As 2020 has ushered in a new way of life, we all have been following the effects of COVID-19 and the methods to treat the patients infected with the virus. In the early part of 2020. We have learned of the urgent need for ventilators to help treat patients severely affected with the virus; we have heard of patients recovering from the virus and those that have succumbed to it.
Like the impact on people, businesses have also been affected by the virus in varying degrees. This article focuses on the voluntary administration of businesses that are private companies (Pty Ltd) and does not consider any government relief.
Severity of infection: Impact on the company’s books
On the milder side, there are companies that experiences reduced turnover but are nevertheless viable and can see their way through the pandemic, like a patient with mild symptoms, the company is solvent, it can continue to trade and meet its overheads and probably see a profit despite the downturn.
More noticeably impacted, are the companies that can see their way through for a certain period before it gets worse if nothing changes. Like patient with more pronounced symptoms who can attempt to isolate and recover; these are the companies that would usually contact their creditors and negotiate temporary relief of sorts. These companies may eventually recover or may require more attention. It is recommended that a company in this situation seek appropriate advice to prepare for a worst-case scenario, like a patient visiting a doctor for an assessment.
Then there are the companies that are severely impacted. If these companies do not get urgent attention, they may not recover. A company in this situation is either insolvent or about to become insolvent. Sort of like a patient in the ICU who needs a ventilator, the company needs urgent attention. Whilst our system does provide various mechanisms for struggling companies, we will focus on the most popular one, that is voluntary administration (‘VA’).
On the Ventilator: Voluntary Administration
If a company is placed into VA, it is sort of like a patient put on a ventilator, the outcome may see a road to recovery, (through a Deed of Company Arrangement (‘DOCA’)), or may not (in which case the company will go into liquidation).
The VA process typically continues over the period of about a month or so[i]. During the VA the administrator acts as agent of the company[ii] with powers to control the company’s property and affairs, carry on the company’s business and may terminate or dispose any part of the company’s business or assets[iii].
As a patient is restricted while on a ventilator, so too are the company’s officers (directors and secretaries), with their powers suspended over the period of the VA[iv].The administrator is authorised to deal with the company’s property[v] during the process.
Enforcement action and claims by the creditors are put on hold during the VA[vi], therefore unsecured creditors will not be able to take any action against the company whilst the VA is ongoing. The directors are also granted temporary relief in that any guarantees for the company’s liability given by the director or his/her relatives are unenforceable during the period of the VA[vii].
Depending on the nature of the security interest, secured creditors, owners and lessors are treated slightly differently throughout the VA process, with a secured creditor holding security over the whole, or substantially the whole of the company’s property as security given a short period to determine whether it wishes to enforce its security.[viii]
During the VA the administrator will investigate the affairs of the company and consider possible causes of action, that is whether the company should enter a DOCA, whether the administration should come to an end, or whether the company should be put into liquidation.[ix]
Off the Ventilator: Hand Back, DOCA or Liquidation
At the end of the VA, there are three possible outcomes which is decided at a meeting of the creditors at the end of the convening period (or the last meeting of the creditors in the VA). Either the company would enter a DOCA, which will set out how the company’s future will be handled, which could be the road to recovery; or the company is handed back to the directors; or the company is put into liquidation.
There is a lot more to VA than the basic above explanation and analogy. Whilst the intention is to help companies survive a downturn, an outcome is never guaranteed. There are advantages and disadvantages to all remedies available under the law and it is important to seek the most appropriate remedy for the circumstance. If you are a director of a company, it is highly recommended that you seek appropriate advice before deciding on the way forward.
Soni Legal is a focused commercial and insolvency law practice, should you require assistance or advice with your company, feel free to reach out to us at firstname.lastname@example.org or visit our website at www.sonilegal.com.au alternatively call us on +61 2 8076 6072.