Things Company Directors Need To Know About Corporate Insolvency But Are Afraid To Ask

Q - What is insolvency?
A - You are insolvent if you cannot pay your debts as and when they fall due, from your own money. Your own money includes money you can raise by either selling or giving security over your assets. Insolvency can be temporary or chronic.

Q - Am I exposing my personal assets if I allow my company to continue to trade when it is experiencing difficulties paying its debts?
A - The answer to this question depends on whether the difficulties are temporary or chronic. If the problem is chronic, by continuing to trade you are exposing your personal assets. A director of a company who allows it to continue to trade whilst insolvent is personally liable for the damage suffered by the company as a result of continuing to trade. A director of a company who allows a company to fail to remit tax deducted on behalf of the Commonwealth on the day the remittance was due is liable for a penalty equal to the tax not remitted until the tax is paid. The tax may be recovered from the director after the expiration of a notice served on the director by the Australian Taxation Office.

Q - When should I take some action?
A - If you are unable to pay all of your debts as and when they fall due, you should seek advice from an expert. Your accountant, solicitor or Forsythes can advise you. Remember, the earlier the problem is identified, the greater the opportunity to rectify it and retain your business.

Q - What are my options if my company is insolvent?
A - You have the following options:
(i) Convene a meeting of directors to appoint an administrator to the company.
(ii) Convene meetings of members and creditors to wind up the company voluntarily.
(iii) Apply to the Court for the company to be wound up.
(iv) Do nothing and suffer the consequences.

Q - What is the time frame associated with each of the options associated with appointing an external administrator to the company?
A - The time frames associated with each of the options discussed are:
(i) The appointment of an administrator is made when the directors resolve to make the appointment.
(ii) A creditors’ voluntary winding up may take up to 21 days to commence due to the time frames prescribed for convening meetings of members and creditors.
(iii) The Court will normally deal with an application to wind up the company within a month.

Q - What is the underlying purpose of each of these forms of insolvency administration?
A - Their purposes are:
(i) A voluntary administration’s purpose is the survival of the business or part of the business. It involves formulating a proposal acceptable to the majority of creditors for dealing with the company’s debts, which is ultimately documented as a deed of company arrangement.
(ii) A winding up of the company, whether initiated as a Court winding up or a creditors’ voluntary winding up by members has the purpose of realising the company’s assets, sharing the proceeds from those realisations between creditors and ultimately the dissolution of the company.

Q - Who can act as an external administrator (i.e. a liquidator or an administrator)?
A - Most external administrators are practising accountants. To accept Court appointments, one must be an Official Liquidator and for a creditors’ voluntary winding up or a voluntary administration, one must be a registered liquidator. Peter Hicks of Forsythes can accept these appointments.

Q - What advantage does a deed of company arrangement offer to directors over a winding up?
A - The major advantage is that the deed of company arrangement will relieve a director from the possibility of liability for compensating the company in the event the company was allowed to trade whilst insolvent.

Q - Who is liable for the debts incurred during the administration?
A - The administrator is personally liable for debts incurred by a company subject to his or her control. Accordingly, the administrator will impose financial controls over the operation of the business that the business has not been previously subject to. These financial controls increase the time spent on the administration by the administrator’s staff. The administrator is responsible for management of the company’s business, investigating the financial affairs of the company and evaluating the proposal.

Q - Does the administrator work for me?
A - No. The administrator’s primary responsibility is to the company’s creditors. The administrator will act in an impartial and independent manner throughout the administration.

Q - Will I continue to run my business during the administration?
A - The administrator will have responsibility for running the business. It will be the administrator’s choice whether to employ you to manage the business on a day to day basis. If the administrator forms the view that it is not in the interests of creditors for the business to continue to trade, he or she is entitled to close the doors of the business without regard to your wishes.

Q - Am I compelled to assist the administrator in his inquiries?
A - You are required by law to provide all assistance practicable to the administrator, including preparing a Report as to Affairs for the company and delivering up the company’s books and records.

Q - How long will my company be under the administrator’s control?
A - The second meeting must be held within 28 days of the administrator’s appointment. The meeting can be adjourned for up to 60 days. If accepted by creditors, the deed must be signed within 21 days of its acceptance.

Q - What will be the outcome of the administration?
A - The outcome will depend on whether the proposal prepared and submitted to the administrator is advantageous to creditors. Creditors will decide the fate of the company. The outcome of the creditors’ meeting from a practical perspective will be either a deed of company arrangement in accordance with the proposal or a creditors’ voluntary winding up. A majority in number and value of creditors in attendance at the meeting must pass the resolution.

Q - What will be the outcome of the administration?
A - The outcome will depend on whether the proposal prepared and submitted to the administrator is advantageous to creditors. Creditors will decide the fate of the company. The outcome of the creditors’ meeting from a practical perspective will be either a deed of company arrangement in accordance with the proposal or a creditors’ voluntary winding up. A majority in number and value of creditors in attendance at the meeting must pass the resolution.

Q - What can the proposed deed provide for?
A - Anything can be proposed. Examples are:
(i) Conversion of debt to equity.
(ii) Payment in full, or in part, by instalments, or by way of a lump sum.
(iii) A moratorium on the repayment of existing debt for a prescribed period.
(iv) Giving of security to unsecured creditors.
(v) Payment out of future trading surpluses.
(vi) Capital injection into the business.
(vii) Sale of part or all of the business.
The law permits any legal arrangement to be proposed.

Q - What about a director’s guarantees?
A - The creditor is prohibited from enforcing the guarantee during the administration. However, no such protection can be incorporated in a deed unless directors and those creditors holding directors’ guarantees enter into separate agreements.

Q - Do I regain control of the company after the administration?
A - Most deeds of company arrangement provide for management of the company to be returned to its directors if the directors proposed the deed. The administrator of the deed will in most cases perform a monitoring, collection and distribution role until the terms of the deed have been fully complied with.

Q - Is it necessary for the business to survive for a deed of company arrangement to be agreed to?
A - No. However, in these circumstances the proposed deed should provide creditors with a better return than the immediate winding up of the company.

Q - How does a liquidator or administrator get paid?
A - A liquidator is paid from the proceeds of the assets realised. The administrator’s remuneration comes from either the proceeds of the sale of assets subject to his or her control or the deed fund.

Q - How much will a voluntary administration cost?
A - The remuneration of the administrator is normally calculated on an hourly basis. The Insolvency Practitioners Association of Australia produces a “Guide to Hourly Rates” from time to time. Forsythes will normally charge their staff’s time costs at discounted rates. The time spent on a job is dependent on many factors that can be influenced by you as a director. These include:
(i) Your co-operation with the administrator.
(ii) The state of the company’s books and records and financial statements.
(iii) The cause of the business’s problems.
(iv) The systems and controls used by the business.
(v) The company’s relationship with its creditors.
(vi) The period elapsed since the problems became apparent.
(vii) The timeliness of the production of the Report as to Affairs.
(viii) The timeliness of the submission of the proposal to the administrator.