It is an unfortunate fact that many companies experience financial difficulties at times.  Often the directors/shareholders do not realise that there are a number of options available to them.  This article provides an overview of the various options for distressed companies.  

A compromise is an agreement between a company and its creditors.  The purpose is to enable a company to trade out of its financial difficulties and thus avoid administration, receivership or liquidation.  In this way the company can survive into the future and provide continuing business to creditors.  

There are two basic features of most compromises:  

• Creditors will be repaid in full or in part over a period.  If creditors are paid in part they write off the balance of their debt;
• During the term of the compromise the company's debts are frozen and no creditor may take any action against the company.

Usually, the directors of a company decide to allow the company to enter into a compromise, subject to creditor approval. Creditors will only approve if they believe that they will receive more money than in an administration, receivership or liquidation.  

Compromises are governed by Part 14 of the Companies Act 1993.  Each class of creditors affected must vote as a class.  Classes can include trade creditors, landlords, employees for preferential wages and holiday pay, Inland Revenue for preferential GST and PAYE, hire purchase creditors and other secured creditors.  

For a compromise to be approved, a majority in number representing 75% in value of each class of creditors must vote in favour of the proposal.  

A creditor's compromise can be a good option for businesses that are fundamentally sound, but are experiencing financial difficulty.  

Voluntary administration   

Voluntary administration is a relatively new rehabilitation mechanism that was introduced into the Companies Act 1993 about seven years ago.  An administrator may be appointed by a distressed company's directors, a secured creditor holding a charge over all or substantially all of the company's property, a liquidator or the Court.  

The aim of voluntary administration is to maximise the chances of the company (or its business) continuing in existence, or if this is not possible, for creditors to receive a better return than in a liquidation.  It is an interim measure during which creditors' rights to enforce charges, repossess assets or enforce guarantees are restricted.  A General Security Agreement ("GSA") holder may, however, appoint a receiver within 10 working days of the administration commencing.  It is therefore critical for the administrator to have the support of any GSA holders.  

Once a company enters into voluntary administration the directors can only act with the written permission of the administrator.  The administrator takes control of the company's business and has 25 working days to complete an investigation and provide an opinion on the most beneficial course of action for creditors.  This will be one of three options:  

• Have the company enter into a Deed of Company Arrangement ("DOCA") with creditors;
• Put the company into liquidation; or
• Return the company to its directors (this is very rare).

A DOCA is an agreement between the company and its creditors.  It is the responsibility of the deed administrator to ensure that the company adheres to the DOCA's terms and conditions.  

Receivership   

A receivership appointment is made by a secured creditor who has been granted a General Security Agreement ("GSA") over the company's assets.  The GSA holder is usually a financial institution or a private lender.  

The conduct of receivers is governed by the Receiverships Act 1993.  A receiver has control over the company's assets subject to the GSA under which they have been appointed.  The receiver's primary purpose is to recover funds for the secured creditor, however, the receiver also has a duty to protect the rights of other creditors.  The receiver provides reports on the conduct of the receivership to the secured creditor and files this report with the Companies Office. 

The receiver ceases to act when the secured creditor has been repaid and at this time control of the company reverts to the directors.  However, a liquidator can be appointed if there are further assets to be realised, funds still owed to unsecured creditors or matters requiring investigation.  

Liquidation   

When the directors/shareholders of an insolvent company become aware that there is no realistic ability to trade out of their financial difficulties they can resolve to appoint a Licensed Insolvency Practitioner of their choice as liquidator.  This is known as a voluntary liquidation. 

In instances where the directors/shareholders do not take any action, a creditor of the insolvent company may apply to the Court for an order requiring the company be put into liquidation.  This is known as a Court appointed liquidation and it is the Court's decision as to who will be appointed as liquidator.  If a company is served with a winding up application by a creditor, the directors/shareholders cannot appoint voluntarily unless with the consent of the applicant creditor. 

