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.
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/
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.
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 (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:
The administration process takes place over an interim period, usually lasting between 25 and 30 business days.
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:
If the voluntary administration attempt fails, the legislation facilitates the winding-up of the company.
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.
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.
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.
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.
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.
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)
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
