Voluntary Administration

What is a Voluntary Administration?

A Voluntary Administration (VA) exists to provide for the business, property and affairs of an insolvent company to be administered in a way that:

• maximises the chances of the company, or as much as possible of its business, continuing in existence
• if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company VA is an insolvency procedure where a voluntary administrator (administrator) is appointed by:
• the company after its directors resolve that the company is insolvent or likely to become insolvent
• the company’s financier who holds a registered general security interest
• the company’s liquidator

What is the effect of a VA?

The effect of the VA is to provide the company with time and protection from creditors while the company’s future is resolved.

There is a stay of proceedings issued against the company and a restriction on owners and lessors recovering property used by the company. However, a creditor with a general security interest may enforce its security interest within 13 business days after receiving notice of the appointment (as required by the Corporations Act) or within 13 business days after the day the administration begins.

Will creditors be paid during the VA?

Creditors will not receive payment of unsecured claims during the VA as they are statutorily frozen. If there are sufficient funds available for creditors, dividends will be paid after the VA; during either the subsequent deed of company arrangement or liquidation.

Any debts that arise from the administrator purchasing goods or services, or hiring, leasing, using or occupying property, are paid from the available assets as costs of the VA. If there are insufficient funds available from asset realisations to pay these costs, the administrator is personally liable for the shortfall.

Who is in control of the company?

While a company is under administration, the administrator:

• has control of the company’s business, property and affairs
• may carry on that business and manage that property and those affairs
• may terminate or dispose of all or part of that business, and may dispose of any of that property
• may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. The powers of other officers are suspended, except to the extent that the administrator has given written approval to the contrary.

What is the role of the administrator?

The role of the administrator is to investigate the company’s affairs, report to creditors and recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.

Can an alternate administrator be appointed?

A creditor who wishes to nominate an alternative administrator must approach a registered liquidator before the meeting of creditors, with a written consent from an insolvency practitioner, stating that they would be prepared to act as administrator.

What Are The Steps Involved in a VA?

 

*Unless the Court allows an extension of time. Source: http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/creditors-voluntaryadministration/

What information is given to creditors?

The administrator will notify creditors of the VA and convene the first meeting of creditors within three business days of the appointment.

The first creditors’ meeting is held within eight business days after the VA begins. The purpose of the first meeting is for creditors to decide two questions:

• whether they want to form a committee of inspection, and, if so, who will be on the committee
• whether they want the existing administrator to be removed and replaced by an administrator of their choice

At the second meeting, creditors are given the opportunity to decide the company’s future. This meeting is usually held about five weeks after the company goes into VA (six weeks at Christmas and Easter).

In preparation for the second meeting, the administrator must send creditors the following documents at least five business days before the meeting:

• a notice of meeting
• the administrator’s report on the business, property, affairs and financial circumstances of the company
• a statement about any proposals for a deed of company arrangement

Administrator’s report to creditors

The administrator is required to:

• report on the company’s business, property, affairs and financial circumstances
• provide a statement setting out the administrator’s opinion about the future of the company and reasons for those opinions

The administrator’s report should contain sufficient information to provide creditors with an understanding of:

• the history of the company and the reasons leading up to and the need for the appointment of an administrator
• the administrator’s prior involvement with the company
• the historic financial performance and position together with the current financial position of the company
• any offences, voidable transactions or insolvent trading claims
• the estimated return from winding up the affairs of the company
• any proposal for a Deed of Company Arrangement and the estimated return from same
• the administrator’s recommendation
• any other material information

 

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Deed of Company Arrangement

What is a deed of company arrangement?

A deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with following a

Voluntary Administration (VA). It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.

What can be proposed to creditors?

Any arrangement can be proposed to creditors. Commonly the proposal will provide for the payment of funds either as a lump sum after the signing of the DOCA, or by periodic

payments over some time period. It may also include the sale of assets owned by the company or the payment of part of the profits generated from continued trading or via third party funding.

What are the effects of a DOCA?

Upon execution of the DOCA:

• the powers of an officer of the company are revived, subject to the terms of the DOCA
• a secured creditor may realise or otherwise deal with its property except where prevented under the DOCA, and then only where the secured creditor has voted in favour of the DOCA
• an owner or lessor of property or secured creditor is only bound by the terms of the DOCA if they voted in favour of the DOCA
• a creditor bound by the DOCA cannot make an application for an order to wind up the company
• a creditor bound by the DOCA cannot begin or proceed with a proceeding or enforcement process in relation to any of the company’s property
• a creditor may proceed to enforce a guarantee provided by a director
• the company is released from a debt only insofar that the DOCA provides for the release and the creditor is bound by the DOCA

When must the DOCA be executed?

