Secured creditors hold security over company assets, such as banks, equipment financiers and asset-based lenders. During voluntary administration, certain secured creditors may still retain important enforcement rights, including appointing receivers or enforcing security during the 13-business-day decision period, particularly where they hold security over substantially all company assets.
On This Page
- Introduction
- What Is a Secured Creditor?
- What Is the 13-Business-Day Decision Period?
- Enforcement Powers During VA
- How Does the Moratorium Apply to Secured Creditors?
- What Outcomes Can Follow Voluntary Administration?
- Does a DOCA Bind Secured Creditors?
- What Directors Should Prepare Before Entering VA
- Final Take
- FAQs
Introduction
Many directors assume that once a company enters voluntary administration, all creditor enforcement action immediately stops. However, secured creditors are often treated differently from ordinary unsecured creditors during the voluntary administration process.
The primary objective of voluntary administration is to maximise the chances of a company continuing to trade, or if that is not possible, to achieve a better return for creditors than would likely be achieved if the company were immediately wound up. The process is also designed to give the company and its creditors a flexible and collaborative way to deal with the company’s debts and, where possible, achieve a fresh start.
In some situations, banks and secured lenders may still retain important enforcement rights, particularly where they hold security over all or substantially all of the company’s assets.
This guide explains how secured creditors are treated during voluntary administration, what the 13-business-day decision period means, when banks may still enforce security, and what directors should understand before appointing a voluntary administrator.
For a deeper understanding, you can explore:
- Voluntary Administration Moratorium
- Voluntary Administration and Receivership
- Voluntary Administration: A Guide for Creditors
What Is a Secured Creditor?
A secured creditor is a creditor that holds security over company assets to support repayment of a debt.
If the company defaults, the secured creditor may have rights to recover money from those secured assets.
Common examples of secured creditors include:
- Banks,
- Equipment financiers,
- Vehicle financiers,
- Asset-based lenders, and
- Some trade and inventory financiers.
What Does a Security Interest Apply To?
In case of secured creditors, security may apply to specific assets, such as vehicles or equipment, or broad categories of company property under a general security arrangement.
Many banks and major lenders use security arrangements covering all present and after-acquired property (ALLPAP), which can give them broad rights over company assets during insolvency.
On the other hand, unsecured creditors do not hold direct security over company property and generally rank differently during the insolvency process.
In practice, secured creditors often have stronger recovery and enforcement rights than ordinary unsecured creditors.
What Does “All or Substantially All” Assets Mean?
Some secured creditors hold security over all or substantially all of a company’s assets. This commonly arises through broad security agreements used by banks and major lenders.
This may include:
- Trading assets,
- Equipment,
- Inventory,
- Accounts receivable,
- Cash flow assets, and
- Other operational business assets.
However, this does not mean the creditor holds security over every individual asset. Instead, the question is whether the security substantially covers the company’s overall business assets and value.
Secured creditors holding security over all or substantially all company property may retain special enforcement rights during voluntary administration, including rights connected to the 13-business-day decision period. More on this below.
What Is the 13-Business-Day Decision Period?
When a company enters voluntary administration, certain secured creditors receive a limited decision period from the appointment of the voluntary administrator, within the formal insolvency proceedings of voluntary administration, during which they may choose whether to enforce their security rights.
This period is usually 13 business days from the appointment of the voluntary administrator.
During this time, an eligible creditor acting as a secured party for these purposes may decide whether to:
- Enforce its security,
- Appoint a receiver,
- Negotiate with the administrator, or
- Support a restructuring proposal.
The first creditors meeting is held early in the administration, generally within eight business days, as part of the process timeline.
The 13-business-day decision period is one of the major exceptions to the general creditor moratorium that applies during voluntary administration.
This is particularly important where a bank or major lender holds security over all or substantially all of the company’s assets. Directors often assume that voluntary administration completely freezes creditor enforcement, but secured lenders may still retain significant leverage during this period.
For a broader overview, read:
Enforcement Powers During VA
Secured creditors holding qualifying security interests may still enforce their rights during the 13-business-day decision period.
Bank Enforcement
Depending on the security arrangements and the bank’s rights arising under the relevant security agreement, banks and secured lenders may:
- Enforce security interests,
- Freeze or restrict facilities,
- Appoint receivers, or
- Seek repayment negotiations,
- If the company owes money under the facility and defaults, enforce according to the security terms.
