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Small Business Restructuring Process

Corporate Insolvency FAQs

Our Corporate Insolvency Team play an active role in searching and recovering assets which should be available to creditors when a liquidator is appointed, and to seek out and analyse circumstances where improper action has been taken.

To assist you with understanding the Corporate Insolvency process, we have put together a list of FAQ’s to help you determine which solution is right for your business.

External Administration

What is an external administration?

An external administration is comprised of several forms of insolvency appointment types including administrations, receiverships and liquidations. When a company enters into an external administration, typically the company will owe money to its creditors.

A company can enter external administration either voluntarily by its own directors or involuntarily, by the creditors that are owed money. For more information on types of insolvency relating to businesses, visit https://svpartners.com.au/services/solutions-for-businesses/

What is a liquidation?

There are various types of insolvency procedures for companies. An administration (see voluntary administration), is a type of formal insolvency process that is intended to resolve a company’s financial debt situation as quickly as possible to maximise survival. However, a liquidation is a type of insolvency that is intended to wind up the company and its affairs.

What is the difference between a company going into administration and liquidation?

A liquidation relates to an insolvent company with the purpose of winding up its affairs by an independent qualified party (liquidator) so that creditors of the company can have a fair chance of recovering debt that is owed to them.

A creditors’ voluntary liquidation is the most common type of liquidation and is the consequence of creditors of the company voting for a liquidation following a voluntary administration or a failed deed of company arrangement (DOCA). A creditors’ voluntary liquidation may also be a result of shareholders of an insolvent company deciding to liquidate the company and appoint a liquidator.

The second type of liquidation is known as a court liquidation. This is where a liquidator is appointed by the court, typically instigated by a creditor’s application to the courts. Directors, shareholders and ASIC can also make an application to the courts to wind up a company.

Voluntary Administration

What is a Voluntary Administration?

Voluntary administration (also known as a VA) is an insolvency procedure where the directors of a financially troubled company with a security interest over most of the company’s assets appoint an external administrator.

The voluntary administration process ensures that the business, property and affairs of the company are administered in a way that:

  • Maximises the chances of a business to continue to exist, or:
  • Results in a better return for the company’s creditors and members, than from an immediate winding up of the company (section 435A).

The administration process takes place over an interim period, usually lasting between 25 and 30 business days.

What does a Voluntary Administration do?

A voluntary administration provides a flexible procedure, enabling a company time to compromise an arrangement with its creditors, which may save the company, the business and jobs while maximising the return to creditors.

It can:

  • Provide a company with breathing space to deal with creditors in an orderly manner and prepare proposal to give the best return to stakeholders
  • Allows an independent party to review the company’s affairs and deal with the pressures of creditors
  • Reduce the possibility of secured creditor proceedings against the assets of the company
  • It may allow the company to stay out of liquidation

If the voluntary administration attempt fails, the legislation facilitates the winding-up of the company.

Deed of Company Arrangement

What is a Deed of Company Arrangement (DOCA)?

A Deed of Company Arrangement is a binding agreement between a company and its creditors. This arrangement sets out how the company’s affairs will be dealt with between both parties and is usually formed at the end of a Voluntary Administration.

The DOCA aims to maximise business survival and to provide a better return for creditors rather than an immediate wind up of a company.

Creditors’ Voluntary Liquidation

What is a Creditors’ Voluntary Liquidation?

A creditors’ voluntary liquidation (CVL) occurs when the company’s members determine that the company can no longer satisfy its debts and is insolvent, or likely to become insolvent. It allows for an orderly realisation of the company’s assets, investigations into the company’s failure and distribution of the company’s assets amongst creditors.

What does a Creditors’ Voluntary Liquidation do?

The creditors’ voluntary liquidation (CVL) process allows for a systematic approach to winding up a company and bringing its affairs to an end. The Liquidator acts as an independent third party to ensure that the process is conducted appropriately and accordingly to the relevant law.

How does a Creditors’ Voluntary Liquidation commence?

A creditors’ voluntary liquidation is commenced after the company’s members pass a resolution that the company be wound up and a liquidator be appointed.

A creditors’ voluntary liquidation may also begin as a result of creditors of a company in voluntary administration resolving that the company be wound up.