The conduct of liquidators is governed by Part 16 of the Companies Act 1993.  Once a company liquidation commences the director's powers are restricted and they must provide the company's records to the liquidator.  They must also co-operate with and support the liquidator. 

The liquidator's main duty is to realise assets belonging to the company and distribute the proceeds to creditors.  The liquidator may also investigate the reasons for the company's failure, set aside insolvent transactions and take legal action where necessary.  The liquidator must report to the company's creditors every six months and file these reports with the Companies Office. 

Upon completion of the business liquidation the company is struck off the Companies Register. 

Every situation is unique and a number of factors should be taken into consideration to determine the best course of action in the event of company insolvency.  If you wish to discuss your situation please contact one of the team at McDonald Vague.

Alternatively, download our Free Guide to Insolvency Services

Background

McDonald Vague partners have been appointed receivers on a number of major appointments, including the recent receivership of Tawera Land Company Limited "TLC". This is an entity owning millions of dollars of farmland associated with bankrupt businessman Ken Thurston.

Mr Thurston (formerly a director of 14 other companies) had a rocky financial period which reached its climax in October 2010 when he was adjudicated bankrupt. Since then a number of his companies have failed.

TLC owned and operated significant land holdings in the Manawatu and Taumarunui regions comprising 15,000 acres. Over the past six months, our Agri-Business team has managed the farming operations which include a dairy farm as well as sheep and beef farms.

One significant event was the successful sale of the Manawatu land blocks to Landcorp Farming Limited who intend to continue the sheep and beef farming operations. Since the start of the receivership McDonald Vague has realised approximately $27 million worth of property for the secured creditor.

Receivership issues

As is the case with many receiverships, we have managed our way through a thorny path of issues including:

• Livestock disputes as regards ownership and security interests therein
• A dispute over neighbouring claims to an airstrip
• Employee claims to pre-receivership wages and holiday pay
• Asset disputes, in particular the right of family members to funds they advanced towards the purchase of a company stocktruck and trailer. There was no loan document drawn up, no security document had been completed and no financing statement had been registered over the truck and trailer. The financial accounts of the company remained incomplete and so were not of any assistance in helping to determine the true owner
• Four subdivision projects partially completed at the date of appointment
• A contractual dispute with a neighbour in which the neighbour had purchased a small block of land from TLC and claimed that as a condition of sale, TLC were required to complete boundary fencing, which had not been done
• A contractual dispute with another neighbour who purchased a farm house. It was alleged that as a condition of the sale TLC were required to install a separate power supply to the property, which had not been done
• The rights of a metal contractor to enforce his three year contract with TLC for metal extraction
• The rights of contractors to barley crops they had planted

The most important point arising from many of these disputes was that the contracts were invariably made with TLC and not the Receivers. The obligation on the Receivers was to either adopt the contracts (if of ongoing value) or novate them. In the majority of the situations listed above, we (as receivers) made it clear that we would not adopt the contracts and therefore no liability attached to the Receivers.

PPSR and creditors

A key issue we continually encountered was the failure of other parties to safeguard their financial position by registering a security interest on the Personal Property Securities Register (PPSR) over financial advances they had made to TLC (for example: the stock truck and trailer, and the crops sown by contractors). Because no PPSR registration was made, all potential security interests given to these parties became subordinate to the interests of the registered secured creditor(s).

In this particular receivership it is highly unlikely that there will be any funds available to pay unsecured creditors. The above mentioned parties that advanced funds to TLC will now miss out altogether when some of them could have been in a position to receive something. This shows the importance of always ensuring that whenever funds are loaned to another entity, a proper loan agreement is drawn up, signed and a security interest registered on the PPSR. This may take more time at the beginning of an agreement, but in the event of a receivership, liquidation or other financial dispute it will have been time well spent.

