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Voluntary Administration: A Case Study Analysis

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Question:

Write about the Voluntary Administration for a Case Study Analysis.

 

Answer:

Constructing a DOCA Proposal

One of the options available under voluntary administration is entering into a deed of company arrangement (DOCA). Either of the interested parties in the administration process, that is directors or creditors, may propose a deed highlighting the rights of creditors against the organisation and its assets and the obligations of the company in paying out its debt (Cseti, 2011). The deed, therefore, is an instrument that presents a compromise arrangement between the organisation and its creditors where the company has been facing financial challenges. It serves as a way to terminate the voluntary administration process. Once the deed is approved by the creditors the administration process is complete and the organisation proceeds to enforce the requirements of the deed accordingly.

However various factors must be considered in constructing a DOCA proposal. As a voluntary administrator, once should ensure the deed adheres to the provisions of s 444A of the Corporations Act 2001. In preparing the proposal, an administrator should ensure they have set out the available property; the extent the company is relieved of its debt, pre-execution conditions and post-execution conditions, grounds for termination and order of distribution of proceeds among others. The deed may propose a continuation of the company’s operation, injection of funds or sale of company properties or outline a fixed sum payable to creditors over a set period of time. Identifying the most suitable cause of action is guided by the deliberations at the creditors’ meetings as well as liaising with the company directors. These are the considerations to be made and criteria to be met in preparing a DOCA proposal for the directors and creditors of 4th Estate Media Limited.

 

Insolvent Trading

The Corporations Act 2001 (Cth) under s 95A defines solvency as the capacity to cover all debts and financial obligations when they are due, failure to this constitutes insolvency under s 95A (2). With regard to companies, Sutherland v Hanson Construction Materials Pty Ltd (2009) NSWSC held that an organization's solvency is determined by its cash flows which are evidenced by the balance sheet among other financial statements. As such, where an organisation’s cash flows fail to cover its debt then the organisation would be considered insolvent (ASIC, 2016). Under s 588G of the Act 2001 (Cth), where a company is insolvent and the directors cause it to incur further debt they would be engaging in insolvent trading which is a breach of their duties.

The Act under s 588G bestows a duty on directors to prevent insolvent trading where they are directors at the time the debt is incurred, where incurring the debt leads to insolvency or where there are reasonable grounds for belief that the company is or would be insolvent (Quinlan, 2017). A director would be held liable if they were evidently aware of the company’s insolvency but allowed the debt to be incurred or where a reasonable person in their position would be so aware of the possibility of insolvency. The Act 2001 (Cth) further considers dishonesty on the part of the director as a determinant for liability; the burden of proof lies with the claimant alleging the directors’ liability for insolvent trading (ASIC, 2016).

Insolvency trading elicits various consequences; perpetrators face civil penalties as well as criminal charges in the event they are convicted of guilt. Contravention of the insolvency provisions outlined above may attract pecuniary penalties totalling up to $200,000. Other civil penalties include disqualification as a manager and compensation to creditors for the loss suffered (ASIC, 2016). Where dishonesty is involved, directors found liable may attract criminal liability. As such, where the director is found criminally liable they are likely to face imprisonment of up to five years (ASIC, 2014).

The Impact of an Administrator’s Appointment on Large Bank Ltd

Large Bank Ltd in this case study qualifies as a secured creditor, that is 4th Estate Media owes the bank money to the tune of Two Hundred and Fifty Million Dollars ($250M). In turn, the bank holds a security interest over some of the company’s assets. Upon assumption of their role as voluntary administrators, Mark Menthol and James Corporal are expected to investigate the company’s affairs and present the bank, along with other creditors and stakeholders with a report and possible options to end the voluntary administration process. Guided by this report the bank and other creditors will hold meetings to determine the best possible cause of action.

However, with the appointment of the voluntary administrators, the bank as a secured creditor cannot enforce any security interests they may hold over the company’s assets (ASIC, 2017). Further, as a creditor, the bank cannot institute legal proceedings to wind up or recover any debt owed once a voluntary administrator is appointed (Quinlan, 2005). If the bank held a charge over any company property, it must enforce it within ten days of the administrator's appointment; later enforcement would require the administrator’s consent or leave of court. However, if the bank had commenced enforcement proceedings prior to the appointment of the administrator, the enforcement of the security would proceed. As such, the appointment of the voluntary administrators would limit the rights of the bank to lay claim over the outstanding loan or enforce any existing securities as described above.

 

Board Composition and ASX Corporate Governance Guidelines

Generally, board size and composition varies depending on the type and size of the company as well as the complex nature of its business (Governance Institute of Australia, 2014). The ASX Corporate Governance Guidelines (2014) outline the composition guidelines for listed companies and provide that the size of a company’s board of directors should be ample enough to cater for the business’s requirements. Additionally, any changes to the board’s composition should be carried out smoothly without disrupting company operations. Further, good governance principles dictate that the chairman of the board should remain a non-executive director; the board should comprise of independent directors to ensure an unbiased opinion is reflected in decision making. In addition to this, any director who is described as an independent director should hold no interest whatsoever within the company that would compromise their independence.

