under.

If you require it for whatever reason we are more than happy to work alongside your usual professional advisors.

Being in your area means you get answers and will not be fobbed off.

To discuss your options click here for our contact details.

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