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What is a Voluntary Administration for?

Voluntary Administration was designed to assist companies seeking options to trade their way out of insolvency.

By Damien Grant - Updated on July 7, 2022

There has been a trend in recent years where a secured creditor with a GSA over a company will appoint a receiver and place the company into Voluntary Administration. Under the Companies Act, a GSA holder has a statutory right to appoint an administrator, and it does not need to be a contractual right inserted into the security deeds.

The purported justification for this practice is that an Administration provides a moratorium that prevents minor secured creditors from recovering their assets and exercising their rights. Even if this was the real reason, it is not correct to act in this manner. The reason for the moratorium to be inserted into the Voluntary Administration regime was to give a company time to resolve its financial issues, not to prevent creditors from exercising their security rights when there is no prospect of the company being salvaged. Insolvency practitioners who take these appointments should appreciate that they are acting in direct contravention of the interests of these secured creditors. If there is no plan to propose a Deed of Company Arrangement, and we can assume this to be the case if the company is in receivership, then taking an appointment as a voluntary administrator in these circumstances is to either frustrate the legitimate interests of the minor secured creditors.

There is another explanation. Placing the company into administration has the merit of preventing the shareholders or any other creditor from appointing a liquidator. An Administrator is not required to present the first report with a list of creditors, so replacing an Administrator at the first meeting is very difficult. One of the roles of a liquidator is to supervise a receiver. A reasonable creditor may assume this isn’t going to happen if the GSA holder who appoints the receiver also manages to choose who the Administrator is, knowing that the administration will inevitably lead to a liquidation.

Voluntary Administration was designed to assist companies seeking options to trade their way out of insolvency. It was not designed as a means by which secured lenders and those they appoint as receivers to avoid the legitimate scrutiny of an independently appointed liquidator. This practice is legal, but it is difficult to see how it is ethical. Liquidators are not lawyers. We are not here to ruthlessly advance the cause of our clients within the confines of the law. We have a different set of obligations, and it is time some members of this profession began to appreciate this distinction. A lack of work does not excuse a lack of morality. This practice should cease.

Filed Under: News

Damien Grant, Principal
damien@waterstone.co.nz
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