Voluntary Administration / Deed of Company Arrangement

IMG

Why commence a voluntary administration?

The voluntary administration regime allows for a company to come to a binding agreement with its creditors, and to prevent the need for the company to being placed into liquidation. If an agreement can be reached, the binding agreement is called a deed of company arrangement.

The deed of company arrangement (DoCA) may or may not provide for the company’s business to continue to trade in the future.

The appointment of a voluntary administrator may also assist in minimising the exposure of a director to a director penalty notice.

How is the company placed into voluntary administration?

There are a number of ways to commence a voluntary administration (VA). The most common way is initiated by the directors of the company.

A meeting of directors is convened, and a resolution is passed noting that the company is insolvent or likely to become insolvent, and that the company is to be placed into voluntary administration.

The directors will also appoint a voluntary administrator (the administrator) to conduct the voluntary administration. The administrator must be a registered liquidator. It is also possible to appoint multiple parties to act as the voluntary administrators, instead of just one person.

How does a voluntary administration work?

Upon the appointment of the administrator, the director’s powers to operate the company cease, and those powers are vested in the administrator who is responsible for the safeguarding of the company’s assets, and the management of the company’s affairs.

The administrator is able to continue to trade the company and can also deal with the company’s assets as they see fit, including ceasing to trade the business if it is no longer viable to do so.

The administrator will conduct investigations into the company’s affairs in order to ascertain the assets and liabilities of the company, and the possible avenues of recovery that may be available should the company be placed into a creditors voluntary liquidation at a later date.

At the same time (usually the directors, but other parties may also do so) a proposal is formulated to put to the creditors to consider entering into a DoCA.

The proposal for a DoCA usually entails one, or a combination of the following:

  • Up front cash payment from a third party (usually a director) of a given sum;
  • Possible multiple payments over a period of time from a third party, or to be funded from the future estimated profits of the company;
  • The provision of funds following the sale of certain company assets;
  • The control of the company is returned to the directors;
  • Creditors are to accept the return they receive from the DoCA in full and final satisfaction of their claims.

There is no defined basis as to how or where the funds are to be sourced to fund the DoCA.

It allows for an agreement to come into effect which is binding on the unsecured creditors of the company.

A detailed report to creditors is prepared by the administrator which is to identify the proposal for the DoCA, and to provide, amongst other things, a comparison to the alternative of placing the company into liquidation.

The report to creditors will also advise of a meeting of creditors at which creditors may attend and cast their vote on a number of things, inclusive of accepting the proposed DoCA.

If creditors agree to accept the proposal, a formal deed of company arrangement is prepared and signed by the administrator and the directors of the company. Once it is signed by all parties, the DoCA becomes effective, and the voluntary administration will come to an end.

Can creditors continue with their actions against the company?

Following the company being placed into voluntary administration, proceedings cannot be continued with, or commenced against the company or its property without the consent of the voluntary administrator or without leave of the court.

What happens to any personal guarantees in a voluntary administration?

Whilst a company is subject to a voluntary administration, creditors are not permitted to enforce a personal guarantee against a director, or a spouse or relative of a director without leave of the court. There are exceptions to these provisions.

The stay on proceedings only remains on force whist the company is subject to a voluntary administration. Once the company is no longer in voluntary administration, this provision no longer continues.

Independent legal advice should be sought in relation to any personal guarantees that may have been provided.

How is the outcome of a voluntary administration determined?

Creditors will be able to attend and vote at a meeting of creditors to determine the ultimate fate of the company. Creditors will be able to pass a resolution which will have the effect of the following outcomes:

  • Terminating the appointment of the voluntary administrator and returning the control of the company to the directors; or
  • To place the company into liquidation; or
  • To agree to accept the proposal for the Deed of Company Arrangement.

Creditors may also resolve to adjourn the meeting to a later time to determine the fate of the company as per the three options discussed above.

The court may also provide an order for the termination of a voluntary administration.

How does the Deed of Company Arrangement work?

If creditors have resolved to accept a proposal a formal document called a Deed of Company Arrangement is prepared. This document sets the terms and conditions which becomes binding on the creditors and the company.

Once the DoCA is executed by the voluntary administrator and the directors of the company, the voluntary administration ceases, and the control of the company is returned to the directors.

The company is then required to comply with the terms and obligations as set out in the DoCA.

If the Company is unable to comply with the obligations of the DoCA, a further meeting may be called to consider varying the terms of the agreement, or alternatively seeking to place the company into liquidation.

Please contact us for further information or an obligation-free consultation regarding how a voluntary administration may be appropriate to deal with your company.

Having Insolvency Concerns?

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