Changes to New Zealand’s Companies Act in 2007 brought in a new procedure for insolvent companies called voluntary administration. If your business is struggling, the voluntary administration process might be of assistance.
What is the purpose of voluntary adminstration?
According to the New Zealand Companies Office, the purpose of voluntary administration is to provide a relatively short-term measure that freezes the company’s financial position while the administrator and the creditors determine the company’s future:
“In an administration an independent and suitably qualified person (an administrator) takes full control of the company to try to work out a way to save either the company or its business. If it is not possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had instead been placed straight into liquidation.”
What are the benefits of Voluntary Administration?
While the company is under voluntary administration, it has the benefit of a moratorium during which creditors are generally prohibited from taking any action against the company to recover debts, enforce charges or put the company into liquidation. Owners of property that is being used by the company and lessors of property to the company are also prohibited from seizing or reclaiming property without consent.
This provides an opportunity for a company’s creditors to meet before the company is liquidated to consider the options for the company.
Voluntary administration is less likely to be helpful if it does not have the support of any secured creditors of the company that have security over the whole or substantially the whole of the company’s property. This is because those secured creditors can choose to enforce their security rather than supporting the voluntary administration.
Voluntary administration might be worth considering if there is likely to be more benefit to the company and its creditors from continued trading than from entering liquidation.
What happens during a voluntary administration?
Once an administrator is appointed, he or she takes control of the company with a view to investigating its financial position. The administrators duties under the Companies Act 1993 include:
- Giving notice of appointment to the Registrar and to secured creditors and publicly advertising the appointment; and
- As soon as practicable after appointment, investigating the company’s affairs and forming an opinion as to whether it would be in its creditors’ interests for:
- The company to enter into a deed of company arrangement; or
- The administration to end; or
- A liquidator to be appointed; and
- Reporting to the Registrar on a variety of matters including any possible offences, misconduct or breach of duty by directors, officers or shareholders of the company; and
- The first creditors’ meeting (within 8 working days after the administration began); and
- Subsequent creditors’ meetings ; and
- The watershed meeting (usually within 20 working days after the administration began); and
- Filing periodic accounts with the Registrar.
The First Meeting
At the first meeting, the administrator tables an interests statement disclosing whether the administrator, or a firm of which the administrator is a partner, has a relationship (whether professional, business, or personal) with the company in administration, or any of its officers, shareholders, or creditors. A statement from the directors’ as to the company’s affairs and circumstances is also tabled. The creditors then consider whether to appoint a creditors’ committee to consult with the administrator. The creditors can also vote on whether to replace the administrator.
The Watershed Meeting
At the watershed meeting, the creditors meet with the administrator to decide the future of the company, and whether the company should execute a deed of company arrangement. The creditors may resolve that:
- The company execute a deed of company arrangement (which will usually, inter alia, specify the amount of any funds available for distribution, when payments will be made and the reporting and monitoring arrangements to be put in place to ensure compliance with the deed); or
- The administration should end and the company continue trading; or
- A liquidator be appointed.
If you are involved with a struggling company, or are a creditor of a struggling company, we suggest you contact Parry Field Lawyers for legal advice on your options. Should you need any assistance with this, or with any other Commercial matters, please contact Kris Morrison or Tim Rankin at Parry Field Lawyers (348-8480).