Australian Voluntary Administrations
I attended the national conference of the Australian Institute of Credit Management in Hobart last month. Credit management in Australia is very similar to that in New Zealand. Their Bankruptcy Act is fairly similar to our Insolvency Act. The actions and documents in their civil litigation process have different names in each State but are essentially the same as in New Zealand. The due date for most trade credit is different, being the 30th of the month following invoice, where ours is usually the 20th. And one crucial difference, as anyone who has watched Australian rugby league players being interviewed will know, is that Australians start every sentence with the word "Mate", and end random sentences with the word "but".
Mate, in terms of the law relating to credit, the most important difference between New Zealand and Australia is probably their voluntary administration (VA) regime but.
Under Part 5.3A of the Corporations Law, a voluntary administrator may be appointed by the directors of a company (the commonest method) if they believe their company is or will become insolvent, or by a liquidator of the company, or by someone entitled to enforce a charge against substantially the whole of the company's property. The increased personal liability of directors in recent years encourages the use of the procedure. For example, the Commissioner of Taxation can make directors personally liable for certain taxes by issuing a penalty notice. This is often the main reason for the appointment of a voluntary administrator, which is one way to limit that personal liability. Likewise, the prompt appointment of a voluntary administrator is a defense to an insolvent trading action.
Once the administrator is appointed, a moratorium is placed on almost all creditors and owners and lessors of property, stopping them from enforcing their rights to recover debts or property during the administration except in limited circumstances. The company is out of the hands of its management, except insofar as the administrator delegates authority to them.
The administrator may do anything the management could have done, including continuing to run the business or selling the business or its assets. The administrators of the Brash group of companies, for example, searched for a purchaser to pump some money - $40 million - into the group. Brashs went into voluntary administration in 1994 and were the first very large company to use the procedure and something of a shining example. Law firm Blake Dawson Waldron saw the following benefits in Brashs' administration:
- the core business was preserved;
- the vast majority of creditors will receive a much better return than they would have received had a receiver or a liquidator been appointed;
- the employment of many hundreds of employees was preserved; and
- a significant market for suppliers was maintained.
Assets which are secured (including those claimed under a lawful retention of title clause) cannot be sold unless the administrator gets the consent of the secured creditor or a court order limiting the secured creditor's rights.
The administrator must hold a first meeting of creditors within five business days of appointment. The company's future is decided, however, by a second meeting of the creditors. This meeting is generally required to be within one month of the start of the administration but the period is commonly extended by court order.
At the major meeting the creditors can decide to wind up the company, end the administration, or approve a deed of company arrangement - the administrator's plan for the survival of the company. Brashs' creditors, for example, approved the sale.
A deed of company arrangement normally sets up a moratorium (under which the company is given time to pay its creditors) or a compromise (under which creditors accept less than full payment). It binds all unsecured creditors, the company, the administrator, the directors and shareholders, and any other party such as a secured creditor or landlord who votes for it.
Secured creditors have the ability to refuse to come to the party. Only those which vote in favour of the deed at the second meeting of creditors will be bound by a deed of company arrangement.
The holder of a charge over all or substantially all of the company's assets might also appoint a receiver during the 10 day window following receiving notice of the appointment of an administrator. "A voluntary administration," one banker told me in 1995, "only gives the directors of the company more time to ignore the writing on the wall." He was appointing a receiver in almost all cases. However, more and more banks are prepared to let the administration run.
The VA procedure was introduced in 1993. At the Hobart conference, insolvency practitioner Peter Macks of Adelaide firm Prentice Parbery Barilla, presented a paper reviewing their effectiveness. The evidence clearly shows that they have been popular and that as VAs have increased, numbers of both liquidations and receiverships have halved. But that doesn’t necessarily indicate success. Success, in light of the intention of the legislation would be more companies surviving, more jobs saved, and higher dividends to creditors.
According to Macks, the latest survey (no date supplied and apparently unpublished) of the Insolvency and Reconstruction Cell of Excellence of the Australian Society of Accountants shows that they are. Responses were received from practitioners who had done 514 VAs - 13% of the total number ever done - and showed that 46% had resulted in the execution of a Deed. Of those, 88% were successful. (Macks did not provide a definition of success but presumably it means that the plan set out in the deed came to fruition.) The average dividend for those entering into a deed was 30 cents in the dollar. The practitioners were also asked to estimate the dividend had the company simply been placed into liquidation and the average of these was 7 cents in the dollar.
Research by the Sunshine Coast University College provided similarly encouraging results although the sample size was much smaller (47 companies in voluntary administration). It also endeavoured to identify the look of the "typical" successful VA. Characteristics were:
- Directors initiated the appointment of the administrator (94% of the deeds executed);
- No action (e.g. winding up proceedings) had been taken against the company prior to appointment (60%);
- Secured creditors had a charge (81%) but chose not to appoint a receiver (71%);
- The main business activity was retail (80%).
The average return for this sample was 21 cents in the dollar if the outcome was a liquidating deed, 33 cents if sold as a going concern, and 57 cents if the business was "rehabilitated". In no cases did the deed fail.
There are still problems with the operation of the regime. Neither Macks nor any of the other commentators are saying that the system is perfect. Mate, overall I’d have to say it looks like something we could use in New Zealand but...
Chartered Accountants Journal of New Zealand