Receivership Risk
If a receiver is appointed, the receiver may:
- Take control of and sell the company’s assets,
- Sell company property, and
- Act primarily for the benefit of the secured creditor.
Where an administrator seeks to sell assets subject to security, consent from the secured creditor or court approval may be required. Voluntary administration does not automatically prevent receivership where secured creditor rights apply.
How Does the Moratorium Apply to Secured Creditors?
The voluntary administration moratorium restricts many creditor enforcement actions once an administrator is appointed. However, the moratorium is not absolute.
Secured creditors holding security over all or substantially all company property may still retain certain enforcement rights during the 13-business-day decision period.
This means:
- Some secured creditors may still appoint receivers,
- Enforcement rights may continue in limited situations, and
- The timing of enforcement decisions can become critical.
If a secured creditor does not enforce within the relevant period, the moratorium may later restrict certain enforcement action unless further rights arise or court approval is obtained.
In certain circumstances, distinct from action taken with the administrator’s consent, the court can restrict a dissenting secured creditor from enforcing under section 444F(2) of the Australian Corporations Act if the secured asset is vital to a proposed DOCA.
What Outcomes Can Follow Voluntary Administration?
At the conclusion of a voluntary administration, the company’s creditors decide between three statutory outcomes:
- entering into a Deed of Company Arrangement (DoCA),
- winding up the company, or
- terminating the administration.
If a DoCA is executed, the company comes out of voluntary administration, and if the administration terminates without a DoCA, control typically returns to the board of directors.
A DoCA is one of the three possible outcomes of the voluntary administration process and is typically used to compromise claims, especially those of unsecured creditors. A DoCA can provide for various outcomes, including
- debt rescheduling,
- extending payment terms, or
- converting debt to equity.
The proposal is usually considered at the second creditors’ meeting, where creditors vote on the company’s future.
If a DoCA is not approved by creditors, the company typically enters liquidation, and a liquidator is appointed, with the voluntary administrator usually taking that role.
Does a DOCA Bind Secured Creditors?
Not in all situations.
A Deed of Company Arrangement (DOCA) primarily deals with how company debts will be handled after voluntary administration, and it must provide creditors with a better outcome than immediate winding up or liquidation. Its terms can address outstanding debts in different ways, including changing debt repayments.
However, secured creditors may retain separate rights relating to their secured assets.
In many cases, a secured creditor will only be bound by a DOCA to the extent that:
- They vote in favour of the DOCA, or
- They otherwise agree to be bound by its terms.
This differs from other creditors, whose claims are more commonly compromised under the deed than those of a dissenting secured creditor.
For a DoCA to be approved, it must be agreed to by a majority in number representing a majority in value of the creditors attending and voting at the meeting held to consider the proposed DoCA.
Once approved, the deed is implemented by a deed administrator.
This means if secured creditors vote “No” or abstain from a DOCA, they retain their full legal rights to enforce their security and recover their debt from secured assets.
What Directors Should Prepare Before Entering VA
Before appointing a voluntary administrator, directors should carefully assess the company’s secured creditor position, the company’s financial position, financial circumstances, and existing security arrangements.
This should include:
- Identifying all secured creditors,
- Reviewing security agreements and lending documents,
- Understanding whether ALLPAP or broad security interests exist,
- Assessing whether the bank may enforce during the decision period,
- Reviewing existing defaults and covenant breaches,
- Assessing whether the business is or is likely to become an insolvent company and whether insolvent trading risks arise,
- Preparing up-to-date financial information, including details of employee entitlements,
- Considering restructuring proposals before the administrator is appointed, and
- Considering what control of the company will pass to the administrator once appointed.
Final Take
While voluntary administration can provide important breathing space for financially distressed companies, secured creditors are not always affected in the same way as ordinary unsecured creditors.
Banks and secured lenders holding security over all or substantially all company assets may retain important enforcement rights during the 13-business-day decision period, including the ability to appoint receivers in some situations.
This means voluntary administration does not automatically prevent secured creditor action, particularly where broad security agreements and major lending facilities are involved.
Before entering voluntary administration, directors should understand:
- Which creditors hold security,
- The scope of those security interests,
- Whether receivership risk exists, and
- How secured creditor rights may affect restructuring options and negotiations during the administration process.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation, consultation to help you understand where you stand, what risks exist, and what options are realistically available before deadlines reduce control. Get in touch today.
FAQs
What is a secured creditor in voluntary administration?
