Corporate insolvency frequently asked questions
What is External Administration?
Insolvency appointments consist of several types, including administrations, receiverships, and liquidations. Usually, a company that enters into an external administration owes money to its creditors.
External administration may be initiated either voluntarily by the company’s directors or involuntarily, by its creditors.
Insolvency procedures for companies can take a variety of forms. For example, a Voluntary Administration is a type of formal insolvency procedure which is intended to resolve a company’s debt issue as quickly as possible. In contrast, liquidation is a type of insolvency intended to wind up the affairs of the company.
In liquidation, an insolvent company’s affairs are wound up by an independent qualified party (liquidator) so that creditors can have a fair chance of recouping their debts.
The most common type of liquidation is creditors’ voluntary liquidation, which occurs when creditors of the company vote for the liquidation after a voluntary administration or DOCA fails. A creditors’ voluntary liquidation may come as 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. Usually, this occurs when a court appoints a liquidator upon receiving an application from a creditor. An application can also be made to the courts by directors, shareholders, and ASIC.
If you are considering external administration options for your company be sure to seek advice from Macmillan. Claim your free consultation today.
What is a Voluntary Administration?
Voluntary Administration (VA) is an insolvency procedure where a company, in financial hardship or experiencing financial difficulties, appoints an independent third party (Administrator) to step into the shoes of the director to assess the options and generate solutions and outcomes for creditors.
It is important to note that Voluntary Administration is NOT liquidation.
The objective of Voluntary Administration is to save the company so that it may continue its operations, whereas liquidation is the process of finalising the company’s affairs.
While daunting, Voluntary Administration has many positives, which include (among other things):
- Providing creditors with an independent third-party assessment and opinion on the company and its business;
- Creating the opportunity to continue the business (either through the company or another);
- Allowing for negotiation and compromise to be reached between the company and its creditors; and
- Serving as an alternative to liquidation.
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 of the Corporations Act 2001 (Cth)).
The administration process takes place over an interim period, usually lasting between 25 and 30 business days.
If you are considering Voluntary Administration as an option for your company be sure to seek advice from Macmillan. Claim your free consultation today.
What is a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation (CVL) occurs when the company’s members determine that the company is unable to continue to meet its debts and is therefore insolvent, or likely to become insolvent. By resolving to place the company into liquidation and appoint a liquidator, it allows for an orderly realisation of company assets, investigations to be undertaken into the company’s failure and distribution of the company’s assets amongst its creditors.
The CVL is a sensible means of winding up an insolvent company and the liquidator will take a systematic approach to bring the Company’s affairs to an end. The Liquidator is an independent third party appointed to ensure that the process is conducted appropriately and accordingly to the relevant laws.
If you are considering Liquidation options for your company be sure to seek advice from Macmillan. Claim your free consultation today.
What is a Court Liquidation?
A Court liquidation occurs when a creditor (or multiple creditors) bring an application to Court for amounts which the company owes to them to seek orders to wind-up a company due to the Company failing to pay its debt. This application is usually preceded by the creditor(s) having issued a creditors statutory demand on the company and that demand having expired without a response.
If the creditor is successful in its application, the Court will order that a liquidator be appointed to the company. The Court liquidation process allows for an orderly realisation of the company’s assets, investigations to be undertaken 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 brings its affairs to an end. A creditor can only resort to this process if they have exhausted all other avenues to obtain payment for outstanding debts as the insolvency regime is not to be utilised as a debt collection tool.
If you are owed money by a company that you suspect is insolvent and would like some advice on the options for your company be sure to seek advice from Macmillan. Claim your free consultation today.
What is a Receivership?
A receivership occurs when an application is made to the Court by:
- A secured creditor wishes to recover his/her loan; or
- An interested party (such as a shareholder, director or investor).
Receivers are typically appointed by secured creditors when a company is unable to pay its debts and are receiving pressure from its secured and unsecured creditors in an effort to ensure that particular creditor is paid what they are owed from the proceeds of selling the assets/taking possession of the property which they are secured over.
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 can cause major failure in the business’ control and management systems, leading to disputes between directors and shareholders and defaults on loan repayments to secured lenders.
A receiver’s role is to realise the Company’s assets and disburse the funds according to the law. This process can be used to safeguard assets in the interim whist other Court action proceeds and allows for a secured creditor to realise the proceeds of any assets which they hold security over in circumstances where there is grounds to do so under the loan documents.
Court Appointed Receivers are also used in circumstances where disputes arise. However, in order to prevent on-going losses and the inability to improve trading, a Liquidator or Administrator should be appointed to the business.
A receivership typically comes to an end once the receiver has collected and sold all of the assets or enough assets to repay the secured creditor, completed all of their duties and paid their receivership liabilities. Generally, the receivership comes to an end once 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 reverts back to the directors of the company.
If you are considering appointing a Receiver over a company you are owed money from be sure to seek advice from Macmillan. Claim your free consultation today.