What happens in a voluntary administration? articles
16 Mar 2021
VA is an insolvency process intended to maximise the chances for all or part of the business to continue. Or, if that is not possible, to develop a plan to dispose of the business that provides creditors and shareholders with a better outcome than if the company went immediately into liquidation.
Creditor rights in VA
When a company goes into VA, a “moratorium” period is triggered. This is designed to provide breathing space for the administrator to investigate the company’s affairs and consider possible courses of action. The key points are:
- Court proceedings cannot be commenced or continued unless the administrator consents or the Court allows. However, arguably a creditor can commence or continue an arbitration or adjudication;
- Secured creditors are prevented from enforcing charges (e.g. PPSR security). The exception to this is a “fully secured creditor” which enforces its security “in relation to all property of the company subject to the charge”;
- Enforcement processes in relation to the company’s property are halted; and
- Unless the court permits, a guarantee of a liability of the company must not be enforced against a director or that person’s spouse or relative.
Unless a “fully secured creditor” was already in the process of enforcing its security when the administrator was appointed, it has 10 working days from the date of the administrator’s notice or appointment (as applicable), known as the “decision period”, to enforce their security without needing the administrator’s consent or the permission of the court. “Enforce” means:
- Appoint a receiver of property of the company under a power contained in an instrument relating to the charge; or
- Obtain an order for the appointment of a receiver of that property for the purposes of enforcing the charge; or
- Enter possession, or assume control, of that property for that purpose; or
- Appoint a person to enter possession or assume control (whether as agent for the secured creditor or for the company) for that purpose; or
- To exercise, as secured creditor or as a receiver or person so appointed, a right, power or remedy existing because of the charge, whether arising under an instrument relating to the charge, under a written or unwritten law, or otherwise.
If the fully secured creditor waits longer than 10 working days, they must wait for the VA to run its course before they can enforce (i.e. they will have no more rights than an unsecured creditor during the period of administration).
A secured creditor whose security covers only specific assets (e.g. goods supplied), only has limited rights:
- Unless the secured creditor had exercised certain rights before the administrator’s appointment, the moratorium prevents them from collecting or repossessing their assets and the administrator is able to continue to use their assets;
- If their security covers or includes perishable stock they can enforce their rights and recover the perishable items assets unless the courts prevent them doing so.
First creditors meeting
Within 8 working days of appointment, the administrator must hold the first meeting of known creditors. At this meeting the creditors are required to vote to confirm or change the appointed administrator.
Within 20 working days of appointment, the administrator must convene a second creditors meeting known as a “watershed meeting”. The administrator’s notice of the watershed meeting must attach a report with their opinion whether creditors should execute a deed of company arrangement (‘DOCA’), place the company in liquidation, or end the administration and return control of the company to the directors.
At the watershed meeting creditors vote on the future of the company and whether the company and creditors will enter into a DOCA. The watershed meeting must be held within 5 working days from the end of that 20 working day period, unless an extension has been granted.
A DOCA usually presents creditors with a compromise. Everyone who votes in favour of the DOCA at the watershed meeting must agree:
- to the terms in the DOCA, which can include forgiving some of the company’s debts; and
- not to take any further action against the company.
If a creditor votes against the DOCA, but a majority of the other creditors in number representing 75% or more of the other creditors vote for it, the creditor will be bound by its terms and will not be able to pursue the company for the balance. If a DOCA is approved, secured creditors only lose rights if:
- the DOCA states that the secured creditor is prevented from enforcing or otherwise dealing with their charge; and
- the secured creditor votes in favour of the DOCA; or
- the court orders otherwise.
For more information, please contact a member of our Restructuring, Insolvency & Credit Management team.
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