Boris van Delden was the appointed Receiver on this appointment. For more information on McDonald Vague's Agri-Business expertise please visit the Agri-Business page.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

When commencing a receivership we often expect that it will involve a relatively straightforward sale, realisation and distribution process. However, it is increasingly common in these economic times for the receivers of an insolvent company to be considering and dealing with not only its creditors' interests but the positions and creditors of other, potentially competing, insolvent entities.

The factual scenario

Matakana was a winemaker. It had a related company, Goldridge, whose role was to market the wine. The Vintage companies ("Vintage") were set up to raise money from outside lenders and to hold that money to be paid when invoiced for the cost of the grape juice and for bottling the wine, and then supply the bottled wine to Goldridge. The use of the funds from Vintage's secured creditor was supposed to be monitored by an independent accountant. That accountant was supposed to be a cheque signatory and control the flow of funds according to the terms of the loan agreement.

There were agreements in place for each stage, except notably there was no agreement between Vintage and Matakana for the actual winemaking. Personal Property Securities Register ("PPSR") registrations were made pursuant to the written loan agreements.

In fact, what was happening was that Vintage drew down all of the loan funds. Matakana was then almost immediately paid all of the funds by Vintage contrary to the lending terms, purchasing the grapes, commencing winemaking and later billing Vintage for the cost of the juice. Later, when it finished and bottled the wine, Matakana would send another invoice to Vintage. Vintage would then sell the finished wine to Goldridge.

In late May 2009 Matakana had invoiced Vintage for 400,933 litres of juice. Matakana had maintained detailed wine records as required by law. This was ultimately very helpful in resolving the ownership issues.

It was intended that Goldridge would pay for the wine sold to it by Vintage in stages so that Vintage could meet its obligations to its lenders.

Four Vintage companies were placed into receivership in December 2010. Boris van Delden (Partner at McDonald Vague) was appointed receiver. Vintage had borrowed money on specific terms from a third party secured creditor. Vintage had lent the borrowed funds to Matakana, contrary to the loan terms. Matakana had different secured creditors to Vintage.

At the time Vintage was placed into receivership, Matakana and Goldridge had been in liquidation for about three weeks. There were many vats of grape juice or wine on the site that all the entities operated from. Matakana's liquidators said the wine was Matakana's or was held by them as bailee, and Vintage said it was theirs.

As you would expect, correspondence ensued between the Vintage receivers and Matakana's liquidators, including a warning from the receivers to the liquidators not to deal with the assets without the receivers' prior consent. The issues were not resolved, and Matakana's liquidators went ahead and sold most of the wine in the vats.

The High Court legal action

The dispute was taken to the High Court by Vintage's secured creditor and the receivers ("the plaintiffs"). Vintage's secured creditor said that under the terms of its security agreements it was entitled to possession of the juice on default, and the liquidators had committed conversion by not giving possession of the wine and by selling it.

Alternatively, all of the plaintiffs said that the wine was Vintage's and that the liquidators had converted it.

The liquidators denied these claims and said that Vintage was at best an unsecured creditor in the liquidation, and that the lenders' security was subordinate to the General Security Agreement ("GSA") held by Matakana's bank. We note that Matakana's bank held no security interest over Vintage. Matakana argued that the sale to Vintage was not in the ordinary course of business, and that as the companies were related, all were on notice about each others' security interests.

The Court's findings

In a decision issued in late October 2011, the High Court agreed with Vintage's secured creditor that most of the wine was the secured creditor's, and that the liquidators had converted it.

This was because the security interests had attached to most of the wine in May 2009 when the property in the original and/or later commingled wine passed to Vintage. The sales were in the ordinary course of business. This was easily proven, as the arrangements had been in place since 2001.

While the invoices from Matakana had not been specifically paid by Vintage, the funds advanced by Vintage to Matakana were sufficient to show that Matakana had received value for the invoices. Therefore, Vintage had paid for the invoiced juice in the vats, and the invoices were not merely an installment for the finished product that was to be invoiced and supplied to Goldridge. In concluding this, the Court relied on the face value of what the invoices actually said and in the absence of any other agreements Matakana was not able to convince the Court to infer any other interpretation of the invoices.