A company that has a winding up application commenced against it cannot resolve to be wound up whilst the application remains on foot.

What impact does a Creditors’ Voluntary Liquidation have on secured creditors?

A creditors’ voluntary liquidation does not usually affect a secured creditor’s right to enforce its security. Often, a secured creditor will allow a liquidator to sell charged assets during the course of the liquidation provided the rights of the secured creditor are maintained.

What impact does a Creditors’ Voluntary Liquidation have on employees?

Employee entitlements (including wages, superannuation, leave and termination pays, etc.) are afforded as a priority under the Corporations Act ahead of ordinary unsecured creditor claims in the event of a distribution in a liquidation.

The federal government has a scheme to protect employee entitlements in the event of a company being placed into liquidation – the Fair Entitlements Guarantee Scheme (FEGS) or previously known as the General Employee Entitlements and Redundancy Scheme (GEERS). This scheme provides a fund to satisfy outstanding wages, leave entitlements and termination pays, but it does not cover unpaid superannuation. Please refer to the FEGS website at https://www.employment.gov.au/fair-entitlements-guarantee-feg for further information. (Relevant news articles)

What impact does a Creditors’ Voluntary Liquidation have on unsecured creditors?

The appointment of a liquidator suspends an unsecured creditor’s rights to pursue a company further for unpaid debts. An unsecured creditor is able to lodge a claim in the liquidation for the amount of its debt and will rank equally with all other unsecured creditors for any distribution.

An unsecured creditor that holds a personal guarantee in respect of company debts can proceed to enforce its rights against the guarantor under the guarantee once the liquidation commences.

What impact does a Creditors’ Voluntary Liquidation have on shareholders?

Shareholdings generally have no value once a creditors’ voluntary liquidation is commenced as the company is insolvent and has insufficient assets to satisfy its liabilities. Accordingly, shareholders will most likely not receive a distribution in a creditors’ voluntary liquidation.

What impact does a Creditors’ Voluntary Liquidation have on directors?

The powers of a director are suspended on the appointment of a liquidator and only the liquidator is able to bind the company in any transaction. A director is required to assist the liquidator in undertaking the winding up and has an obligation to comply with any requests made by the liquidators.

Directors often provide personal guarantees to creditors for debts incurred by the company and as such, may become liable for some company debts once the liquidation commences.

What are the roles and powers of the liquidator in a Creditors’ Voluntary Liquidation?

Once the liquidation has commenced, the liquidator takes control of the company’s assets and affairs and is the only one with the power to bind the company. In general, the liquidator will:

  • Identify, secure and realise the company’s assets
  • Investigate the failure of the company
  • Identify any voidable transactions
  • Report to creditors and hold meetings
  • Report to the Australian Securities and Investments Commission (ASIC) on any offences committed by company officers
  • Distribute any company assets to creditors
  • Apply to ASIC to deregister the company

How does the Liquidator get paid in a Creditors’ Voluntary Liquidation?

A liquidator’s fees receive a priority under the Corporations Act from funds received from realising company assets. A liquidator cannot draw fees without the prior approval of creditors or the Court.

What is the outcome of the Creditors’ Voluntary Liquidation process?

Once all assets have been realised, investigations are completed and distributions to creditors are made, the liquidator will apply to ASIC for the company to be deregistered. Creditors will no longer have any claim against the company and the company will no longer exist.

Court Liquidation

What is a court liquidation?

A court liquidation occurs when a creditor (or group of creditors) make an application to court to wind-up a company due to non-payment of a debt. It allows for an orderly realisation of the company’s assets, investigations into the company’s failure and distribution of the company’s assets amongst creditors.

What does a court liquidation do?

The court liquidation process allows for a systematic approach to winding up a company and bringing its affairs to an end. A creditor can resort to this process if they have exhausted all other avenues to obtain payment for outstanding debts.

What is the impact of a court liquidation on secured creditors?

A court liquidation does not usually affect a secured creditor’s right to enforce its security. Often, a secured creditor will allow a liquidator to sell charged assets during the course of the liquidation provided the rights of the secured creditor are maintained.

What is the impact of a court liquidation on employees?

