There are a number of insolvency processes available to companies if they are facing financial difficulty, but which one is best?
We have outlined below a brief summary of three of the most commonly used processes to give you a flavour of the differences.
People commonly think of liquidation when a company is in financial distress, but it is not the only process by which a company can deal with a financially difficult situation, and it is not always the best. Liquidation can occur either because a company cannot pay all of its debts as an when they fall due (that is, it is insolvent) or the members of the company have decided to end the company’s existence with a view to having it struck off the company register.
Liquidation is a way in which to wind up a company’s affairs to enable a fair distribution of the company’s assets to its creditors.
A company can either be wound up by the court (usually by a creditor) or voluntarily by a resolution of its directors and members (if appropriate) at the relevant meeting.
A liquidation ends when:
- The company is dissolved by the court;
- The company is struck off the ASIC register; or
- The winding up is set aside or stayed by the court.
Not all companies need to be insolvent to be wound up. Solvent companies can be wound up by what is known as a members’ voluntary liquidation or MVL. Please contact us for further information regarding this process.
As an alternative to liquidation, voluntary administrations are designed to assist insolvent companies satisfy their debts by ensuring they can either:
- Come to some kind of formal agreement with their creditors , for example, in the form of a Deed of Company Arrangement (DOCA);or
- Subsequently place the company into liquidation.
A voluntary administration can be a good solution to enable a company to trade out of its short-term financial difficulties and prevent creditors from enforcing their claims against the company while the company seeks to come to a resolution with its creditors.
The most common process to commence a voluntary administration is the execution of appointment documents by either the directors of the company, a liquidator or secured creditor (for example, the bank). The appointed administrators must consent to the appointment.
A voluntary administration can end in a number of ways. The most common methods include:
The execution of a DOCA;
The creditors resolve to wind up the company; or
The Court orders that the administration should end or appoints a liquidator to the company.
A receiver is one form of controller who may be appointed by a secured creditor (for example, a bank) who holds security over an asset of the company. If the company breaches the terms of the security by way of either a financial or non-financial default, the secured creditor may appoint a controller to the company to take control of the assets and sell them. The terms of the security and the nature of the assets will determine whether the controller appointed to the assets is a receiver, receiver and manager or an agent for the mortgagee in possession.
The main difference between the appointment of a controller and a liquidator or voluntary administrator is that a controller acts only for the secured creditor who, most importantly, do not act for unsecured creditors.
The controller’s powers are derived from the security documents and any relevant Acts, such as the Corporations Act 2001. The controller’s main functions are to “get in and out ” as quickly as possible by:
- Realising the assets covered by the security and appointment;
- Pay any employee entitlements that have priority under the Corporations Act 2001; and
- Pay the money from the sale of those assets to the secured creditor to satisfy their debts.
The appointment ends by the controller executing a deed of resignation or by the secured creditor executing a termination notice.
Issues for directors to consider
If you are a director, think about whether you would like to be more in control of the process. If so, appointing your chosen voluntary administrator may allow you do to that.
Consider having your company’s security documentation reviewed and seeking advice on its enforceability and what powers a secured creditor may have.
The liquidation process is more invasive and allows liquidators to investigate the company’s activities. Liquidators have the ability to recover monies and assets in relation to unreasonable director-related transactions and insolvent trading. These powers are not available to voluntary administrators or controllers.
We invite you to review our Insolvency and Banking & Finance service sections for further details. If you have any questions, please contact us for a no obligation, fee-free discussion.