But the juice in the vats was not all Vintage's. Some of it had been commingled with Matakana's own juice and the juice of others at different times. The Court had to consider:-

1. What juice had not been blended at all;
2. What juice had simply been blended with other Vintage-invoiced stock; and
3. What juice had been blended with Matakana stock.

in each case as at 19/20 May 2009 when Matakana had invoiced Vintage.

On each question the Court referred to the provisions of the Sale of Goods Act 1908.

The Court went back to May 2009 (being the invoice dates) because that was the clear starting point to ascertain if property in the juice had been acquired by Vintage. The Court decided that Vintage was not entitled to any juice that had been mixed with Matakana's juice prior to the 19/20 May 2009 invoicing, as the relevant goods being transferred could not be ascertained despite the May 2009 invoicing. Where Vintage owned the juice, as a result of the May 2009 invoicing, and it was later mixed with other juice ("commingled"), Vintage owned the juice as tenants in common with any other entities whose juice was commingled with Vintage's.

The Court held that the liquidators were responsible for conversion. This is only the second instance we have come across of insolvency practitioners being found guilty of conversion. The Court also awarded substantial costs to the plaintiffs.

Recovery of the losses arising from the conversion is still under way.

Footnote

An action is under way against the independent accountant who was supposed to oversee the control of the lenders' funds.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

Introduction

In August 2011, the High Court issued an important decision in Burns v Commissioner of Inland Revenue on the widely argued question of "what is an account receivable?". This followed an earlier decision (re Northshore Taverns, 2008) in which the High Court decided that "accounts receivable" amounted to "book debts" only. This may sound like an academic point, but it is very important in determining which creditors receive distributions from the various sources of funds realised in a receivership or liquidation. The decision has positive implications for employees and the IRD as preferential creditors, and negative implications for General Security Agreement ("GSA") holders and guarantors.

The legal issue

The Seventh Schedule to the Companies Act 1993 sets out the order in which receivers and liquidators must pay preferential claims. This relies on definitions in the Personal Property Securities Act 1999 ("the PPSA"). The current wording took effect from 2002 but the meaning of some of the definitions is still being debated in insolvency circles.

The Seventh Schedule provides that, where a creditor holds a GSA over a company's assets, they rank ahead of most other creditors in the distribution of funds from the insolvent estate, except where the assets comprise "accounts receivable" or "inventory", in which case the proceeds must first be used to pay preferential claims, ahead of the GSA holder.

These preferential claims mainly comprise employee debts for wages, holiday pay and redundancy pay, and amounts owing to IRD for GST and PAYE.

While inventory is relatively easy to assess, there are many assets that could potentially be considered accounts receivable. Whether these assets are categorised as accounts receivable or not can have a major impact on the returns to secured and preferential creditors. In many cases, these items are the only assets and therefore the interests of preferential and secured creditors are directly in competition, with one or other of these groups potentially standing to recover nothing.

The PPSA defines an account receivable as "a monetary obligation...whether or not that obligation has been earned by performance". In most cases it is easy to determine whether an asset is an "account receivable" within that definition.  There is no question that routine trade debtors, properly invoiced and appearing in the company's accounts as a trade debt, fit the definition. This had already been confirmed in the earlier High Court decision. Where problems arise is in situations where money is due to a company for some other reason.

The Burns v IRD decision considered this definition in the context of such items as:-

• Council bond refunds
• Amounts refundable following overpayments
• Amounts held for the company in a lawyer's trust account

These, and similar items, have in the past proved difficult to categorise for distribution purposes and therefore entitlement to the proceeds of these assets has been potentially contestable.