Employee entitlements (including wages, superannuation, leave and termination pays, etc.) are afforded as a priority under the Corporations Act ahead of ordinary unsecured creditor claims in the event of a distribution in a liquidation.

The federal government has a scheme to protect employee entitlements in the event of a company being placed into liquidation – the Fair Entitlements Guarantee Scheme (FEGS) or previously known as the General Employee Entitlements and Redundancy Scheme (GEERS). This scheme provides a fund to satisfy outstanding wages, leave entitlements and termination pays however does not cover unpaid superannuation. Please refer to the FEGS website at https://www.employment.gov.au/fair-entitlements-guarantee-feg for further information.

What is the impact of a court liquidation on unsecured creditors?

The appointment of a liquidator suspends an unsecured creditor’s rights to pursue a company further for unpaid debts. An unsecured creditor is able to lodge a claim in the liquidation for the amount of its debt and will rank equally with all other unsecured creditors for any distribution.

An unsecured creditor that holds a personal guarantee in respect of company debts can proceed to enforce its rights against the guarantor under the guarantee once the liquidation commences.

What is the impact of a court liquidation on shareholders?

Shareholdings generally have no value once a court liquidation has commenced, as the company is insolvent and has insufficient assets to satisfy its liabilities. Accordingly, shareholders will most likely not receive a distribution in a court liquidation.

What is the impact of a court liquidation on directors?

The powers of a director are suspended on the appointment of a liquidator and only the liquidator is able to bind the company in any transaction. A director is required to assist the liquidator in undertaking the winding up and has an obligation to comply with any requests made by the liquidators.

Directors often provide personal guarantees to creditors for debts incurred by the company and as such, may become liable for some company debts once the liquidation commences.

What is the outcome of the court liquidation process?

Once all assets have been realised, investigations are completed and distributions to creditors are made, the liquidator will apply to ASIC for the company to be deregistered. Creditors will no longer have any claim against the company and the company will no longer exist.

How does the liquidator get paid in a court liquidation?

A liquidator’s fees receive a priority under the Corporations Act from funds received from realising company assets. A liquidator cannot draw fees without the prior approval of creditors or the court.

What is the role and powers of the liquidator in a court liquidation?

Once the liquidation has commenced, the liquidator takes control of the company’s assets and affairs and is the only one with the power to bind the company.

In general, the liquidator will:

  • Identify, secure and realise the company’s assets
  • Investigate the failure of the company
  • Identify any voidable transactions
  • Report to creditors and hold meetings
  • Report to the Australian Securities and Investments Commission (ASIC) on any offences committed by company officers
  • Distribute any company assets to creditors
  • Apply to ASIC to deregister the company

Receivership

What is a receivership?

A receivership can occur when:
• A secured lender wishes to recover his/her loan
• An interested party (such as a shareholder, director or investor) makes an application to the Court

After this occurrence, the receiver will realise the Company’s assets and disburse the funds according to law. This process can be used to safeguard assets in the interim whist other Court action proceeds.

Court Appointed Receivers can be used in dispute circumstances.

What causes a receivership?

Receiverships are caused when a company is unable to pay its debts and are receiving pressure from secured and unsecured creditors. A receivership may also be caused when management does not have the skill set to move the business forward – more often than not the business is already strained because of past activity. This often causes major failure in business control and management systems, leading to disputes between directors and shareholders and defaults on loan repayments to secured lenders.

In order to prevent on-going losses and the inability to improve trading, a Liquidator or Administrator should be appointed to the business.

What is the role and power of a receiver?

A receiver is an independent person who controls the assets of the business. They would manage those assets to recover all or part of the debt for a secured creditor.

Receivers will take control out of the hands of the director and have the potential to trade on the company and sell the business if there is a growing concern.

Receivers can conduct limited investigations of the company’s affairs.

What is the outcome of a receivership?

A receivership usually ends when the receiver has collected and sold all of the assets or enough assets to repay the secured creditor, completed all their receivership duties and paid their receivership liabilities. Generally, the receiver resigns or is discharged by the secured creditor. Unless another external administrator has been appointed, full control of the company and any remaining assets goes back to the directors.

Simplified Liquidation

What is the purpose of a Simplified Liquidation?

