Voluntary administration


01 Apr 2020

When a capital raise and a director penalty notice collide


4 min

The shortest possible voluntary administration?

We were recently involved in a matter that started with a director making a frantic call to our office, holding a non-lockdown Director Penalty Notice (DPN) in his hand that was due to the expire the very next day. What followed was a peculiar set of circumstances, not often seen in insolvency circles.

Given 20 of the 21-day notice had already passed, the director had little to no options other than appoint us as voluntary administrator. Once the Australian Taxation Office (ATO) issues a DPN, a director has three options to remit personal liability and stop a subsequent winding up. Directors can either pay the outstanding debt, place the company into voluntary administration (VA), or place the company into liquidation to avoid any personal liability[1] for the company’s outstanding pay as you go (PAYG) and superannuation guarantee charge (SGC) debts. Despite the director having an ongoing dialogue with the ATO, a DPN was issued against the company’s director. The director was also not on the best of terms with the group executives (shareholder) and felt that he had no other option, so elected to place the company into VA.

What was quite peculiar about this case was the fact that the company had only just completed a Deed of Company Arrangement (DOCA) a month earlier. The DOCA had been in operation for approximately two years and it was during this period that the company had incurred the new tax debt that was captured under the DPN. It should be noted that the previous VA and DOCA were also due to an expiring DPN.Race

Immediately after appointment, we uncovered that this company was a subsidiary of a larger group that was in the process of a capital raise. The VA appointment took the executives of the group by complete surprise and as soon as they found out they bombarded our office with questions, trying to understand our appointment and what could be done.

After many discussions to thoroughly explain the options available in VA, the group executives were decidedly opposed to a liquidation as it could jeopardise their capital raise, and for the same reasons, a DOCA wasn’t an option either. They were highly motivated by the last option for a VA to see the company handed back to the director. Unsurprisingly, they also wanted to end the VA as soon as possible. The race was on.

It poses the question: how quickly can a VA be completed?

The answer lies in the statutory periods stipulated under Corporations Act 2001. The VA process requires two reports to creditors and a meeting to be held after each report. The first meeting is to be held within eight business days after the appointment. Each report must be sent with five business days’ notice. It’s at the second meeting of creditors that the company’s future is decided.

The second meeting cannot be held until five days before or after the convening period (20 business days after the appointment date). Therefore, the shortest VA period is 15 business days after appointment. Then, allowing for the five business days’ notice to creditors, the second VA report must be sent 10 days after the appointment. (Coincidentally, this is the same period required for a creditors’ voluntary liquidation first report to creditors.)

Another quirk in the law requires electronic reports be sent a day earlier than the mailed version. This meant we issued our second report to creditors—the day after holding the first creditors meeting—nine business days after the appointment started.

Meanwhile, the group was paying the debts owing to most of the other creditors or entering into payment agreements with the larger creditors.

At the second meeting, the group was successful in achieving the majority in number and in value to ‘defeat’ placing the company into liquidation, and it was resolved to hand the company back to the director. That director was then replaced with a group member who was “more aligned” with their agenda. And the group executives continued with their capital raise.

This turnaround was completed in the quickest possible time for a VA and the director avoided their personal liability under the DPN. This appointment demonstrates that Worrells can complete appointments in a tight turnaround, please contact us if you require any assistance.

Worrells recommends that directors should always seek appropriate advice in respect to receiving a DPN (non-lockdown or lockdown).

Related article: Director penalty notice regime extended to GST, WET, and LCT

[1] Effective as at 1 April 2020, the DPN regime extends to goods and services tax (GST), wine equalisation tax (WET), and luxury car tax (LCT).

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