As already identified in a previous article titled, How to Restructure your Business: Part One, the broad insolvency process in Australia can be broken down into 2 stages:
- Where there is a possibility of a turnaround; and
- Where there is no real possibility of a turnaround.
The focus of the article, How to Restructure your Business: Part One, was when a company has the possibility of a turnaround. This article will focus on the second category, when a company has no real possibility of a turnaround.
Broadly speaking there are two well-known options to wind up a company: liquidation and receivership.
Liquidation
Liquidation is the process of realising a company’s assets, selling them and using the proceeds to pay off as much of the debts & liabilities of the company as possible.
There are however several forms of liquidation including:
- Members Voluntary Liquidation (MVL)
- Creditors Voluntary Liquidation (CVL)
- Court Ordered Provisions Liquidation
- Court Ordered Liquidation
An MVL is set apart from other forms of liquidation in that the company has to be solvent.
Usually creditors who have proved the company to be insolvent, commence the liquidation process by applying to the court under s459P of the Corporations Act
This practice is open to both secured and unsecured creditors.
Once a liquidator is appointed, they take over the operation of the company and can deal with its assets. The role of a liquidator is to effectively deal with the company so that it can be shut down. This process entails a detailed look at the company and the realisations of its assets, an equitable distribution to creditors and an examination of the events that led to the liquidation. Unlike administrators, liquidators have the power to undo voidable transactions through the court process. This can present problems for the Directors or the beneficiaries of assets of the company.
Once the liquidator has examined the company they can:
- Distribute funds and deregister the company;
- Commence voluntary administration of the company if they believe it can be salvaged; or
- The court can order the termination on the basis that the company is solvent.
Receivership
Receivership is a form of administration where the receiver takes control of a secured property and becomes an agent on the secured party’s behalf.
The receiver’s main role is to take control of the asset which is secured, realise it or manage it and distribute the benefit to the secured party (creditor).
A receiver is usually appointed as a result of non-compliance with a contract, such as a loan agreement, or some failure to pay a debt. In some rare circumstances a court can appoint a receiver if the contract is flawed, however they have been reluctant to in recent times.
As receiverships are fairly private in their nature, that is one creditor over secured property, they can occur at the same time as voluntary administrations, DOCAs and liquidations. This can have significant impacts on the assets left to be realised and distributed to unsecured creditors.
Conclusion
It is incredibly important to ensure that companies and directors are given timely advice when it comes to a business that is in trouble. This can result in the protection of assets, a turnaround or an orderly realisation and winding up. With time there are options.
If you have a client or your company is struggling then please reach out to James Frank, jfrank@franklaw.com.au or call 02 9688 6023.
Key Takeaway
The Winding Up process is like a Lego set or a giant puzzle. If you have time the end product looks like the picture on the box, however if you rush it, it will look like a dog’s breakfast.
This is not legal advice.