The decision in Burns v CIR

The Burns decision stated that a broad interpretation should be applied to the phrase "account receivable". It held that bond refunds, refunds of overpayments and amounts held for the company in a lawyer's trust account all fitted the definition of accounts receivable and were therefore available to preferential creditors. The decision thus clarifies the position regarding a range of assets which were previously seen by practitioners and their lawyers as a "grey area". The decision also resolved the question of at what point a debt is classed as an "account receivable". Is it at the date of liquidation, or could it also refer to amounts which only become due after liquidation or receivership? The Court confirmed that the wording only refers to amounts due at the date of liquidation, and therefore only these amounts will be payable to preferential creditors. This is unsurprising, as otherwise many anomalies would arise.

For instance, if a liquidator trades on for a short period and sells inventory purchased after liquidation on credit, or sells a company's plant and gives the buyer 30 days to pay, should the amounts due suddenly become payable to the preferential creditors? The High Court has said no; the asset type is tested and determined as it exists at the date of appointment.

Implications for preferential and secured creditors

This decision will clearly not be welcomed by banks, finance companies and other parties who have lent against GSA securities (for instance, private individuals including investors, directors, and their spouses, friends and family members). It will, however, be welcomed by employees and the IRD, who will see themselves pushed to the front of the queue in cases where they might otherwise have ranked behind a GSA holder. For our part, there remains the question of which other assets the definition could capture. We are concerned that the two decisions have not provided total clarity as to what assets may constitute an account receivable. Instead, there is the potential for the definition to capture even more assets.

We understand that the case may be subject to an appeal in mid 2012, but for now it is the precedent and we must follow it. There may well be other cases on this issue, as there unfortunately remain some unanswered questions.

This decision should be brought to the attention of GSA holders, and also to guarantors under those GSAs. It means that there are likely to be less proceeds available to secured creditors and consequently there is a greater likelihood that secured creditors will be pursuing other repayment rights and remedies. The decision, and consequent expectations of loan collectability, will also impact on the holding values of loans in the financial accounts of secured lenders.

Update - December 2012

The Burns v IRD case is the subject of an appeal to the Court of Appeal. We understand that this is likely to be heard in mid 2013.

Note: This article was written by Jonathan Barrett who has subsequently left the firm.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

Introduction

It is now almost ten years since the Personal Property Securities Act 1999 ("PPSA") was enacted. Despite this, in our insolvency work we still regularly come across suppliers who have not performed the necessary registrations, and as a result lose priority to other creditors. This is highly unfortunate, given that a PPSR registration is simple to do and costs only $3.07. A PPSR registration is a little like income protection insurance - not terribly exciting to think about now, but it can make all the difference if the unexpected happens. We encourage all our clients to check that they, and their own clients, are fully conversant with this vital area. In this short article we attempt to explain the main points of the PPSA and its implications for suppliers.

The PPSA - a brief summary

The PPSA came into force on 1 May 2002. It constituted a major reform of the law relating to security interests in "personal property". The new law was closely modelled on a similar act in the Canadian province of Saskatchewan.

Prior to the PPSA, such interests were registered at a variety of locations including the Companies Office. The previous law was regarded as inadequate and cumbersome. The PPSA set out to provide a single online location where suppliers could find out at minimal cost what existing security interests there were against their customers' assets.

The PPSA affects lending, leasing and other types of credit-providing activities. Personal property is given a wide definition. With few exceptions it covers any property someone can own, notable exceptions being land (interests over which are still registered at the Land Registry), and ships over 24 metres in length.

The Personal Property Securities Register ("PPSR")

The PPSA introduced a registration system for what are termed "security interests" in personal property. This is run through an online registry called the PPSR, which anyone can search for just $1.02. Registration is not compulsory. However, failure to register means a creditor may lose priority to another creditor who does register, and is therefore inadvisable. A supplier generally only has to register once in respect of each customer (not every time goods are supplied), and then renew the registration every five years. There are strict time limits for registration - generally on or before delivery in the case of inventory, and within 10 working days for other assets.

