RECEIVERSHIP, VOLUNTARY ADMINISTRATION AND LIQUIDATION: WHAT’S THE DIFFERENCE?

Last year, a total of 236,724 new companies were registered in Australia, bringing the national total to over 870,000. However, at the same time, 8,105 of these companies entered into a form of external administration, and 10,748 had insolvency appointments.

These numbers can seem daunting, particularly for company directors, as they indicate the prevalence of companies experiencing financial distress in Australia.

As such, it is important for directors to have an understanding of the avenues of receivership, external administration and liquidation, which they may be required to consider if faced with the challenge of a company in financial distress and the difficult decision of determining the company’s future.

Receivership

Receivership is normally an administrative procedure that occurs in instances where a particular secured creditor seeks to have an independent third party (the ‘receiver’) collect and sell any charged assets held by a company in order to repay a debt owed to that secured creditor.

Receivers can be appointed either by a Court or by a creditor where there is a contractual right to do so in a lending document.

Once a receiver has been appointed, they will ordinarily take steps to begin realising the company’s assets.

This process may also include an investigation into the books and records of the company.

In contrast to liquidation or voluntary administration, a company to which a receiver is appointed will retain ownership of all its secured property, with the condition that the receiver has control over it.

In addition, the director(s) of a company will retain their positions, albeit with limited powers of management.

Importantly, where a company has existing contracts containing provisions for termination on the appointment of a receiver, the contracts will so terminate. The practical result of this could likely be further financial difficulty for the company as the termination of contracts would lead to reduced revenue.

Receivership ends where the appointment’s objective has been fulfilled, or the company has reached other arrangements satisfactory to those persons who sought the appointment of the receiver.

In the event that there are no assets available and directors do not propose any action in relation to the company, the receiver may notify ASIC so that the company may be deregistered.

Voluntary Administration

Voluntary administration (‘VA’) is another form of external administration whereby a third-party ‘administrator’ assumes control of and investigates the affairs of a company, with a view to helping it trade out of a period of financial distress.

VA is ordinarily suggested in situations where at least part of a company’s business remains viable despite its present financial difficulties.

An administrator may be appointed either by:

  1. The company, through a resolution of directors, who have formed the opinion that the company is insolvent or likely to become insolvent;
  2. A liquidator or provisional liquidator, provided they think the company is insolvent or likely to become insolvent; or
  3. A secured creditor, provided they have a security interest over all or nearly all of the company’s property, and the security interest is perfected and enforceable.

Within eight business days of being appointed, a VA will convene a first meeting of creditors wherein the creditors:

  • Must decide whether to appoint a committee of creditors; and or
  • Have the opportunity to replace the existing administrator.

If a creditors’ committee is appointed, it has the power to consult with the administrator and receiver and consider reports by the administrator.

As noted above, an administrator is treated as an agent of the company and has complete control of the company’s business.

The powers of other company directors and officers are suspended while the company is under administration, and they may perform company functions only with the administrator’s approval. 

An administrator will then take steps to investigate the company’s business, property, affairs and financial circumstances.

Within 25 business days of being appointed, an administrator must then convene a second meeting of creditors, wherein they will suggest one of the following courses of action to the company’s creditors:

  1. For the company to execute a deed of company arrangement (commonly referred to as a ‘DOCA’);
  2. For the administration to end; or
  3. For the company to be wound up.

A DOCA is a binding arrangement between a company and all secured and unsecured creditors of that company, to pay off all or part of their respective debts.

It will then be up to the creditors to vote and decide how the affairs of the company are to proceed.

Liquidation & Special Purpose Liquidators

Liquidation is arguably the most common response to corporate insolvency. The two usual types of liquidation are:

  1. Court liquidation; and
  2. Voluntary winding up.

Court liquidation is commenced by a creditor, member, or by ASIC filing an application with the Court, which leads to an ultimate judicial winding up order.

Voluntary liquidation is commenced by a special resolution of members at a duly convened meeting of members (or creditors) under Part 5.3A of the Corporations Act 2001 (Cth).

In some circumstances, following a creditor’s voluntary winding up as a result of VA, the Court may appoint an additional liquidator known as a ‘Special Purpose Liquidator’ (‘SPL’).

The purpose of an SPL is generally to supplement the investigations of a company in circumstances where there are, or are likely to be, disputes or conflicts of interest which may require a different liquidator to be appointed. 

In any case, once a liquidator is nominated they will generally administer their powers in the same way, by preserving and categorically selling off the assets of the company so as to repay the company’s debts.

What should you do if your company is in financial distress?

If you are a director of a company which is struggling financially, it is important that you seek legal advice as soon as possible regarding which of the above options it is recommended you take. You also have a number of duties mandated by common law and legislation which you must ensure are observed at all relevant times. The penalties for breaching such duties can be severe.

Contact DSS Law today if you believe that you may require advice in relation to the immediate or future financial viability of your company.

Thomas Klepper & David Chen 14/01/2020

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or epost@dsslaw.com.au.