Court demonstrates flexibility in relation to voluntary administration regime

The purpose of the voluntary administration regime under the Companies Act 1993 (Companies Act) is to provide insolvent (or nearly insolvent) companies with breathing room to either: (a) restructure/rehabilitate the company to allow it to continue trading; or (b) to re-organise the affairs of the company in a way which maximises the return to creditors and shareholders on a slightly delayed liquidation of the company.

The voluntary administration regime deliberately sets short deadlines for achieving the above purposes. Creditors of a company in voluntary administration decide, at a watershed meeting (usually 25 working days from when the administrator is appointed), whether the company should: (a) enter into a deed of company arrangement (essentially a restructuring); (b) end the voluntary administration; or (c) enter into liquidation.

Under the Companies Act, administrators of a company in voluntary administration are liable for the debts that they incur in the performance of their role in allowing the company to continue trading. However, two recent decisions of the High Court relating to the Ruapehu Alpine Lifts Limited (Ruapehu) administration show that the Court is prepared to limit the liability of administrators in certain circumstances. In particular, the Court has limited Ruapehu's administrators' liability in relation to a loan obtained from a government owned entity. The Court has also significantly extended the period within which the watershed meeting should be convened (by some months).

The Court has permitted these departures from the standard administration regime for the following reasons:

• The debt incurred by Ruapehu was in the interests of its creditors as it would enable Ruapehu to continue trading and maximise the possibility that it could be sold as a going concern; 
• Ruapehu's secured creditors consented to the orders sought; and
• Ruapehu's unsecured creditors were not prejudiced and could stand to benefit from the orders if Ruapehu was ultimately able to be sold as a going concern (if the orders were not granted, the administrators advised that Ruapehu would be placed into liquidation immediately which would result in destruction of Ruapehu's value).

Ultimately, these decisions show that New Zealand courts are prepared to be flexible in their approach to the voluntary administration regime. This should give businesses and administrators comfort in the utility of the regime, and its potential benefit to those insolvent companies in need of time to restructure or maximise returns to creditors.

If you would like to discuss the voluntary administration process in more detail, please do contact on of our experts.

Author: Heather Froude

Heather Froude is an Associate in our Resource Management, Litigation and Employment Teams.