There is something annoying me about the REDgroup voluntary administration (VA).
PEP is a private-equity firm that owns REDgroup. When it advanced money to the company it elected to provide some of the funds as a loan. It then secured that loan by a general security agreement (GSA). PEP cannow place the business in receivership, sell assets and pay itself back the value of its loan.
If REDgroup was in liquidation, a liquidator would have the right under Section 299 of the Companies Act to try to invalidate this security.
This is not an option in VA, which has been a major disappointment in New Zealand. Fewer than 100 companies have been placed in VA since it was launched in 2007 and fewer than 20 have been successful.
VA is more common in Australia, where preferential and unsecured creditors can be treated the same. In New Zealand, preferential creditors, such as staff owed holiday pay, GST and PAYE, must be accorded their preferential status. This usually means they are paid before unsecured creditors.
This difference is important. In Australia it is common to use VA as a means of giving the Australian Tax Office a "hair-cut"; this cannot be done as easily here.
The second important difference is in Australia you need only get either half of creditors by total number or half by dollar value to have the deed of company arrangement passed, and the voluntary administrators have a casting vote. Here, proposals need half of creditors by number or 75 per cent by dollar value to get across the line, and the casting vote can only be used if the number of creditors is deadlocked.
This means that if PEP wants its deal passed in New Zealand it will need the majority of creditors by number to agree, which means it needs the support of the large number of staff who are all entitled to vote. But because PEP has secured its debt it can hold the creditors to ransom: agree to the deal or watch us appoint a receiver.
The purpose of VA is to keep a firm trading, not so shareholders can enhance their balance sheets at creditors' expense.
