Voluntary administration can be a valuable option to restructure a company into a leaner, more profitable entity, and should not be seen as a last resort.
There is no doubt that the COVID-19 pandemic has brought many underlying business issues to a head: weak balance sheets are forcing many companies into a battle for survival, while upheavals in hard-hit industries are prompting businesses to restructure at a rapid pace, bringing forward long-term transitional plans.
Voluntary administration is often viewed as a last resort for many companies, a legal necessity that protects Directors from breaching their duties while paving the way for a likely wind-up of the current business.
However, this period of economic upheaval is an opportunity to reframe the perception of voluntary administrations and utilise the Corporations Act so that companies can restructure out of distress and into a financially stable position via a Deed of Company Arrangement (DOCA).
The current reality is that many companies often delay the process for so long that by the time it is placed into administration it is too late to bring any substantive change and preserve the business going forward. This is a great loss not only for the individual business and its employees, but other key stakeholders and to the vibrancy of the business landscape.
Part of the problem comes down to the market perception that voluntary administrations are the end for a distressed company.
Yet voluntary administrations should not be viewed as the end of a business, but rather as an effective tool to enact a comprehensive turnaround and maximise the viability of the ongoing business.
Seizing the opportunity
It is worth noting that the negative perception of corporate legal mechanisms to facilitate a restructure does not extend to the largest economy in the world, the US, where Chapter 11 Bankruptcy provides an opportunity for companies to reorganise their business model.
The Chapter 11 Bankruptcy process is viewed as a legitimate mechanism to restructure without negative stigma, and several high-profile brands have emerged from Chapter 11 processes as stronger businesses, including Chrysler and Six Flags.
More recently, companies such as Hertz, Neiman Marcus and JCPenney have also made use of Chapter 11 to restructure during the COVID19 pandemic with hopes of achieving similar success through a restructured business model.
In Australia, a number of companies have also implemented successful restructures via the voluntary administration process.
For example, in 2017 KordaMentha ran the administration of Network Ten, leading to the station entering an arrangement with NYSE-listed US television network giant CBS. As part of the restructure, CBS funded a $143 million facility to refinance Network Ten's secured debt — including shareholder guarantor fees — and a working capital facility of $30 million.
During our appointment, we worked alongside management, suppliers, and content providers to ensure that viewers around the country continued to enjoy the content they knew and expected from the network. Numerous contracts were renegotiated to match payment terms to Network Ten's cash inflows, stabilising cashflow and allowing for the continuity of business and employment.
We were also responsible for the voluntary administration of Steel manufacturer, Arrium Australia. The company had crippling debt of more than $4 billion and the future of the steel works city of Whyalla, a community of 22,000 in regional South Australia, was on the line.
The company employs some 6,500 employees across 150 sites in Australia. As a result of the restructure, we managed to minimise job losses, stabilise the business, and arrange the sale of Arrium to Liberty House GFG — one of 50 companies that lodged expressions of interest. The purchaser has and continues to invest in the business for future operation.
Most importantly, Network Ten and Arrium avoided liquidation, which ensured the preservation of those companies, retention of jobs, and continued trade with customers and suppliers.
A duty to act
The Corporations Act is clear in its intent that companies and their businesses should be preserved wherever possible.
The objective of Part 5.3A of the Act in relation to voluntary administrations is to "maximise the chances of the company, or as much as possible of its business, continuing in existence", and equal consideration should be given to using this section of the Act to proper effect.
During the unusual business climate of the COVID-19 pandemic, the Federal Government has announced a six-month moratorium on directors being held personally liable for insolvent trading claims. While this provides some protection, it is important to remember that directors have other duties such as the General Duties to act with care and diligence, and to act in good faith. No relief has been provided to directors in respect of these duties and directors that choose to continue to trade during this moratorium period should be mindful of their obligations.
Directors may also wish to use the Act's Safe Harbour provision to attempt to turn around the business during this time, making use of the protection it offers against penalties for insolvent trading. However, while Safe Harbour has a vital role to play, especially in protecting directors and encouraging proactive steps, it may not give directors ample scope to restructure the business.
Value of the DOCA
An option for restructure using a voluntary administration is the use of a DOCA, which should be considered as an effective, flexible way to restructure a company. The Corporations Act includes provisions in voluntary administration that are not available in a consensual restructure.
These provisions provide a moratorium on certain creditors exercising their rights, such as landlords taking possession of leased property, and allowing time for the best path forward to be outlined for a company and its business. The Administrator also assumes liability for debts incurred during the process which can encourage suppliers to trade with confidence, where they may otherwise feel uncertain that the company could meet its obligations.
Voluntary administrations may be particularly useful where there are onerous contracts or liabilities that cannot be avoided through commercial negotiation. For example, a retailer may only have a portion of their portfolio that is viable. A voluntary administration process may be used to exit non-viable stores and restructure their portfolio.
It is worth noting that a Voluntary Administrator may be appointed if directors resolve that the company is insolvent or is likely to become insolvent at some future time. This distinction is critical, as it allows businesses to utilise the process proactively if they believe the company will become insolvent in its current form at some future time and proactively restructure the business for sustainable performance going forward.
A DOCA requires the support of the majority of creditors to institute, and it must offer creditors a better outcome than liquidation. Once implemented, a DOCA is binding on all unsecured creditors; and those secured creditors who voted in favour.
Supporting the objective of Part 5.3A, since July 2018, restrictions have been placed on the termination of certain contracts by counterparties allowing businesses to preserve crucial contractual relationships.
Dispelling voluntary administration concerns
Despite the capacity of a voluntary administration to fundamentally reshape a company and save it from collapse through the use of a DOCA, many people still do not realise how valuable it can be.
There is a fear that the voluntary administration process will result in a loss of control of the business, when in reality the best restructures occur when there is a well-considered plan for Administrators to independently assess, often formulated by the directors and management, and put to the creditors for approval. Voluntary Administrators will often leverage knowledge of existing management throughout the process to ensure the best outcome for creditors is achieved.
There are other protections too arising from the use of a DOCA: creditors can be looked after in a tiered fashion with key creditors prioritised, while businesses cannot be evicted from premises.
Now is the time
There is no doubt that the COVID-19 pandemic has brought many systemic issues to a head. This presents an opportunity to use the period of slower economic activity to make full use of the voluntary administration process to restructure a business so the company emerges in a stronger position. During periods of upheaval, companies should take the time to explore all of the options available, and voluntary administration is one of the most underutilised ways to enact a business restructure.
Placing a company into voluntary administration should no longer be seen as a is a negative reflection on the Company and its directors, but rather view it as a proactive, tactical gambit to be deployed when transforming a struggling business.
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