Question

Very Big Mines Ltd (VB Mines) was a no-liability company that operated in the Pilbara region of Western Australia. It was registered in January 2013 and began operating in the same year. At first, the company was very successful and secured lucrative contracts for mining iron ore. However, following the end of the “mining boom” in 2015, the company became insolvent in February 2016.

At the time of becoming insolvent, VB Mines owed money to several creditors, with the debts running into tens of millions of dollars. However, VB Mines owned several very large rural properties over which it held valid mining licences. VB Mines held valid leases (expiring in 2018) over most of their mining plant and equipment, including a lease for a high-tech device that can detect commercially viable resource deposits.

At the time company became insolvent, it was widely observed by experts that the downturn in global iron ore demand was likely to be long-term. The board of VB Mines decided in February 2016 to place the company into voluntary administration.

Question 2: Answer A, B, C and D
A). Define ‘insolvency’ under the Corporations Act 2001 (Cth) .
B). Explain why directors may want to place their company into voluntary administration .
C). Outline the procedure once a company enters voluntary administration.
D). Given the circumstances of VB Mines, consider each course of action that the administrator could have taken, paying attention to interactions between the company’s directors and members and creditors and the administrator. Which course of action do you think would be most suitable given VB Mine’s situation?

Answer 1

A).

The definition of insolvency is set out at section 95A of the Corporations Act 2001 (Cth) which states as follows:

• A person is solvent if and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
• A person who is not solvent is insolvent.

B).

Directors may want to place their company into voluntary administration because of following reasons:

• To avoid trading while insolvent
• To resolve creditor issues
• To attempt to enter a Deed of Company Arrangement
• To protect directors from a director penalty notice
• To prevent liquidation

C).

The Procedure once a company enters voluntary administration:

1. The First Meeting of Creditors. Once the administrator has been appointed, all creditors to the company will receive notice of the first meeting. ...
2. The Voluntary Administrator Investigates and Reports. ...
3. Second Meeting of Creditors.

In Simple Word, the voluntary administration process allows a company experiencing cash flow or solvency problems breathing space from its creditors to restructure. It is generally a short period of approximately one month, whereby the directors hand control of the company to an independent administrator. In that month, the administrator secures and protects the assets and assesses the business to provide a recommendation to creditors on whether they should:

1. Liquidate the company, or
2. Execute a deed of company arrangement (DOCA) – meaning compromise the debts in some way and allow the company to continue in existence, or
3. Return the company to the control of the directors.

Importantly, the final decision on the future of the company rests with the creditors.