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What are your options if your company is insolvent?

If your company is in financial difficulty and heading towards insolvency, there are options available which allow a company to be guided through its financial distress. The best option for your company depends on the solvency of the company and the broad range of director duties and obligations.

In this article, we examine the three most common insolvency procedures:

  • Voluntary administration,
  • Liquidation: and
  • Receivership

Voluntary administration

A company will be placed in voluntary administration if the directors make a decision that the company is insolvent, or likely to become insolvent.

If the directors place the company into voluntary administration a voluntary administrator takes control of the company, investigates the company’s affairs and provides recommendations to creditors.

The aim of voluntary administration is to attempt to solve the debt problems of the company in one or other way.

There are three possible outcomes to voluntary administration:

  • End the voluntary administration: if the administrator finds that the company is solvent, control of the company can be returned to the directors.

  • Deed of company arrangement: this is a process that normally only provides a limited return to creditors of less than 100 cents in the dollar in settlement of their debts and allows the company to return to trading. It might also allow the company to continue trading whilst seeking funding or whilst locating a buyer of the company.

  • Liquidate the company: if it is found the company is insolvent.

During voluntary administration there is a moratorium on unsecured creditors pursuing their debts owed by the company.

Liquidation

Liquidation involves winding up the company’s affairs, dismantling the company structure, selling the company’s assets and distributing the proceeds of sale to the company’s creditors. Liquidation is considered a last resort for a company in financial difficulty.

There are three types of liquidation:

  • Court liquidation: occurs when an application is made to the Court, normally by a creditor, to wind up the company.

  • Creditors’ voluntary liquidation: occurs when the company is insolvent and the members agree that the company should be wound up.

  • Members’ voluntary administration: is a form of winding up where the company is solvent but the company’s members want to end the company’s existence.

Receivership

A receivership occurs when a secured creditor appoints an external person to collect and sell the company’s assets, after the company has defaulted on its contract either through non-payment or breach of other terms.

The receiver acts in the interests of the appointing party to attempt to ensure that the secured creditor obtains payment of the debt which is owed to it. When the receiver has collected and sold enough assets to pay the debt to the secured creditor, the receivership terminates and full control of the company returns to the directors.

Conclusion

There are significant penalties for allowing your company to trade whilst insolvent. For example, a breach of the duty to avoid incurring any debts if a director is aware that a company is insolvent can give rise to civil and/or criminal penalties that may lead to personal liability for the company directors.

If your company is facing financial difficulty or you are unsure about the solvency of your company, we recommend that you seek immediate legal or financial advice.

If you or someone you know wants more information or needs help or advice, please contact us on 08 9422 8111 or email buslaw@taitlegal.com.au.