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Secured Creditors position In Voluntary Administrations

There are a number of matters which a secured creditor should be mindful of when faced with a Voluntary Administrator being appointed to a company in which they have a charge over all, or substantially all, of the company’s property.

Appointment of Receiver and Manager

Upon the appointment of a Voluntary Administrator to a company, it is possible for a secured creditor to enforce a security as long as it is done within the “decision period”. The decision period is defined under the Corporations Act to be the period beginning on the day when notice is given pursuant to section of 450 A (3) of the Corporations Act and ending at the end of the 10th business day after that day. If the option is not taken to enforce the security prior or during the decision period then the secured creditor is prevented from doing so during the administration. This period can extend up to 95 days or even beyond if sanctioned by the Court. It should be remembered that a Voluntary Administrator is required to make decisions on behalf of all creditors and therefore a secured lender’s interests may not necessarily be the same as the interests of the unsecured creditors of a company.
The Voluntary Administrator’s Costs

A Voluntary Administrator is entitled to be indemnified out of the property of a company for debts incurred and for fees. The right to this indemnity has priority over debts secured by floating charges with the exception of where a secured creditor has entered into possession or a receiver is appointed before the administration began. This right of indemnity is secured by the administrator having a lien on the company’s property. Therefore a slow decision by a secured creditor may be a costly one. A secured creditor must consider whether the benefits of the Voluntary Administration outweigh the fact that control over charged assets is temporarily lost whilst the Voluntary Administration is conducted. It may be that the value of the charged assets is reduced by trading expenses and the Voluntary Administrator’s fees.
Deed of Company Arrangement

Upon the completion of their investigation into the affairs of a company, one of the alternatives for the Voluntary Administrator is to recommend that the company enters into a Deed of Company Arrangement with its creditors. Creditors may consider the proposal and amend or reject it. The secured creditor’s rights may be affected by a deed and so any proposed deed should be carefully reviewed by a secured creditor.
Voting rights

Prior to a secured creditor attending any meetings relating to a voluntary administration, they should be mindful of their voting rights. Regulations within the Corporations Act require a secured a creditors to surrender their security if they wish to vote or permits them to vote only in respect of the balance owing to them if they retain the security. But, this regulation does not apply to meetings under Voluntary Administration which therefore allows a secured creditor to be involved in voting at the various creditor meetings. However, a secured creditor may well be bound by a Deed if they vote in favour of a Deed which affects their rights under their charge.