Voluntary Administration: What a Secured Lender Decides

Voluntary administration gives a company in difficulty a pause, during which an independent insolvency practitioner runs it, investigates its affairs and recommends what should happen next. The directors usually make the appointment by board resolution; less often a liquidator does, or a secured creditor with security over all or substantially all of the company's property. The pause is a moratorium: unsecured creditors cannot sue or enforce, owners and lessors of property the company uses cannot take it back, and secured creditors generally cannot enforce, except in the limited cases the legislation allows.

Creditors then decide among three outcomes: return the company to its directors, accept a deed of company arrangement, or put it into liquidation. A deed is a binding arrangement setting out how the company's debts will be dealt with, often a fund paid over time or by an investor, run by a deed administrator.

Both countries let the court extend the meeting periods. Within the decision period a secured creditor whose security covers all or substantially all of the property has two choices. It can enforce, usually by appointing a receiver, who then controls the secured assets alongside the administrator. Or it can stand back and work through the administration, keeping its security and its vote. Such a creditor can also appoint the administrator itself, in either country, if it moves before the directors do. Once an administrator is in office it cannot appoint its own, though creditors can replace the practitioner by resolution at the first meeting.

The vote differs between the two countries. In Australia, a resolution passes on a poll with a majority in number and in value of the creditors voting, the chair has a casting vote in a deadlock, and a secured creditor can vote for its full debt. In New Zealand, a resolution needs a majority in number representing 75% in value of the creditors voting, and the administrator, as chair, has a casting vote. The deed works the same way in both: it binds the company and its unsecured creditors, but limits a secured creditor's security, or an owner's or lessor's property, only if that party voted for the deed, though the court can restrain one who voted against where its interests are adequately protected. Since July 2018 Australia has also stayed many contract rights that would otherwise be triggered by the administration itself.

An aluminium window and door fabricator in Australia, constructed for this page like every figure in it, owes its bank US$4.2m under facilities secured by a general security agreement over all its property. A builder it supplies collapses owing it US$900,000, and on a Monday the directors appoint an administrator. The bank receives notice that day. Its team has thirteen business days to choose, and puts two estimates side by side.

In this example the investor's deed also funds the employees' priority claims. If the deferred US$1.0m arrives, the deed returns US$750,000 more than receivership. If none of it does, the bank is US$250,000 worse off and two years later. The bank's leverage lies in the fact that the deed will not bind its security unless it votes for it. It tells the administrator it will support a deed in which the deferred payments are secured over the business and guaranteed by the investor, and it does not enforce within the decision period. The moratorium then holds the bank, and its next decision is its vote.

The two are often run by the same kind of practitioner, and readers confuse them. The difference is whom the office-holder serves and what it may decide. A receiver is appointed under a lender's security to realise the assets it covers, and answers mainly to that lender for the result. An administrator acts for the creditors as a whole: it investigates, reports to them and recommends an outcome, and it can propose a deed that changes what unsecured creditors are owed. A company can have both at once, with the receiver controlling the secured assets and the administrator the rest of the process.

The UK has no voluntary administration. Its administration is the nearest procedure, with its own moratorium; a lender holding a qualifying floating charge can appoint the administrator itself, and directors who intend to appoint must first give such a lender at least five business days' written notice. A UK company voluntary arrangement, despite the similar name, is a separate procedure.

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It decides what kind of security a lender takes in the first place. The decision period belongs to a creditor whose security covers all or substantially all of the company's property. A lender holding only a mortgage over a building, or security over one class of asset, does not have it in the same way, and is generally held by the moratorium from the start. A general security agreement is partly a ticket to that choice.

It also decides how a workout file is kept. A bank with a borrower in difficulty should already know which way it would go if the directors appointed an administrator tomorrow: what receivership would realise, what the employees rank ahead of it for, and what a deed would have to offer. Thirteen business days, or ten working days, is too short to start that work. In both countries, a guarantee from a director, or a director's spouse or relative, cannot be enforced while the administration lasts without the court's permission, which matters to the recovery plan.

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