The company must sign the DOCA within 15 business days of the second creditors’ meeting, unless the Court allows a longer time.

If this doesn’t happen, the company will automatically be placed into liquidation, with the administrator becoming the liquidator.

Can the DOCA be varied?

A DOCA can be varied by a resolution passed at a meeting of creditors convened for that purpose but only if the variation is not materially different from the proposed variation set out in the notice of meeting.

What is the role of the deed administrator?

The deed administrator (administrator) usually monitors the DOCA to ensure that the provisions are fulfilled and distributes dividends, where available. Control of the company usually reverts to the directors but the DOCA will provide the deed administrator whatever powers are necessary to fulfill the terms of the DOCA.

How does a creditor get paid?

All creditors are required to submit a proof of debt, including copies of any relevant invoices or other supporting documents, to the administrator. Where funds are available, a dividend will be paid to all creditors whose claims have been agreed and admitted to rank for distribution. The order in which creditor claims are paid depends on the terms of the DOCA.

What happens if the company does not comply with the DOCA?

If the DOCA terms are not satisfied, it is considered to be in default. The deed administrator would usually issue a default notice, and if the default is not rectified within the period set out in the notice, the DOCA will be breached.

The DOCA may contain enforcement provisions or the deed administrator may have access to guarantees given in support of the DOCA. The DOCA may also be terminated by:

• the provisions of the proposal, automatically terminating the DOCA
• passing a resolution at a creditors’ meeting
• an application to court and the subsequent granting of an order

How does a DOCA end?

A DOCA will end:

• when the provisions of the DOCA are fulfilled or if the DOCA specifies circumstances in which it is to terminate and those circumstances exist
• if it is terminated under the terms of the DOCA due to a default not being rectified or if the creditors resolve to terminate the DOCA because of default
• if the court orders that the DOCA be terminated becasue of a default or any other reason
• the administrator executes a notice of termination

A termination of the DOCA, where it does not achieve its objectives, will also usually lead to the liquidation of the company.

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Creditors Voluntary Liquidation

A creditors’ voluntary liquidation (CVL) exists to provide for the winding up of the affairs of the company and to provide for a fair and equitable distribution of the company’s property and assets amongst its creditors, and it allows for investigations into the company’s failure. It may only occur if the company is insolvent or likely to be insolvent. It can commence following a Voluntary Administration (VA) resolving that the company be wound up or by a resolution of the company’s shareholders.

When is a CVL suitable?

The procedure may be used when:

• a company has come to the end of its useful life; and
• the company is insolvent, yet no application or order has been made by the Court that the company be wound up in insolvency

What are the steps in a CVL?

A CVL can be initiated by circular resolution executed by the directors and shareholders or by holding separate meetings of directors and shareholders. In both cases, the steps in a CVL are shown on the following page.

A company that has a winding up application commenced against it cannot resolve to be wound up whilst the application remains on foot. There are two key steps in a CVL.

1. Passing of resolutions by the directors
2. Passing of resolutions by members

The liquidator must, within 10 business days after receiving the report on the company activities and property from the directors, lodge a copy with ASIC.

What are the steps in a creditors voluntary liquidation?

Initial information

The liquidator must give creditors notice of their appointment and information advising creditors of the following:

• their right to request information, reports and documents
• their right to direct that a meeting of creditors be held
• their right to give directions to the liquidator
• their right to appoint a reviewing liquidator
• their right to remove and replace the liquidator
• a summary of the company’s affairs and a listing of the names, addresses and estimated amounts owed to the company’s creditors (and identifying if any of the creditors are related entities of the company).

The liquidator must also

• send with this information an initial remuneration notice if they propose to seek fee approval during the liquidation
• lodge a copy of these documents with ASIC

Statutory report

The liquidator must provide a report to creditors within 3 months after their appointment. after appointment

Other reporting

There is no statutory requirement for the liquidator to provide further reports to creditors. However, a liquidator will often provide further reports to creditors updating them on the conduct of the liquidation.

Creditors’ meetings

In a creditors’ voluntary liquidation, a meeting may be requested in the first 20 business days by ≥ 5% of the value of unrelated creditors.

