WHAT YOU NEED TO KNOW

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?

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;
  • Receivership.

Here is a brief overview of the formal insolvency appointments available when a company is or suspected to be insolvent.

Voluntary Administration

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.

Let us guide you through Voluntary Administration.

Liquidation

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.

Get help from our Liquidation experts.

Receivership

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.

See how we can help you with a receivership.

Summary

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 profit 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 review the resources below or contact us today.

CORPORATE INSOLVENCY RESOURCES

DEBT RECOVERY
If a creditor is owed money by a company, there are many ways they can seek to recover it. Directors and companies should be aware of their rights and obligations in the event that debt collection processes are in full swing and the company is exposed to legal action and enforcement.

CREDITORS
Taking an interest in the liquidation of a company that owes you money may help you to secure a better financial return. Whether you’re an employee who is owed wages or a supplier seeking payment, here is an overview of the rights and obligations of creditors in insolvency.

CREDITORS’ MEETINGS
When a company goes into liquidation, the Liquidator will use a Creditors’ Meeting to communicate with the creditors about the progress of the liquidation and to seek approval or guidance from creditors. In the case of Creditors Voluntary Liquidation a creditors’ meeting is required to be convened within 11 days of the appointment of a liquidator.

DIRECTOR PENALTY NOTICE
One of the most powerful tools wielded by the Australian Taxation Office is the ability to issue a Director Penalty Notice (DPN) against company directors for certain company debts including PAYGW and SGC. Serious implications flow from non-compliance with the ATO’s requirements it pays to be informed, upfront, lodge company statements on time and to maintain good order in the books.

EMPLOYEE ENTITLEMENTS SAFETY NET
When a Director is contemplating putting their company into liquidation, one of their biggest fears is that their loyal and hardworking staff won’t be paid their entitlements. Fortunately there is a government safety net that protects employee entitlements in these situations.

INSOLVENT TRADING
Insolvent trading occurs when a company is unable to pay its debts and continues to incur further debt. When a company is experiencing a cash flow or liquidity crisis, it is important that its directors and officers consider the company’s ability to pay all of its debts as and when they become due.

LIQUIDATORS’ RECOVERY ACTION
The Corporations Act 2001 (Cth) (Act) permits liquidators to recover certain transactions made within a set period before the commencement of a company’s liquidation. These transactions are known as “voidable transactions”.

CORPORATE TURNAROUND
Get a broad overview of the major steps in turnaround strategy. One of the major drivers for business insolvency is failure to challenge business models and take strategic action early. When businesses started to find themselves in a tight financial position it is vital that an appropriate turnaround strategy is implemented quickly.

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