Voluntary Administration Explained

Voluntary Administration Explained

It is the duty of a company’s directors to ensure that a company has the ability to pay its debts as and when they fall due. If the board of directors believes that the company is insolvent, or may become insolvent at some time in the future, the directors may resolve to appoint an administrator under section 436A of the Corporations Act 2001.

A recent example of this was the case of electronics retailer ‘Dick Smith’. Leading up to Christmas there had been media reports as to the company’s viability which also resulted in heavily discounted sales in the days prior to Christmas. On 5 January 2016 the directors of Dick Smith resolved that the company was insolvent or may become insolvent in the future, and appointed advisory firm McGrath Nicol as Voluntary Administrators.

What now?

The purpose of voluntary administration is to allow the company some breathing space so as to assess its future viability. The administrator usually takes control of the business during this period, but their role can be subject to the rights of any receiver appointed to take control of the business by the company’s secured creditors. In the case of Dick Smith secured creditors lead by NAB and HSBC appointed receivers from the firm Ferrier Hodgson. While the receivers and administrators work together (subject to the terms of any charge which enabled the secured creditors to appoint the receivers) the administrator must act quickly, as the Corporations Act 2001 requires the administrator to hold two meetings in a very short amount of time.

First Meeting

Within 8 business days of their appointment the administrator must convene the first meeting of creditors (s.436E). The purpose of this meeting is to allow the creditors of the company to vote to replace the administrator (who was appointed by the directors in the first place and not the creditors) and to determine whether to establish a committee to take reports and consult with the administrator during the administration. In the case of Dick Smith the administrator as appointed by the directors remained, and a committee was formed.

Business as usual?

Given the administrator has not been changed by the creditors at the first meeting the administrators appointed are charged with the task of investigating the company’s business, property, affairs and financial circumstances with a view of forming an opinion about (s.438A):

– Whether it would be in the interests of the company’s creditors to execute a Deed of Company Arrangement (DOCA) to allow the company to recommence trading free of all previous debt, in accordance with the terms of the DOCA (which may provide for instance that creditors accept x cents in the dollar as opposed to nil);

– Whether it would be in the interests of the company’s creditors for the administration to end and for the company to be handed back to the directors;

– Whether it would be in the interests of the company’s creditors for the company to be wound up.

The administrator’s opinion as to these three matters will be detailed in a report given to creditors prior to the second meeting, which must be held within 25 business days of appointment (s.439A).

Second Meeting

On or before 10 February 2016 the administrator will hold the second meeting of creditors at which time the creditors will vote as to whether to enter into a DOCA, hand the company back to the directors or wind the company up, in which case the administrator becomes the liquidator. Given the short timeframe in which to make such an important decision as to the company’s future it is possible for the Court to extend the time in which to hold the second meeting if the Court is satisfied that it is in the bests interests of the creditors to extend the time for the second meeting. It would seem likely that such an application will be made in the present instance.

If at the second meeting the creditors resolve to wind up the company then the administrator becomes the liquidator and the assets of the company are sold to pay the creditors. In the case of Dick Smith the receiver will have the right to sell the secured assets for the benefit of the secured creditors, and if any assets are left after payment of the secured creditors the balance is then paid to the remaining creditors in the order of priority set out in the Corporations Act 2001.

Why won’t Dick Smith honour my gift voucher?

Many customers of Dick Smith were left out of pocket after buying or receiving gift vouchers prior to the administration which became worthless in the very the same Dick Smith store after appointment of the administrator / receiver.

The reason for this is that gift card holder is a creditor of Dick Smith, Dick Smith owing the customer the value of the gift card (and in accordance with any its terms of issue). Had the receiver / administrator honoured the gift cards then arguably those gift creditor’s were receiving a priority payment ahead of other creditor’s such as suppliers, tradespeople and even employees. By refusing to honour those cards the person left holding the card must submit a proof of debt as an unsecured creditor in the hope that an eventual liquidation will see a return to unsecured creditors.

For those holding a gift card it may be advisable to take up a competitor’s offer such as the online retailer Kogan (to honour up to $25.00 of the gift card), rather than submit a proof of debt through the administrator, but hurry as offers by rival retailers are subject to their own terms and conditions and won’t last long.

Prime Lawyers have experienced insolvency lawyers who can advise you of your rights and options during a corporate winding up. Get in touch to talk to one of our team if you are owed money by a company and wish to know your recovery options.

We have debt recovery and litigation lawyers located at Sydney, Parramatta, Chatswood, Sutherland and Wollongong.