At any other time, a liquidator is not required to call a creditors’ meeting unless a matter requires creditor approval.

The liquidator can call a creditors’ meeting at any time and if directed to do so by the committee of inspection and/or creditors. Requests should be made in writing and creditors should provide security for the costs of calling and holding the meeting.

The liquidator is not required to comply with a direction to call a meeting given by a committee of inspection or creditors if that direction is not reasonable.

What happens during a creditors voluntary liquidation?

Once the liquidation has commenced, the liquidator takes control of the company assets and affairs and is the only one with power to bind the company.

The liquidator:

• realises assets
• investigates affairs / failure of company
• pursues actions (e.g. voidable transactions, related party transactions and insolvent trading)
• reports to ASIC on conduct of directors
• distributes where funds available

What are the effects of a creditors voluntary liquidation?

Once a company is placed in liquidation, unsecured creditors cannot continue recovery action against the company unless the creditor obtains the leave of the Court.

The directors and officers lose their rights of management powers and authority to the liquidator. They are also required to provide information regarding the company’s financial position and assistance to the liquidator in undertaking his or her duties.

Liquidation brings to an end the normal operations of the company. It can only continue to trade so far as it is necessary for the beneficial disposal or winding up of the business and its assets.

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Court Liquidation

What is a Court liquidation?

Liquidation is the process that prepares a company for deregistration. The main reason for liquidation is because the company is insolvent. A Court liquidation is a compulsory winding up of a company where the liquidator is appointed by order of the Court.

Various parties including creditors, shareholders and directors of a company may initiate the Court process.

The most common petitioner is a creditor that is owed money.

What are the objectives of liquidation?

Liquidation allows for the equitable and fair distribution of the company’s assets amongst its creditors. It allows an investigation of any improper conduct that may lead to the recovery of funds for creditors.

What happens during the Court liquidation?

The liquidation involves the cessation of the business operated by the company, collecting of assets, realising and converting the assets to cash, dealing with the claims of creditors by admitting or rejecting them and distributing the net proceeds, after providing for costs and expenses, to the persons entitled.

What are the advantages of liquidation?

Liquidation provides an orderly winding up of the company. The directors are not in control of the company as control rests with the liquidator.

What are the effects of liquidation?

• The company ceases to carry on business except to the extent that the liquidator believes that it will assist the beneficial realisation of assets
• The assets of the company remain with it, but the liquidator becomes an agent of the company
• All legal proceedings against the company are stayed. Proceedings cannot be commenced or continued without the leave of the Court
• The disposition of property by the company after the commencement of the winding up is void
• The powers of the director(s) cease upon appointment of the liquidator
• Only the liquidator can exercise a function as an officer of the company
• All director(s) must prepare and submit a Report on Company’s Activities and Property and deliver all the company’s books and records to the liquidator
• A secured creditor can enforce its valid registered security

What is the priority for repayment?

Proceeds realised from the sale of non-circulating assets must be paid to the secured creditor. If there is a surplus, then this is paid to the company’s unsecured creditors.

Proceeds realised from the sale of circulating assets are paid to meet the costs of the liquidation, employee entitlements, the secured creditor and then to unsecured creditors.

What are the roles and powers of the liquidator?

The liquidator has a duty to:

• Ascertain and take possession of the assets, preserve and realise the assets
• Ascertain the liabilities of the company
• Investigate and report to ASIC concerning the affairs of the company and if less than 50 cents in the dollar is paid to unsecured creditors, or if an officer may be guilty of an offence
• Act honestly, to avoid conflicts of interest and to act impartially
• Act with care and skill

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Provisional Liquidation

Why does a Court appoint a provisional liquidator?

An appointment of a provisional liquidator is usually made if there is a perception that the assets and affairs of the company are in jeopardy and that the ultimate effect of leaving assets in the hands of the company may be that the creditors and or shareholders will be disadvantaged. A court must be convinced that the assets of the company are in danger of being dissipated for the appointment to occur.

When can the Court appoint a provisional liquidator?

The Court has the power to appoint a provisional liquidator after the filing of an application for the winding up of a company and while the hearing of the winding up application is pending. The appointment gives interim control to a liquidator on a provisional basis until the final determination of the winding up application.

Who can make an application to have a provisional liquidator appointed?

• A creditor
• A shareholder
• The company

What is the role of the provisional liquidator?

The primary role of the provisional liquidator is to preserve the status quo pending the hearing of the winding up application.

