Creditors’ rights in voluntary administrations

Creditors’ rights in voluntary administrations

Creditors play a crucial role in voluntary administration. In contrast to the more restrictive provisions for liquidations, both unsecured and secured creditors are invited to participate in this process.[1] This article outlines some of the main rights of creditors in relation to voluntary administration as set out in the Companies Act 1993 (the Act).

1. Appoint an administrator
2. 239K of the Act provides that a secured creditor may appoint an administrator, provided the company is not already in liquidation.

Vote at the first creditors’ meeting

• Creditors may vote at the first creditors’ meeting, which the administrator is required to call under section 239AN(1) of the Act. The purpose of this meeting is twofold:
• To decide whether to appoint a creditors’ committee and, if so, to appoint its members; and
• To decide whether to replace the administrator.
• A resolution is adopted if a majority in number representing 75% in value of the creditors or class of creditors voting in person, or by proxy vote or by postal vote, vote in favour of the resolution.[2]

Vote at the watershed meeting

• Creditors may vote at the watershed meeting, which is a meeting of creditors called by the administrator to decide the future of the company and, in particular, whether the company and the deed administrator should execute a deed of company arrangement (DOCA).[3] 
• At the watershed meeting, there are three possible outcomes, as set out in section 239ABA of the Act. The creditors may-
  • resolve that the company execute a DOCA specified in the resolution; or
  • resolve that the administration should end; or
  • unless the company is already in liquidation, by resolution appoint a liquidator.
• If the creditors resolve that the company execute a DOCA, the deed administrator must prepare a document setting out its terms.[4] Section 239ACN prescribes a list of information which the DOCA must include.
• If the creditors resolve that the company execute a DOCA, but the proposed DOCA is not fully approved at the meeting, the administrator must take the steps set out in section 239ACP (which broadly involve drafting a deed and circulating it to creditors).
• Challenge the validity of the DOCA
• Under section 239ACX(2)(b) of the Act, creditors are entitled to apply to court to determine whether the DOCA was entered into in accordance with the Act or complies with the Act.
• Vary or terminate the DOCA
• Creditors representing 10% or more of the total value of all creditors’ claims may request that the deed administrator convene a meeting of creditors under section 239ADF. At this meeting, creditors may:
• vary a DOCA passed at a meeting convened under section 239ADF of the Act.[5]
• terminate the DOCA if a material breach of the DOCA has not been rectified.[6]

[1] Companies Act 1993, section 239C.

[2] Companies Act 1993, section 239AK(2).

[3] Companies Act 1993, section 239AS.

[4] Companies Act 1993, section 239ACM-ACN.

[5] Companies Act 1993, section 239ADA

[6] Companies Act 1993, section 239ADE