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Alternate use of the voluntary administration moratorium – Insolvency/Bankruptcy



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How a VA can be used to deal with personal debt.

The voluntary administration (VA) process is used
to restructure company debts. But what about a director’s
personal guarantee debts?

On The Pulse readers will be familiar with the VA concept, which
was designed to increase the chances of a company’s survival
where it cannot pay its debts as and when they fall due, or if it
is not possible, results in a better return to the creditors and
members when compared to an immediate wind up of the company. This
however does not cover all the benefits a VA can provide.

This article discusses how the VA process can minimise a
director’s exposure to a personal guarantee debt.

Recently, Christopher Darin was appointed as voluntary
administrator of a franchisee business that was hit hard by the
COVID-19 pandemic and despite the landlord providing free rent and
rent deferrals, the business still fell a few months behind in
rent. Apart from the landlord, the company did not have other
outstanding creditors of significant value.

The director was ready to shut down the business but knew that
the personal guarantee on the lease would expose him for rent for
up to two years until the lease ends (unless a new tenant could be
found). To make matters worse, the two shops next to the business
had been vacant for the past six months. So the director engaged a
business broker to sell the business.

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Initially the landlord was supportive but as more rent became
overdue, the landlord lost patience and gave notice to repossess
the premises and change the locks in three days. At that time, the
business broker was dealing with several interested parties and a
sale could be on the way anytime. It was therefore critical to
continue trading to keep the sale process alive.

The director approached Worrells and we discussed the various
benefits of the VA process, including:

  • Unsecured creditors cannot enforce their claims or apply to
    wind up the company.

  • Secured creditors (with perfected security interest over
    company’s property) have 13 business days to exercise their
    security, or otherwise be bound by the moratorium.

  • Landlords cannot repossess the premises (unless they do so
    prior to the VA appointment).

  • Creditors holding personal guarantees from directors and other
    parties cannot enforce their guarantees.

Following the VA appointment, we continued the sale process with
the landlord’s support and successfully found a purchaser
within three weeks. This means that the director’s only
personal exposure was to the current outstanding rent and luckily,
the majority of it was covered by the bond (the director
subsequently settled the debt with the landlord). If the director
had chosen an alternate action, the landlord would have repossessed
the premises and the business would not have been sold, potentially
leaving him exposed for rent until the landlord could locate a new
tenant.

PS-you should always take care to engage with your key
suppliers, banks, and landlords no matter how difficult the
situation can be. This outcome may have been very different. Read
Chris Cook’s article: Business survival impossible without the support
of critical stakeholders
.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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