"Security interest" is a broad term. Some of the most important examples of a security interest are:-

• A General Security Agreement - previously known as a debenture
• A retention of title clause
• A lease of goods/equipment of more than one year
• A lease of goods/equipment for an indefinite term
• An agreement to provide goods on consignment

Where things tend to go wrong

Where problems arise for many suppliers is when a bank or other lender has been granted a General Security Agreement ("GSA"). This is because most GSAs refer to "all present and after acquired personal property" and therefore potentially cover all company assets.

Because a supplier of stock or equipment has provided new value for its security, it normally ranks ahead of the GSA holder's general security in respect of those goods (this is known as 'super-priority'). However, this is only true if the supplier registers its interest on the PPSR. If not, it is likely to lose priority in those goods to the GSA holder (and also potentially the preferential creditors) in the event of its customer's insolvency. In most cases this means a supplier with a retention of title clause or a lessor of goods who has not registered walks away with nothing.

This is despite the fact that the retention of title clause may be perfectly valid in itself. This is because the PPSA only concerns itself with priority between security interests, not legal ownership. This subtle distinction is not often understood and tends to result in some understandably very disgruntled creditors.

Even where there is no GSA, a supplier of stock with no PPSR registration is still at risk of losing priority to the preferential creditors.

What are the key areas of risk for suppliers and lessors?

For most normal trading businesses, the main risk areas tend to be:-

Retention of title/"Romalpa" clauses

These should be agreed in writing rather than just stated on the back of invoices. However, even with a full set of signed terms and conditions, a retention of title ("ROT") clause is likely to be worthless in an insolvency if a PPSR registration has not been made. We have been involved in numerous cases where we have had to tell suppliers that their unregistered ROT clauses had no practical use and they could not recover any stock.

Consignment stock

The same principle applies to stock supplied on a consignment or "sale or return" basis. Even though legal title may not have passed to the customer, the consignment is a security interest and therefore has to be registered to rank ahead of a GSA holder or preferential creditors. Again, an unregistered supplier is likely to be unable to recover stock supplied in the event of its customer's insolvency.

Leased goods

Where a lease is for a term greater than one year (or for an indefinite term), the lessor must register its interest in the goods on the PPSR. If it fails to do so, the lessor may lose priority over those goods to a GSA holder. A lease agreement may be held to be of an indefinite term if it does not contain a clearly stated term, or end date. This is where many lessors run into problems.

General Security Agreements

GSA holders need to be aware that the old priority rules no longer apply. Previously, the first GSA to be executed ranked first, unless specific accommodation had been given to a subsequent GSA holder. The date of a GSA's execution is now irrelevant when assessing priorities. What matters now is the date of registration on the PPSR. The first GSA to be registered ranks first.

Conclusion

This is only a brief summary of this complex legal area. However, two very important points are clear. Suppliers/lessors of goods must ensure that their terms and conditions are properly worded to reflect the current law. They must also ensure that they have a valid PPSR registration to protect those legal rights. We recommend that all businesses selling goods on credit (or leasing goods) carefully review both their terms of trade and their PPSR registration procedures. We are happy to answer further questions, and can also recommend appropriate commercial lawyers with expertise in this field.

Note 1 -PPSR fees increased on 1 August 2012 to $3 for a search and $20 to register or renew a financing statement.

Note 2: This article was written by Jonathan Barrett who has subsequently left the firm.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

When a company fails one of four things usually happens:-

• A receiver is appointed
• An administrator is appointed
• It enters into a compromise with its creditors
• It is put into liquidation (this will be covered in Part 2)

This article seeks to explain the rights that creditors have in each of the above insolvency proceedings. It is written from the perspective of the ordinary unsecured creditor.

1 - Receivership

The purpose of receivership is to repay the debt owed to the General Security Agreement ("GSA") holder.  GSA holders tend to be banks but can also be private lenders (including directors and family members). The receiver's obligations are primarily to the GSA holder who appointed them. If a receiver holds surplus funds after repaying the GSA holder these must be returned to the company or paid to a liquidator to distribute. Receivers have no powers to make distributions to unsecured creditors. There are also no meetings of creditors in a receivership.

