A rescue plan or reconstruction of a company may be implemented by a formal agreement with creditors known as a deed of company arrangement.
Responsibility for proposal
Contents of deed
Execution of deed of company arrangement
Effect of a Deed of Company Arrangement
Release from debts
Binding agreement with creditors
Creditors not Bound by deed
Control of the company
Options for secured creditors
Litigation against directors by liquidator
Variation of deed of company arrangement
Directors and other interested parties are responsible for formulating a proposal for creditors to consider. The administrator is not required to design or create the proposal for a deed of company arrangement. However, an administrator will normally assist directors to formulate any proposal, if requested.
The content of a deed of company arrangement is contingent upon the company's circumstances. A deed will typically be a binding agreement between a company and its creditors, which provides for new terms for the repayment of existing debts. The new terms may include any of the following:
- A moratorium of payments to creditors for a defined period;
- Company continues to trade;
- Compromise, release or reduction from a company's current unsecured debts. Normally this is in consideration of an undertaking by the company to repay a new reduced debt to its creditors by a lump sum or by periodic payments to a fund controlled by a deed administrator;
- Merger, sale or closure of existing operations;
- Ability to use tax losses maintained;
- Takeover of operations of new joint venture;
- Injection of new management, capital or other expertise;
- Reorganisation of loans and shareholdings;
- Debt forgiveness by stakeholders.
The deed of company arrangement must include:
- the particulars of property of the company that is to be available to pay creditors' claims;
- the nature and duration of any moratorium period;
- the extent to which the company is to be released from its debts;
- the conditions for operation and termination of the deed;
- the order creditors will be paid;
- a date for claims to be lodged under the deed.
Typically, a deed of company arrangement would include a binding agreement on all creditors (except secured creditors) to accept x cents in the dollar in full and final settlement of all creditors claims. (The average repayment approximates 20 cents in the dollar.)
The timing of the creditor payments of x cents in the dollar will be determined by the deed. Typically creditors would be paid 12 to 24 months after the date of appointment of the administrator. This provides time for the company to contribute monthly instalments to an administration fund, which is controlled by the deed administrator.
If the proposal is accepted by creditors, a deed of company arrangement will be drafted in accordance with the terms detailed in the proposal. To be effective, the deed must be executed by the company within 15 business days of the proposal meeting. The administrator of the deed must execute the instrument before or as soon as practicable after, the company executes it.
When executed by both the company and the deed's administrator, the proposal becomes a deed of company arrangement.
Effect of a Deed of Company Arrangement
A deed of company arrangement releases the company from a debt only in so far as:
- The deed provides for the release; and
- The creditor concerned is bound by the deed.
A deed of company arrangement binds all creditors of the company, so far as it concerns claims arising on the date of appointment of the administrator (unless the deed prescribes an alternative date).
A deed of company arrangement does not:
- bind or prevent a secured creditor from realising or otherwise dealing with their security;
- affect a right that an owner or lessor of property has in relation property;
except so far as the secured creditor, owner or lessor voted in favour of the alteration of their rights as prescribed by the deed.
From 1 July 1993 the priority repayment of taxation liabilities was revoked. Subject to rare exceptions, outstanding tax debts including penalties (excluding court penalties) are now treated just like any other trade creditor.
If a deed of company arrangement is accepted by the prescribed majority of creditors, the Australian Taxation Office (ATO) must accept the terms prescribed by the deed (i.e. x cents in the dollar in full and final settlement of outstanding taxation obligations).
It is for this reason that a deed of company arrangement is sometimes looked upon by directors as a remedy to the claims by the ATO, and on occasion resisted by the ATO. Directors should be advised the Tax Administration Act has provision to make a director personally liable for failure to remit tax to the ATO. A precondition of this personal liability is the service of a Director's Penalty notice stating the ATO's intention and detailing the options for the director.
The Corporations Act also provides that a director may be personally liable to indemnify the ATO if it is compelled to repay a preference payment to a liquidator.
Typically the powers of the administrator to control the company's business, property and affairs will revert back to the directors upon entering into the deed of company arrangement.
A deed may provide that directors have a limited authority to deal with any of the assets, perform certain management functions, or the deed administrator be provided with regular management accounts.
The directors must ensure that a company under administration discloses on every public document, and the expression "(administrator appointed)" is placed after the company's name on every negotiable instrument.
The return available to the secured creditors will be contingent upon the following:
- The potential sale price of the business or assets.
- The potential return available from a deed of company arrangement if proposed and implemented.
- The priority, validity and assets subject to each of the secured creditors' security interests.
These contingencies will normally be determined in two to three weeks. The administrator's report to creditors should contain sufficient information to enable the secured creditors to determine their position within three weeks. However, all secured creditors should make their own enquiries and take independent legal advice regarding their own circumstances.
The possible courses of action are detailed below:
- Where a secured creditor is adequately protected they may elect not to participate in the voluntary administration.
- If the proceeds of realisation of the assets subject to a general security agreement are inadequate to discharge the funds due to a secured creditor, the secured creditor will have unsecured claim to the extent of the inadequacy. Accordingly, the secured creditor may participate in the administration process as both secured and unsecured creditor.
- A secured creditor may realise the secured property, either personally or via an agent. The secured creditor would then become a "mortgagee in possession". A secured creditor may wish to avoid becoming a mortgagee in possession because of the potential personal liabilities that result from dealing with the property. In 1993 the taxation advantages of a mortgagee in possession were eliminated when the extended definition of a controller imposed duties and liabilities on mortgagees in possession via Part 5.2 of the Corporations Act 2001.
- A secured creditor may appoint a receiver and manager to realise the assets subject to their general security agreement. This process is likely to involve a duplication of costs that are likely to be incurred by the administrator. The administrator will be entitled to a lien over the assets held prior to the appointment of a receiver and manager.
If a deed of company arrangement is executed and its requirements complied with, the company will avoid liquidation. Without a liquidator the following actions are not permissible:
- Insolvent trading against directors and holding companies
- Uncommercial transaction
- Unfair preference
- Indemnity to ATO by directors if ATO repays a preference to a liquidator
A deed of company arrangement may, after execution, be varied by creditors at a meeting of creditors called for that purpose.