Forsythes

Guide To Understanding Corporate Insolvency

1. The Corporations Act governs corporate insolvency administrations. The Australian Securities Commission administers the Corporations Act. Registered liquidators and official liquidators administer corporate insolvency administrations. Only official liquidators can perform court appointments. Registered liquidators and official liquidators are practising accountants. Both the Federal Court and the respective State Supreme Courts play a role in the administration of corporate insolvency administrations.

Voluntary administration

2. Insolvent companies have chosen to utilise the voluntary administration provisions of the Corporations Act. Registered liquidators (administrators) administer voluntary administrations.

3. The voluntary administration process may be initiated by the directors of the company on becoming aware of the company’s insolvency or pending insolvency. A liquidator or the holder of a charge over all or substantially all of the assets of the company may also initiate the voluntary administration process.

4. On appointment, the administrator takes control of the affairs of the company. The rights of both secured and unsecured creditors are curtailed. The administrator has far reaching powers. A first meeting of creditors must be held within 5 business days of the appointment to validate the administrator’s appointment.

5. The administrator will explore opportunities for the formulation of a proposal acceptable to creditors. If acceptable, this proposal will be incorporated into a deed of company arrangement binding on all creditors. From a practical perspective, the proposal will usually originate from the company’s directors or a third party wishing to acquire the business or a part of the business.

6. The administrator must investigate the affairs of the company. The administrator prepares a report for creditors in which an opinion on the proposal for a deed of company arrangement must be stated.

7. A second meeting of creditors, held normally within 28 days of the commencement of the administration, decides the fate of the company. Creditors may resolve to either accept the proposal, wind up the company or return it to the directors control.

8. On execution of the deed the administrator becomes the administrator of the deed. The company will remain subject to the deed until the terms of the deed are fully complied with. The directors will normally regain day to day control of the company on the execution of the deed. The deed administrator’s role is, in most cases, a monitoring role or a collection and distribution role.

9. In the event that creditors do not accept the proposal for a deed of company arrangement, creditors may resolve either to release the company from administration, or to wind up the company. If creditors resolve to wind up the company, the administrator becomes the liquidator and the administration proceeds as a creditors’ voluntary winding up.

Liquidation

10. Traditionally, companies that have become insolvent were wound up. There are two types of winding up available to an insolvent company, a creditors’ voluntary winding up and a court winding up. A registered liquidator administers a creditors’ voluntary winding up. An official liquidator administers a court winding up.

11. The company itself initiates a creditors’ voluntary winding up. The company must resolve by special resolution to be wound up. The company must convene a meeting of creditors for the day of the company meeting or the day immediately after the company meeting. The company will nominate a liquidator to conduct the winding up. The creditors may nominate a liquidator. In the event the creditors and the company nominate a different person to act as liquidator, the creditors’ nomination prevails.

12. A court winding up is initiated by a creditor or creditors owed $2,000 or more. The failure by the company to satisfy a statutory demand provides the creditor with a presumption of insolvency on which to base the application to wind up the company. The Court may make a winding up order against the company and appoint an official liquidator to administer the winding up. In the New South Wales Supreme Court and in the Federal Court, the creditor may nominate the official liquidator of his or her choice. In the absence of a nomination, a rotation system operates.

13. In certain circumstances, the Court may appoint a provisional liquidator to take control of the company any time after the filing of the application to wind up the company if the Court considers that the assets of the company are at risk. The role of the provisional liquidator is to maintain the status quo until the application to wind up the company is finally determined by the court. The provisional liquidator in most cases becomes the liquidator of the company on it being wound up.

14. The liquidator takes control of the company, investigates its affairs and realises the company’s assets for the purpose of paying a dividend to creditors. The liquidator has a statutory duty to report any offences disclosed through his investigations to the ASIC. The liquidator is empowered to seek compensation from directors for insolvent trading and to recover monies and property disposed of as unfair preferences, uncommercial transactions and unfair loans.

Receiverships

15. A secured creditor, in the event of a debtor’s insolvency, may appoint either a receiver or a receiver and manager. The nature and extent of the appointment will depend on the powers available to the secured creditor in the security document. A common security taken by financiers is a fixed and floating charge (mortgage debenture). Receivers and managers must be registered liquidators.

16. The powers of the receiver and manager come from the security under which he or she is appointed and the Corporations Act. A receiver and manager’s primary obligation in the performance of his or her duties is to the appointor. A secondary obligation is owed to the company. The receiver’s primary function is to get his or her appointor’s debt repaid.

Need assistance?

17. Forsythes are specialists in both corporate and personal insolvency. If you need advice from independent, ethical and experienced insolvency practitioners, contact Peter Hicks for a confidential, obligation free consultation.