The main option for unsecured creditors is therefore to apply to the Court for a liquidator to be appointed (assuming the shareholders are not willing to appoint a liquidator voluntarily). Although a liquidator cannot take control of charged assets until the GSA holder has been repaid, he/she can do the following:-

• Examine the validity of the GSA and of the receiver's appointment
• Examine the receiver's acts and ensure that he/she has obtained the best possible price for the assets
• Take actions not available to a receiver, the commonest being:-

- Insolvent transactions (previously known as voidable preferences), and insolvent setoffs
- Voidable charges
- Transactions for inadequate or excessive consideration with directors

However, legal action can cost many tens of thousands of dollars and if there are no surplus funds a liquidator may well need funding to bring such actions.

2 - Voluntary administration

The voluntary administration procedure was introduced in New Zealand in November 2007. Its stated aims are to either:-

1. maximise the chances of the company continuing in existence or;
2. achieve a better return for creditors than would be achieved in a liquidation

Appointment
An administrator can theoretically be appointed by the Court on a creditor's application. However, this is unlikely in practice given the amount of knowledge that is required for the court application. The administrator is much more likely to be appointed by the company.

The right to have a first meeting of creditors
The administrator must hold a meeting of creditors within eight working days of their appointment. Creditors can vote at this meeting on whether to appoint a creditors' committee or whether to replace the administrator. A vote is passed if approved by a majority in number, representing 75% in value, of the creditors or class of creditors voting in person or by proxy/postal vote. The creditors' committee has the right to consult with the administrator and to receive and consider reports by the administrator.

The right to have a 'watershed meeting'
This meeting must be convened within 20 working days of the administrator's appointment (unless the Court extends this period) and then held within a further five working days. Voting rules are as above. Creditors have the right to vote on the following:-

1. to resolve that the company execute a Deed of Company Arrangement ("DOCA") with creditors
2. to resolve that the administration should end
3. to appoint a liquidator (which also ends the administration)

The administrator will become the deed administrator (where a DOCA is approved) or the liquidator (where creditors vote to put the company into liquidation), unless creditors specifically nominate another person for this role.

The deed administrator can later be replaced by the Court on a creditor's application. A DOCA is binding on all creditors (excluding secured creditors), whether or not they voted in favour of its execution.

The right to request amendments to or termination of a DOCA
Creditors owed a total of at least 10% of the combined amount owing to all creditors can require the deed administrator to convene a meeting to either vary or terminate the DOCA.

The right to review the administrator's accounts
The administrator is required to file receipts and payment summaries at the Companies Office every six months. Any creditor can view these accounts online.

3 - Compromises with creditors
Compromises with creditors are the one situation where power is technically in the hands of the unsecured creditors. For a compromise to succeed it must be approved by a majority in number and 75% in value of each class of creditor voting for the proposal. The same rules apply for voting as to any proposed variations to the compromise terms.

One of the difficulties with compromises is that every compromise is different and there is less integrity in some compromises than others. This is where the power to ask for amendments is invaluable. Before voting, creditors need to be satisfied that the following questions have been answered satisfactorily:-

• Will the proposal give them a greater return than they would achieve in a liquidation? To give some degree of comfort on this issue it may be necessary for an independent accountant to examine the company's books and records
• Is there a professional Compromise Manager in charge of the process? It would seem to be relying on blind faith to assume that the director, who was the architect of the company's difficulties, can independently manage the compromise arrangement
• Is there a creditors' committee to work alongside the Compromise Manager? If creditors want to be involved with the process they must be represented
• What happens if the compromise does not work out? For instance, will the Compromise Manager hold a signed resolution by the shareholders to place the company into liquidation, to be exercised if the company does not fulfil its obligations under the compromise?

Our article 'Company creditor compromises - worthwhile or not?' covers this topic in greater detail.

Note: This is an expanded and updated version of an earlier article written by John Vague and was subsequently revised by Jonathan Barrett.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.