Corporate Insolvency: An Overview
From macroeconomic conditions to legislative and policy amendments to the individual circumstances of each company, the factors driving corporate insolvency are diverse and changeable.
Understanding the overall insolvency framework can assist advisors to guide their clients through complex insolvency processes and lessen any financial and emotional impact on stakeholders such as directors, employees, and creditors.
How Does Corporate Insolvency Work?
A formal insolvency commences when a company is unable to pay its debts as and when they fall due, prompting the appointment of an external administrator (a qualified registered liquidator).
The three most common types of formal insolvency appointments that are used when a company is in financial trouble are:
- Voluntary Administration
- Liquidation, also known as a winding up;
Here is a brief overview of the formal insolvency appointments available when a company is, or suspected to be insolvent.
Directors may appoint a voluntary administrator to take control of the company to navigate a way out of insolvency by seeing if the company and its business can be saved. If it is possible to ‘trade out’ of the difficulties, the voluntary administrator will steer the company through that process.
The administrator, who assumes the powers of the company’s directors (which are suspended as a result of the administration), will review the company’s position and provide a report to creditors on the property, business, affairs and financial circumstances of the company as well as a recommendation as to the most appropriate strategies for the company to take.
Depending on the outcome of those investigations, there are three options:
1) End the voluntary administration and return the company to the control of the directors;
2) If the company is able to regain its momentum, to recommend and approve a deed of company arrangement (“DOCA”) to allow the company to pay all or part of its debts and maximize creditor returns, or
3) Wind up the company and appoint a liquidator.
The courts and/or creditors also have the power to appoint an administrator, for example, a secured creditor holding security over most of the company’s assets may decide to appoint an external administrator to govern the company’s affairs.
A liquidation is the term used to describe the process of winding up the company’s affairs including the realisation of company assets, the ceasing of trade, distribution of proceeds to creditors and distributing the surplus (if any) to its shareholders.
The three types of liquidation are:
- Court liquidation (as a result of a court order)
- Creditors’ voluntary liquidation (initiated by the company), and
- Members’ voluntary liquidation (a procedure initiated by company members of solvent companies to wind up the company).
The liquidator’s primary duty is to secured and unsecured creditors with shareholders ranking behind company creditors.
Receivers are generally appointed by secured creditors who hold security over some or all of the company’s assets, such as a bank or financial institution holding security pursuant to a mortgage. The appointment is made pursuant to the secured creditor’s security documentation. A receiver has a duty of care to all creditors and shareholders to sell the secured assets for not less than its market value or, if there is no market value, the best price reasonably obtainable.
Various stakeholders will have a different perspective on the company’s insolvency situation. Creditors will want their debts paid as soon as possible, directors will likely be concerned with any personal exposure to liability, and employees may wish to protect their employment entitlements. Seeking the advice of an insolvency professional will help key players navigate the unpredictable storm of the company’s financial distress.
For more information on corporate insolvency or specific insolvency services, contact the team at Rapsey Griffiths on (02) 4929 3019 for a confidential consultation.