As the social and economic disruption caused by coronavirus (COVID-19) continues to rapidly evolve, the boards of Australian companies are facing solvency related issues. These issues extend to the solvency of suppliers and customers, and the potential consequences of the appointment of a voluntary administrator.
The appointment of a voluntary administrator to a company is not the end of the road. The object of the statutory process is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
- maximises the chances of the company, or as much as possible of its business, continuing in existence; or
- if it is not possible for the company or its business to continue in existence, results in a better return to the company’s creditors and members than would result from an immediate winding up of the company.
The ultimate decision as to how the company might be able to continue is made by its creditors at the end of the administration period – normally around six weeks. Until that time, a statutory moratorium operates to restrict certain creditors exercising rights, including:
- unsecured creditors wishing to make or continue with a claim against the company;
- landlords wishing to take possession of property leased by the company; and
- a creditor holding a personal guarantee from a director of the company.
There are also restrictions on the termination of certain contracts with suppliers or customers based on ’ipso facto’ clauses – a clause that allows one party to terminate a contract when insolvency events occur, such as a company entering voluntary administration.
Where the company is large and complex, or there is a prospect of successful realisation of assets through negotiations with third parties, the administrator may apply to the Court for the administration period – and moratorium – to be extended. The Court will tailor the length of the extension to the circumstances of the company in question. There are instances where the extension has been nine months or more.
In determining whether to extend the administration period, the Court attempts to strike a balance between:
- the expectation that the administration will be conducted relatively quickly and summarily; and
- the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders through a properly conducted administration.
The Court has approached this by reference to a number of guiding principles, including whether the additional time will improve the chances of a recapitalisation or allow the sale of the business as a going concern.
Although the disruption caused by COVID-19 is unprecedented, we expect that the Court will look upon applications favourably where that disruption is the primary cause of the insolvency of the company and there:
- are reasonable prospects of the company recapitalising, or its business being sold as a going concern, once the disruption has stabilised; and
- is sufficient funding available to the administrator to enable the company to continue to trade in the meantime.
A creditor wishing to exercise rights during the administration period must apply for leave from the Court. The creditor bears the onus on that application and, in essence, needs to show that the exercise of the right (for example, a landlord taking possession) will not in any practical way affect the options available to the creditors.
This article is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.