Your options

OPTIONS AVAILABLE TO DIRECTORS / TYPES OF INSOLVENCY APPOINTMENTS

The options available to a director in terms of a formal insolvency appointment are dependent upon the specific circumstances faced by the corporate entity.

Creditors Voluntary Liquidation

A form of winding up where a company is insolvent. The appointment of a Liquidator is achieved by the following steps:

  1. A resolution of the Board of Director is passed that the company is insolvent and is to be wound up, and that a general meeting of members be held for the purpose of considering the winding up of the company.
  2. A special resolution at the general meeting of members is passed to wind up the company.

The Liquidator’s role is to realise the company’s assets and distribute the proceeds to creditors in accordance with the priorities prescribed by the Corporations Act. The Liquidator is also required to investigate and prepare a report to the ASIC in respect to the company’s affairs (in particular, the reasons for its failure and whether any contraventions of the Corporations Act have occurred), and report to creditors generally.

A Creditors Voluntary Liquidation can also follow a Voluntary Administration appointment or a Deed of Company Arrangement.

Members Voluntary Liquidation

A form of winding up where a company is solvent. The appointment of a Liquidator is achieved by the following steps:

  1. The Board of Directors make a declaration as to the company’s solvency whereby it has the capacity to pay out its debts in full within twelve (12) months of the appointment.
  2. A resolution of the Board of Directors is passed to hold a general meeting of members for the purpose of considering the winding up of the company.
  3. A special resolution at the general meeting of members is passed to wind up the company.

The Liquidator’s role is to realise the company’s assets and distribute the proceeds to members (after discharging creditors, if any).

Official or Court Liquidation

This type of winding up occurs when an application is made to the Court for the purpose of winding up the company. An application is normally made by a creditor of the company after the expiry of a statutory demand for non-payment after a period of twenty-one (21) days. However, an application can also be made by the company itself, its directors, its shareholders, a Liquidator, the ASIC or a prescribed agency. The grounds for which an application is made is normally as a result of the company’s insolvency but may also be made in the scenario where a company has failed to commence or has suspended its business, where a company has no shareholders, if discriminatory conduct against its shareholders has occurred, pursuant to a special resolution to wind up the company, or on just and equitable grounds.

The Liquidator’s role is to realise the company’s assets and distribute the proceeds to creditors in accordance with the priorities prescribed by the Corporations Act. The Liquidator is also required to investigate and prepare a report to the ASIC in respect to the company’s affairs (in particular, the reasons for its failure and whether any contraventions of the Corporations Act have occurred), and report to creditors generally.

Voluntary Administration

In the event that a company is insolvent or is about to become insolvent, this type of appointment allows an independent party (an insolvency practitioner) to take control of the business, property and affairs of the company for the purpose of assessing options available (including Deed of Company Arrangement, being a formal compromise arrangement for creditors) and assist with fulfilling the objective of maximising the chances of continuing the existence of the company and/or maximising the return to its creditors more than by way of a liquidation. A Voluntary Administrator has the power to preserve and realise (where appropriate) a company’s assets. During a Voluntary Administration, there is a statutory moratorium on unsecured creditors in respect to pursuing their debts owed by the company.

An Administrator may be appointed by:

  1. The company via a resolution of its directors if they are of the opinion that the company is insolvent;
  2. A Liquidator of the company; or
  3. A Security Interest holder over the whole or substantially the whole of the company’s property.

An Administrator is required to prepare a report to creditors on the company’s business, property and affairs, and make a recommendation to creditors as to whether they should resolve to:

  • Accept a Deed of Company Arrangement (usually proposed by the company’s directors);
  • Place the company in liquidation; or
  • End the Voluntary Administration (i.e. hand the company back to the control of its directors).

Deed of Company Arrangement

This is a formal proposal usually put forth by the directors (or any other interested party) that normally provides for a cents in the dollar return to creditors in settlement of their debts and will allow the company to continue in its existence. The terms of the proposal are up to the party propounding the Deed of Company Arrangement, but may include scheduled contributions over a period of time for the purpose of compiling a pool of funds to be distributed to creditors. The Deed of Company Arrangement will usually provide a better return to creditors than a liquidation scenario.

Receivership

This is an appointment over a company or over specific company property by a Security Interest holder. Receivers (or Receivers & Managers or Controllers, as the case may be) have the capacity to realise the property for the benefit of the Security Interest holder who appointed them, with any surplus funds available after their debt has been paid being returned to the company or a Liquidator (if one is so appointed). Receivers have limited obligations to the general body of creditors.

 In Summary:

Are you solvent?

Should you be in a position to meet your outstanding creditors in full but are unable to continue to trade the company or for reasons associated with the future strategic objectives of the company (i.e. succession planning), it may be appropriate to place the company into Members Voluntary Liquidation.

Are you insolvent?

Where a company is showing signs of insolvency it is appropriate to take immediate action to preserve the position of the company and to avoid any personal liability for a director in continuing to trade the company. The directors of a company can place it into Voluntary Administration which provides time for an Administrator to investigate the affairs of the company and assess its solvency position. A Voluntary Administration also allows for the possibility of a company to continue in the future, usually by way of a Deed of Company Arrangement being accepted by creditors.

Should it be determined by the directors that the company is insolvent and not in a position to continue its going concern obligations, then it may be appropriate to place the company into Creditors Voluntary Liquidation.

Do you have a Security Interest?

Where you are the holder of a Security Interest and a company has defaulted on your agreement/contract either as a result of non-payment or other terms, then you may seek to appoint an independent party for the purpose of preserving your interests. A holder of a Security Interest may appoint a Receiver or a Voluntary Administrator. A Receiver is appointed specifically over the assets for which you may hold a security interest in and is responsible for realising these assets for the recovery of your debt as a priority. A Receiver will act in the interests of the appointing party. Alternatively, a Voluntary Administrator may also be appointed by a secured creditor and is normally the case in a situation where the preservation of a lease is critical to the business. A Voluntary Administrator must act in the interests of the general body of creditors of the company and is not necessarily required to does not prioritise the interests of the secured creditor even if they are the appointing party.

Are you owed money as an unsecured creditor?

If you are a creditor of a company, you may be able to commence an Official Liquidation via winding up proceedings through an application to the Court. A creditor who has issued a statutory demand against a company provides a period of twenty-one (21) days for the debtor to either pay the debt in full or enter into a payment arrangement within this period. Should the statutory demand expire, then a creditor may make an application to the Court pursuant to Section 459E of the Corporations Act to wind up the company.