Two of our Melbourne partners were recently appointed Voluntary Administrators of a company by the company’s directors. Of course this is not an unusual occurrence but what happened then is.

The directors intended to propose a Deed of Company Arrangement (DOCA), principally to avoid liquidation as by the time we had become involved a creditor had proceedings on foot to wind the company up.

The directors were of the view that if given time to realize the assets of the company in an orderly fashion all creditors could be paid in full. Our investigations lead us to concur with this view. If the assets been disposed of by fire sale it may have been that there would have been enough to pay out the secured creditor, with little or nothing left for the unsecured creditors. The directors proposed a DOCA effectively returning the company to their control, in exchange for subordinating the debts due to them, while seeking a moratorium to allow the company time to pay the debts. Our analysis suggested that had all gone to plan creditors would have been paid in full over approximately a two year period.

To our surprise one of the major creditors also submitted a proposal for a DOCA. We have seen such attempts previously where a creditor seeks to obtain control of a valuable asset; this was not the case in this instance. The creditors’ proposal was not entirely dissimilar to the directors proposal; it had more stringent controls, including providing for the DOCA Administrators to realize the assets of the company as opposed to the directors doing so. It also sought various commitments from the company’s banker, who held security over all of the company’s assets.

The company’s banker was happy to be involved in the process. Readers who have been involved in this aspect of insolvency practice for as long as the author will remember that one of the things that the Harmer Report was trying to achieve in introducing the Voluntary Administration regime was to encourage secured creditors to become involved in the process. Until this administration I doubt that, that objective had been fully achieved. In any event the bank to our surprise agreed to take a percentage of proceeds from the sale of each part of the assets of the company, as opposed to the bank insisting on full payment from each part of the asset.

The ultimate result of all of this was that the creditors DOCA proposal was used as leverage to negotiate a better outcome for the ordinary unsecured creditors. Ultimately the bank moved a motion that the directors DOCA proposal be accepted, with amendments that were made in the days leading up to the meeting and at the meeting of creditors. We believe that the ultimate outcome provided for the best result obtainable for the creditors in the circumstances, and also provides an outcome where the company will be left with substantial assets at the end of the DOCA, thereby maximizing the position of all parties. It certainly beat the alternative of disposing of assets by fire sale which would likely have left nothing for either the ordinary unsecured creditors or the company.