Business & Company: Insolvency & Liquidation - Guides
Insolvency & Liquidation
11. Voluntary Process
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Last updated: 11 Aug 2015
- During a voluntary administration two creditors’ meetings must be held:
- the first creditors’ meeting; and
- the second creditors’ meeting where the company’s future is decided.
- If it is agreed upon at the second meeting a deed of company arrangement (DOCA) can be entered into by the creditors and the company.
- The voluntary administrator must convene the first creditors’ meeting no later than eight business days after the voluntary administration commences so that creditors can decide whether:
- they wish to form a committee of creditors and if so who they wish to elect for the committee; and
- they wish to replace the current voluntary administrator with an administrator of their choosing.
- After this initial meeting the administrator will investigate the company’s affairs and advise creditors of their findings by way of a report. The report must also set out the three options available to creditors regarding the company’s future these being to:
- vote in favour of a deed of company arrangement (DOCA) if proposed;
- wind up the company; or
- end the administration and return the company to its directors.
- After investigating the company’s affairs and reaching an opinion on the three options including an opinion as to which option is in the best interests of creditors the administrator must convene a second creditors’ meeting.
- This meeting is generally held approximately five weeks after the company enters voluntary administration. No less than five days before the meeting the administrator is required to send creditors certain documents including:
- a notice of meeting;
- their report;
- a statement regarding any DOCA proposals;
- a claim form; and
- a proxy voting form.
- At this meeting creditors determine the company’s fate by voting for one of the three options. If they vote for a DOCA the company and its creditors become bound by the deed’s terms.
- A Deed of Company Arrangement (DOCA) aims to increase the chances of company rescue and provides creditors with a greater return than they would receive if the company were to be wound up immediately.
- If creditors vote for a DOCA the company must sign the deed no more than 15 business days after the creditors’ meeting unless the court approves a longer timeframe. If the deed is not signed within the required timeframe the company is automatically placed in liquidation and the administrator becomes the liquidator.
- The DOCA binds all unsecured creditors regardless of whether they voted for or against the proposal as well as any owners, lessors or secured creditors that voted in favour of the DOCA or that are bound by the deed by order of the court.
- How creditor claims are handled under a DOCA depends on its terms. The terms may for example:
- provide for either a lump sum payment or a series of payments; and
- for payment from profits or from a final sale.
- The order in which creditor claims are paid also depends on the terms of the DOCA. Sometimes the terms of the deed require that they be paid in the same priority as in a liquidation while at other times the deed sets out a different order.
- Similarly the order of payment of outstanding employee entitlements is dictated by the terms of the deed.
- Sometimes the deed dictates that these entitlements are to be paid in the same priority as they would be paid in a liquidation.
- Other times the deed stipulates a different priority.
- However a DOCA must ensure that employee entitlements have the same priority as in a liquidation unless eligible employees agree by a majority in both number and value to a different priority.
- Creditors and employees should make sure they understand the way the DOCA may affect the priority of their claim before making a decision on how to vote at the second creditors’ meeting. It is highly advisable to seek legal advice and discuss any concerns with the administrator.
- The administrator must ensure that the deed is complied with and that the company and others who have made commitments under the deed fulfil their obligations under the deed.
- The consequences for breaching the deed are determined by the terms of the deed.
- Breaches of the deed may lead to it being terminated and the company entering liquidation.
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