When adverse conditions arise, Secured Creditors are often faced with the challenge of recovering their money. Traditionally, this has involved appointing a controller (such as a mortgagee in possession) or a Receiver/Receiver Manager to take control of the Company’s secured assets.
However, these options carry inherent risks. They can lead to the termination of key contracts, loss of control over unencumbered business components, negative perceptions that may impact asset values, and general disruption to operations.
Although the appointment of any external administrator can create negative market sentiment, the appointment of a Voluntary Administrator (VA) is often viewed favourably. It offers the perception of a potential rehabilitation of the business, which can preserve or even enhance the value for stakeholders.
Under the Corporations Act 2001 (Cth), Voluntary Administration is a mechanism designed to provide financially distressed companies with a chance to restructure or reorganise. In certain situations, a Secured Creditor, being a creditor holding a security interest over all or most of the Company’s assets, may play a pivotal role in appointing a VA to facilitate this process. This is an alternate measure to the Secured Creditor appointing a Receiver or Receiver & Manager who would only have authority over the encumbered assets, not the Company per se.
Having a VA appointed as opposed to a Receiver in certain circumstances gives control over the Company and any contracts that it is obliged to fulfil, such as onerous leases etc. The VA can deal with the termination of onerous agreements, which the Receiver may not. Also, the Receiver must be indemnified by the Secured Creditor, which can be risky for the Secured Creditor. The VA can be given priority for fees and costs over the secured assets but does not need to be indemnified by the Secured Creditor.
The Process of Appointment
When a Secured Creditor decides to appoint a VA, they typically notify the Company and the appointed VA of their intention. Usually, the Secured Creditor will engage with the nominee VA to discuss the strategy. This appointment must follow the correct procedure, which includes:
- Filing the Appointment: Once appointed, the VA must file the appropriate documents with the Australian Securities & Investments Commission (ASIC) and notify other relevant parties. The appointment can occur as soon as the creditor makes the decision, and signs the relevant appointment documents (Minutes, Notices etc.), which must comply with the provisions under the Corporations Act.
- Administrator’s Role: Upon appointment, the VA takes control of the Company, assessing its financial position, evaluating the viability of a restructuring, and formulating a plan to either save the Company or wind it down. The VA’s primary duty is to act in the best interest of all the creditors, which includes Secured Creditors. The options that are typically available in a VA are a Deed of Company Arrangement (“DOCA”) or, if none is proposed, the Company either gets returned to its directors or is placed into Liquidation. This allows for various restructuring proposals to be considered. There are mechanisms to extend the process, which allow time for the sale of the business and/or assets, or a restructuring of the business.
- Interim Protection: Once a VA is appointed, the Company is protected from any legal action by creditors under a moratorium. This gives the Company time to reorganise its affairs and protects it from enforcement actions such as asset seizures or court proceedings.
Secured Creditors benefit significantly from the Voluntary Administration process, as it allows them to have greater control over the restructuring of the Company. As the VA works to restructure the Company, Secured Creditors can actively participate in the process, with the goal of maximising the return on their security interest.
However, it’s important to note that a Secured Creditor’s rights are not absolute. If the Company is eventually liquidated, Secured Creditors are only entitled to the value of the Company’s assets that fall within the scope of their security interest. Unsecured Creditors will be paid from any remaining assets.
In conclusion, the ability of a Secured Creditor to appoint a VA under the Australian Corporations Act offers a strategic mechanism for Secured Creditors to protect their interests when a company faces financial distress. While the appointment of a VA provides an opportunity for the Company to restructure, it also allows Secured Creditors to have more control over the process. This ensures that their interests are prioritised and aligned while providing a framework for all stakeholders to work toward an optimal outcome.
If you’re unsure whether Voluntary Administration or Receivership is the right path, contact 02 9633 333 or mail@dvtgroup.com.au. We’ll help you navigate the options and protect your position confidently.
