External Administration During COVID-19

Disputes and Insolvency

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DATE PUBLISHED: April 30, 2020

Temporary changes have been made to external administration procedures as a consequence of the coronavirus pandemic, although not all procedures have been affected. Directors should be aware that some creditors still have powers to appoint an external controller to the company, and that other external administration options are available and may be suitable in the current environment.


CHANGES TO WINDING UP AND BANKRUPTCY PROCEDURES

Creditors cannot apply to Courts for debtors to become bankrupt or enter liquidation until after the expiry of lengthy periods. Bankruptcy notices and statutory demands issued after 25 March 2020 will expire after 6 months, rather than the usual 21 days.

This will result in a substantial reduction to the number of Court ordered liquidations and bankruptcies whilst the economic impact of the coronavirus is ongoing. The usual expiry timeframes for bankruptcy notices and statutory demands will not resume until late September 2020 (assuming that the current relief measures are not extended further).


NOT ALL EXTERNAL ADMINISTRATION PROCEDURES ARE AFFECTED

Other external administration procedures are however unaffected by the legislative changes which have been made.

Importantly, it remains open for creditors to appoint receivers and other controllers in the course of realising debts that are secured. It is also possible for directors and shareholders of a company to cause a company to be placed into liquidation or enter voluntary administration.


RECEIVERSHIP

A secured creditor, or the Court, may appoint a receiver to a company in certain circumstances. This generally occurs when a company cannot repay a debt owing to a creditor that is secured by an asset, or all assets, owned by the company. The receiver is an independent person appointed to take control of the secured assets with a view to realising sufficient funds to repay the secured creditor. Some receivers, depending on the terms of their appointment, also have the power to manage the company’s affairs, and will effectively take control of the company during the receivership period.


VOLUNTARY ADMINISTRATION

Voluntary administration involves an independent ‘administrator’ taking control of a company with a view to its creditors determining the company’s future. An administrator may be appointed by the company’s directors, or less frequently, by an existing liquidator or a secured creditor.

Within 25 business days of an administrator being appointed, the creditors must determine the company’s future, being to:

  • return the control of the company to the directors;
  • accept a deed of company arrangement (DOCA) (which is a binding agreement between the company and its creditors about the future of the company); or
  • put the company into liquidation.

The voluntary administration procedure may be useful for some companies, particularly because it allows for a tailored DOCA proposal to be made to creditors. A flexible and tailored solution in the form of a DOCA may be what is necessary for some businesses to survive until the economic impact of the coronavirus recedes.


VOLUNTARY WINDING UP

In certain circumstances it may be an appropriate solution to cause a company to be placed into liquidation.

If directors declare that a company is solvent its shareholders may resolve to wind up the company voluntarily, through a members’ voluntary winding up.

Directors may also resolve to appoint a liquidator to an insolvent company. This process, called a creditors’ voluntary winding up, usually occurs where a DOCA is not possible and the appointment of a voluntary administrator is not otherwise suitable.


FINAL THOUGHTS

Directors and creditors should not assume that the effect of the Federal Government’s coronavirus relief measures is to impose a moratorium on all external administration procedures.

It remains open for secured creditors to appoint receivers, and directors should seek to work with secured lenders whilst their business is affected by COVID-19.

Similarly, directors who have been unable to find a solution to trading difficulties associated with COVID-19 should consider whether an external administration procedure could assist the company in achieving a satisfactory outcome.

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