How can creditors participate in a voluntary administration creditors’ meeting
The primary way in which creditors can influence a voluntary administration is through participation in either the first or second creditors’ meeting — meetings chaired by the voluntary administrator. Through this process creditors can replace voluntary administrators, have a say on remuneration and costs, approve of a debt compromise and more.
Table of Contents:
- What is the nature of creditors’ meetings in a voluntary administration?
- The right to appoint a committee of inspection
- The right to approve remuneration
- The right to receive relevant information about the company’s circumstances and plans for the administration
- The right to remove and replace the voluntary administrator
- The right to appoint a reviewing liquidator
- The right to pass resolutions and approve/decline a DOCA
Voluntary administrators are appointed by the directors of a business, but they ultimately serve the creditors. This means that creditor participation is vital to the voluntary administration process.
However, creditors can often become frustrated with the process, and for this reason, often seek to avoid the process. Creditors have limited control over the process, with their main powers being to reject a proposed debt compromise (known as a ‘Deed of Company Arrangement’ or ‘DOCA’), and to reject the voluntary administrator’s proposal for remuneration and costs. These occur at either the first or the second creditors’ meeting.
Furthermore, the majority of creditors by value is often the Australian Tax Office (ATO), meaning that they have significant power over minority creditors, limiting the ability of the latter to meaningfully participate.
In this article, we look at all the different ways that creditors can participate in meetings as part of the voluntary administration process.
What is the nature of creditors’ meetings in a voluntary administration?
There are two creditors’ meetings held during a voluntary administration.
The first creditors’ meeting must be held within eight business days after the voluntary administration begins. Prior to the meeting, the voluntary administrator must send key information about their appointment to creditors (such as a declaration of their interests or relationships). Then, at the meeting, creditors can decide whether:
- To create a committee of inspection that will supervise the voluntary administration. If one is appointed, the creditors should also determine who will serve on that committee.
- The existing voluntary administrator should be removed and replaced by another voluntary administrator.
In the second creditors’ meeting, occurring approximately five weeks later, the creditors are presented with key information about the company and a recommendation is made about whether a debt compromise (DOCA) should be agreed to, the company wound up or the voluntary administration ceased. The creditors then decide the fate of the company.
The right to appoint a committee of inspection
As mentioned, at the first creditors’ meeting, a committee of inspection (COI) can be formed. This is a small group of either creditors themselves, or their representatives. They can be appointed in either a liquidation (where it is not a simplified liquidation) or a voluntary administration.
A member can be appointed by an ordinary resolution at the first meeting, by an employee or group of employees representing 50% or more of the entitlements owed to employees, or by a large creditor or group of creditors representing at least ten percent of the total value of creditor claims.
The role of the COI is to advise and assist the voluntary administrator, to give directions to the voluntary administrator and to monitor the conduct of the process as a whole. Note, however, that the voluntary administrator is not bound to follow the directions of a COI, and must only ‘have regard’ to them.
The COI also has specific powers and rights such as those relating to approving remuneration, requiring the voluntary administrator convene a meeting of creditors, approving of certain actions (such as entering into contracts of more than 3 months) and the right to apply to the Court to look into the voluntary administration.
The right to approve remuneration
The voluntary administrator cannot simply charge whatever they like. They must provide information explaining their proposed fees and costs and have those fees and costs approved, either by:
- a resolution of creditors;
- a COI (unless a resolution of creditors has already approved it); or
- the Court, if neither of the above have approved remuneration.
If fees are not approved, then the voluntary administrator is entitled to reasonable fees up to a maximum default amount.
The right to receive relevant information about the company’s circumstances and plans for the administration
The voluntary administrator must provide their report on the company to creditors prior to the second meeting. It must provide enough information to explain the company’s affairs and financial circumstances, and allow creditors to make an informed decision.
Creditors can also ask questions, though they may often get a guarded response from voluntary administrators. This is particularly true where the creditor has little likelihood of recovery (e.g. self-employed subcontractors who don’t have the priority that employees get in an any possible liquidation and don’t have access to the FEG scheme).
The right to remove and replace the voluntary administrator
To exercise this right in the first meeting, a resolution of creditors must be passed. A creditor who seeks an alternative voluntary administrator must, prior to the first meeting, obtain written consent from another voluntary administrator that they are prepared to act. That voluntary administrator should also provide declarations about their relationships and any indemnities so that creditors can make a decision about their appointment.
The right to appoint a reviewing liquidator
Creditors can pass a resolution to appoint a ‘reviewing liquidator’ to review the fees and/ or costs of the voluntary administrator or deed administrator (the individual who supervises the execution of the DOCA, usually the same individual as the voluntary administrator).
Where there is no such resolution, an individual creditor can appoint a reviewing liquidator with the voluntary administrator or deed administrator’s consent.
The right to pass resolutions and approve/decline a DOCA
At the second meeting, the creditors have the right to pass a resolution approving a DOCA proposal, or putting the company into liquidation. This is the most important role of the creditors and it is common for interested parties to try and recruit creditors to the position they favour. For example, directors can often round up employees to bolster their own position.
In order for the DOCA proposal to be accepted, it must be approved by a majority of creditors in number and value. In order to be rejected, it must be rejected by a majority of creditors in number and value. This means deadlocks can, and do, occur, in which case the casting vote goes to the voluntary administrator as chair of the meeting. Usually, the voluntary administrator would vote in favour of the proposal outlined in their report.
There are a range of ways in which creditors can participate in creditors’ meetings. At the first meeting, the key interventions are the possibility of replacing the liquidator and appointing a committee of inspection. At the second meeting the key power is passing a resolution agreeing to a DOCA. It is worth noting that creditor participation is relative to the size of the creditor’s claim, meaning large creditors like the ATO have a significant influence.