A secured creditor is a creditor owed a debt owed by the company and holding security over company assets to support repayment of that debt.
Common examples include:
- Banks,
- Equipment financiers,
- Vehicle financiers, and
- Asset-based lenders.
Under Part 5.3A of the Australian Corporations Act 2001, secured creditors have specific rights, exceptions, and voting leverage.
Secured creditors hold a unique and powerful position compared to unsecured creditors in voluntary administration. Unlike unsecured creditors, a secured creditor is only bound by a Deed of Company Arrangement (DOCA) if they explicitly vote in favour of it.
Can secured creditors vote on a DOCA?
In voluntary administration, secured creditors can vote using the full amount of their debt without deducting the value of their security.
Secured creditors can actively participate in the administration process through the meeting of creditors and any later creditors meeting required under the process.
What is the difference between secured and unsecured creditors?
Secured creditors hold security over company assets, while unsecured creditors generally do not.
Because of this, secured creditors often have stronger recovery and enforcement rights during insolvency.
For example, a secured creditor holding a charge over the whole, or substantially the whole, of a company’s property can directly appoint a voluntary administrator if the company defaults.
What does “all or substantially all” assets mean?
It means the lender holds a security interest over the core assets required to run the business or the vast majority of its financial value. This is typically achieved through an ALLPAP (All Present and After-Acquired Property) security interest registered by major banks.
To meet this threshold, the security does not need to cover every single physical item. Instead, courts look at whether the company could realistically continue operating as a going concern if those secured assets were removed. If it cannot, the lender meets the criteria and gains the right to enforce their security within the 13-business-day decision period.
What is the 13-business-day decision period?
It is a period after the appointment of a voluntary administrator during which certain secured creditors may decide whether to enforce their security rights.
During this time, eligible secured creditors may:
- Appoint a receiver,
- Enforce security,
- Negotiate with the administrator, or
- Support a restructuring proposal.
This decision period runs alongside the early administration timetable, including the first and second meeting stages.
Secured creditors holding security over the whole or substantially the whole of the company’s property may take enforcement action during the 13-business day decision period following the appointment of an administrator, but if they do not act within this period, they are bound by the moratorium for the duration of the voluntary administration.
Can banks still appoint receivers during voluntary administration?
In some situations, yes.
Secured creditors holding security over all or substantially all company assets may still appoint receivers during the decision period.
More on this: Voluntary Administration and Receivership
Does voluntary administration stop secured creditors?
Not completely.
Voluntary administration provides a temporary shield from creditor actions, allowing the company time to formulate a plan to either recover or conclude its affairs in an orderly fashion.
During that period, the administrator takes control of the company’s business and the company’s affairs to the exclusion of directors, with broad power to run operations and deal with assets.
The administrator may incur debts, raise funds, and arrange for security granted over assets for administration purposes, and may be personally liable for those debts, which are treated as administration expenses.
Does the moratorium apply to secured creditors?
Yes, but with important exceptions.
During voluntary administration, there is a statutory moratorium on claims against the company, which applies to both unsecured and secured creditors, preventing them from initiating or continuing legal proceedings without the administrator’s consent, written consent where required, or court orders allowing the action to proceed.
More on this: Voluntary Administration Moratorium
Does a DOCA bind secured creditors?
Not automatically in all situations.
A secured creditor will generally only be bound by a DOCA to the extent they:
- Vote in favour of it, or
- Otherwise agree to be bound.
A court determined restriction may apply where enforcement would have a material adverse effect on a DOCA proposal involving certain creditors or another interested person.
Secured creditors holding a security interest over the whole or substantially the whole of a company’s property may take enforcement action during the 13-business day decision period following the appointment of a voluntary administrator, unless they are bound by a deed of company arrangement (DoCA).
What happens if a receiver is appointed during voluntary administration?
A receiver may take control of secured assets and act primarily for the benefit of the secured creditor.
This can significantly affect restructuring efforts and the company’s ability to continue trading. Sale proceeds are usually applied first to the secured debt, with the net proceeds then distributed according to the priority rules.
Should directors speak to banks before appointing an administrator?
In many situations, yes.
Early discussions with secured lenders may significantly affect:
- Receivership risk,
- Restructuring negotiations,
- Ongoing funding arrangements, and
- The overall outcome of the voluntary administration process.
Directors should also be careful before appointment: if the company pays some creditors selectively, or allows new debts incurred when insolvency is apparent, this can increase personal liability risk and may affect what is in creditors’ best interests.