The conditions listed above outline the criteria for public companies to observe with regard to board composition. In the case study discussed herein, 4th Estate Media Limited has a board of five directors. The number falls within the criteria provided by the ASX guidelines. Additionally, the board chairman Flem Worsley is described as independent which also conforms to the ASX guidelines. Further, Caddy Isely fills in the role of the non-executive director as required by the ASX guidelines. Given the size of the board, it is evident that there is a balance of executive, non-executive and independent directors on the board. With this analysis in mind, it is evident that the company, 4th Estate Media Ltd, has conformed with ASX guidelines with regard to board composition.

 

The Role of Minority Shareholders in the Voluntary Administration Process

As aforementioned, the purpose of the voluntary administration process is to restructure the organisation so as to allow it to survive where it has been faced with financial difficulties (Hughes, 2017). It allows the organisation an opportunity its financial status by suspending or negotiating obligations with creditors. During the administration process, the administrator assumes management control from company directors and assesses the company’s affairs so as to determine the best possible option for creditors that would ensure the company’s survival.

The primary duty of the voluntary administrator is to the creditors and the company directors; shareholders play a minimal role in this process (ASIC, 2017). In order to commence the process a voluntary administrator is appointed through a board resolution; shareholders and particularly minority shareholders do not play any role at this stage. Additionally, as previously mentioned the voluntary administrator is under no duty to report to the shareholders; however, shareholders may inspect administration books kept to maintain a record of the process. Shareholders are not accorded the right to vote on the company’s future once the administrator is appointed they would also be bound by a DOCA once or if it is approved. It is evident therefore that shareholders’ rights are limited under the voluntary administration regime (Williamson-Noble, et al., 2015).

 

Minority shareholders are likely to be severely disadvantaged where a company opts for voluntary administration. This is because they lack sufficient voting rights to influence the company’s future prior and post voluntary administration and as such are bound by any decisions made by directors and the majority. Additionally, as was the case in Australian Blue Mountain International Cultural & Tourist Group Pty Ltd [2015] NSWSC 937, the minority may receive notice of the ultimate decision either in delay or not at all and as such cannot adequately participate in the post administration process. Further, priority payment policies under Australian Corporation Legislation place minority shareholders at a lower priority level over creditors and majority shareholders as such they may receive little to no funds should the company decide to ultimately wind up after the voluntary administration process is complete (Resolute Lawyers & Associates, 2014).

 

Reference List

ASIC, 2014. Insolvency for directors. [Online] Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-consequences-of-insolvent-trading/
[Accessed 13 September 2017].

ASIC, 2016. Insolvent Trading: Duties of Directors. [Online] Available at: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx [Accessed 13 September 2017].

ASIC, 2017. Information Sheet (INFO 43): Insolvency, A Guide for Shareholders, s.l.: ASIC.

ASIC, 2017. Information Sheet 74 (INFO 74): Voluntary Administration, A Guide for Creditors.[Online] Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/voluntary-administration-a-guide-for-creditors/
[Accessed 13 September 2017].

ASX Corporate Governance Council, 2014. ASX Corporate Governance Principles 3rd Edition. s.l.:ASX Corporate Governance Council.

Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (2015) NSWSC 937.

Cseti, D., 2011. Understanding Personal Property Securities Law. Sydney: CCH Australia Ltd.

Governance Institute of Australia, 2014. Good Governance Guide: Board Composition. s.l.:Governance Institute of Australia.

Hughes, R., 2017. Explaining the Voluntary Administration Process. [Online] Available at: https://www.franchise.edu.au/home/topics/franchise-management-topics/explaining-the-voluntary-administration-process [Accessed 13 September 2017].

Quinlan, M., 2005. Corporate Insolvency and Restructuring. s.l.:Allens Arthur Robinson.

Quinlan, M., 2017. What is insolvent trading?. [Online] Available at: https://www.findlaw.com.au/articles/782/what-is-insolvent-trading.aspx [Accessed 13 September 2017].

Resolute Lawyers & Associates, 2014. Insolvency Laws Used to Eliminate Minority Shareholders. [Online] Available at: https://resolutelawyers.blogspot.co.ke/2014/06/insolvency-laws-used-to-eliminate.html [Accessed 13 September 2017].

Sutherland v Hanson Construction Materials Pty Ltd (2009) NSWSC.

Williamson-Noble, J., Gordon, T. & Tobin, G., 2015. Shareholder's rights in private and public companies in Australia. [Online] Available at: https://ca.practicallaw.thomsonreuters.com/2-611-6545?transitionType=Default&contextData=(sc.Default)&__lrTS=20170613194830306&firstPage=true&bhcp=1 [Accessed 13 September 2017].

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