Taxman gets dibs on cash

Damien Grant. Photo / Janna Dixon

An insolvency practitioner says a High Court decision that the taxman still comes first in a voluntary administration undermines the fledgling system and may deny struggling businesses the chance to avoid liquidation.

Voluntary administration was introduced in 2007 as an alternative to liquidation or receivership. The aim is to rehabilitate companies, and it can result in unsecured creditors getting more of their money back.

In 2008 Waterstone Insolvency undertook the voluntary administration of Jones Publishing.

For a VA to succeed half of the company's creditors in number and three quarters by value must agree to a deed of company arrangement (DOCA), or plan, for keeping the business going.

In the case of Jones Publishing only 68 per cent of creditors by value voted for the DOCA, so Waterstone Insolvency used what it thought was its casting vote under the legislation.

The plan did not give the Inland Revenue preference over other creditors on the amount it was owed, as would have been the case if the company went into liquidation.

IRD challenged the DOCA in court and won. The court ruled that the administrator's casting vote could be used only when the creditors were tied in number, and that the Jones DOCA was oppressive to the IRD because it put aside the taxman's preference.

Waterstone principal Damien Grant said the decision undermined what Parliament intended when it passed the VA law, and administrators would be reluctant to use it in the future.

Many struggling businesses were returning to profitability following the recession but were saddled with historical debt, and voluntary administration would be a good option for them. "As a result of this judgment it's a regime that's not going to be used."

However, Chapman Tripp partner Michael Arthur disagreed the ruling was the "death knell" for VAs.

He had seen voluntary administrations where the IRD's preference had been acknowledged, and as a result the tax department had voted for the DOCA allowing the rescue plan to go ahead.

"What the judge has really said is that if you move creditors' rights around vis a vis each other then you're going to be susceptible to having the DOCA ruled out by the court."