A simplified liquidation (also known as a simple liquidation) is one of two new formal insolvency processes introduced by the Federal Government, in the wake of the COVID-19 pandemic (the other being the Small Business Restructuring Process). This new process has been designed to reduce the cost and time involved in completing the liquidation process.

How does a Simplified Liquidation commence?

When a company is placed into a Creditors’ Voluntary Liquidation, the liquidator can choose (subject to the rights of creditors) to adopt the simplified liquidation process if they believe the company is eligible.

Who is eligible for a Simplified Liquidation?

In order for a company to be eligible, the company must be unable to pay its debts in full within 12 months after the liquidation commences, have total liabilities of less than $ 1 million, ensure all its tax lodgements are up to date and generally not have used the Simplified Liquidation or Small Business Restructuring Process in the last 7 years (including current and former directors).

How does a Simplified Liquidation differ from a Creditors' Voluntary Liquidation?

Cheaper and more convenient communication to creditors via the SV Partners Creditor Portal or email, without the hassle of postage or holding creditors meetings.

There are also fewer circumstances in which Liquidators are required to report to ASIC or clawback monies, assets or properties from voidable transactions and as the process is significantly streamlined, there is potential for expedited wind up and deregistration of the company at a reduced cost.

How do I know a Simplified Liquidation is suitable for my business?

Simplified Liquidations are generally useful where a small company has not traded a business or incurred a debt for some time, but, because it is insolvent, does not qualify for the requirements to deregister or wind-up under a Members Voluntary Liquidation. It is best to meet with a professional to assess your situation and discuss your options. There may be other alternatives which could be more suitable for your circumstances.

What are the expected outcomes of a Simplified Liquidation?

Once all company assets have been realised, investigations are completed and distributions to creditors are made, the liquidator will apply to ASIC to deregister the company. Creditors then no longer have any claim against the company.

Small Business Restructuring Process

What is the purpose of the Small Business Restructuring Process?

The purpose of the SBRP is to provide directors and the company time to put forward a plan to creditors to pay off their liabilities, in full, or in part, within a period not exceeding 3 years.

How does a Small Business Restructuring Process commence?

In order for a SBRP to commence, directors of the company must pass a resolution that they believe the company is insolvent or likely to become insolvent at some future time and that a Restructuring Practitioner should be appointed.

Who is eligible for the Small Business Restructuring Process?

In order for a company to be eligible, the company must have liabilities of less than $1 million. To be able to propose a restructuring plan, the business must have paid all employee entitlements and made all tax lodgements

How does the process work?

The company has 20 business days to propose the restructuring plan to its creditors. After receiving the plan, creditors have 15 business days to vote on the plan. If more than 50% in value of unrelated creditors vote in support of the plan, it is approved and binds all unsecured and participating creditors.

Who controls the company during a Small Business Restructuring Process?

The company continues to trade and remains under the control of its directors during the Small Business Restructuring Process.

What happens if the plan is not approved by creditors?

If the plan is not approved by creditors, the company does not automatically enter other forms of formal insolvency appointments. Rather, the directors remain in control of the company and creditors may continue enforcement action.

The directors are able to consider placing the company into Voluntary Administration, or Creditors Voluntary Liquidation, but are not obligated to. Likewise, creditors may consider winding the company up by way of an application to court.

How do I know a Small Business Restructuring Process is suitable for my business?

Simplified Liquidations are generally useful where a small to medium business seeks to trade out of its financial problems, by way of putting forward a formal short-to-medium term restructuring plan for its creditors to vote on. It is best to meet with a Restructuring Practitioner to assess your situation and discuss your options. There may be other options which could be more suitable for your circumstances.

What is Small Business Restructuring Practitioner?

A Small Business Restructuring Practitioner administers the SBRP and must be a Registered Liquidator. The practitioner will (amongst other things) give advice and assistance to the directors of the company, examine the company’s business, property and affairs and adjudicate on creditors claims.

What are the expected outcomes of the Small Business Restructuring Process?

Once the plan is approved, the business continues to trade under the control of the directors. The Restructuring Practitioner will administer the plan and distribute funds to creditors.

The plan is complete when its terms are satisfied and the company is then released from its admissible debts.

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