The principal duty of a provisional liquidator is to take into custody and control all the property of the company with a view to protecting and preserving it and to report to Court.

How does a provisional liquidation end?

A provisional liquidation will come to an end either when a winding up order is made or when the application to wind up the company is dismissed or withdrawn.

A Court will terminate the appointment if the provisional liquidator has fulfilled his purpose.

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Members Voluntary Liquidation

A Members Voluntary Liquidation (MVL) is a simple and cost effective means of finalising a company’s affairs and distributing its assets to creditors (if any) and shareholders. It does not necessarily entail the realisation of assets, as assets can be distributed in specie.

When is an MVL suitable?

The procedure may be used when:

• a company has come to the end of its useful life
• it is anticipated that the company has sufficient funds to meet all of its liabilities in full within 12 months of the date of liquidation
• in some circumstances a MVL liquidation can distribute pre-CGT assets (prior to September 1985) held by the company, tax free

What happens during the liquidation?

Following the appointment of a liquidator:

• the powers of the directors cease (except where delegated by the Liquidator)
• ASIC will be informed of the liquidation
• notice to potential creditors to submit any claims will be advertised on ASIC Published Notices
• the liquidator will collect and realise the assets of the company where appropriate and seek to agree and pay any outstanding claims of all creditors, including the ATO
• the liquidator will obtain clearance in respect of the company’s tax affairs up to the date of the liquidation

Following tax clearance being obtained from the ATO the liquidator will distribute any surplus assets to the company’s shareholders, which may be done by distributing them in specie or by way of a cash distribution.

Once all of the assets of the company have been realised and/or distributed to shareholders, the liquidator will lodge an end of administration return with ASIC, 3 months after which ASIC deregisters the company.

What are the steps to liquidation?

An MVL can be initiated by circular resolution executed by the directors and shareholders or by holding separate meetings of directors and shareholders. In either case, there are two key steps to appoint a liquidator to an MVL.

1. Passing of resolutions by the directors and execution of Declaration of Solvency
2. Passing of resolutions by members

The liquidation commences from the time of passing the special resolution by shareholders. From that time, the directors’ powers cease and the liquidator controls the affairs and assets of the company.

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Small Business Restructuring

The Small Business Restructuring (SBR) legislation was introduced on 1 January 2021 as an option for companies with debts of less than $1 million to compromise their debts with creditors.

WHAT IS THE ELIGIBILITY CRITERIA?

• Total liabilities of less than $1 million
• Company must be insolvent or likely to become insolvent
• Must be able to pay all outstanding employee entitlements
• Must have lodged all outstanding returns with the ATO
• Company has not undergone Small Business Restructuring (SBR) (some exceptions) or Simplified Liquidation (SL) (see page 37) in the past 7 years
• Current or former director (within 12 months) has not been a director of a company that has undergone a SBR or SL in the past 7 years unless it began less than 20 business days before the process commenced

In order to commence a SBR the directors of a company will need to declare that the company is eligible.


WHAT ARE THE KEY POINTS FOR A SBR?

• Restructuring practitioner (RP) (which must be a registered liquidator) is appointed by resolution of the company
• Directors maintain powers during SBR including the power to continue to trade the business of the company
• Company must disclose that it is subject to a SBR once a RP is appointed
• Restructuring plan is developed for approval by the company’s creditors
• Related creditors are excluded from participation in the SBR


HOW DOES A SBR COME TO AN END?

The SBR concludes:
• Where the RP terminated the SBR because they are of the view that the eligibility
criteria is no longer met or it is no longer in the best interests of creditors
• Where creditors vote against the plan
• The plan is terminated as its terms cannot be complied with
• When the terms of the plan are completed

When the plan is terminated all debts of the company, subject to the plan, become immediately due and payable. If this occurs, you should seek immediate professional advice as to the next steps.

The above is only short summary of the process and therefore professional guidance should be sought as to the full extent of the issues to be addressed.

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Simplified Liquidation

The Simplified Liquidation (SL) legislation was introduced on 1 January 2021 as an option for companies with debts of less than $1 million. The legislation modifies the obligations of a liquidator in a CVL in undertaking the liquidation process.

WHAT HAS BEEN SIMPLIFIED?

• Extent of reporting requirements to creditors
• Higher threshold and reduced recovery period for unfair preferences,
except for related parties
• Reduced requirements for reporting to ASIC
• Modified dividend requirements
• No creditor meetings
• No ability for creditors to appoint a committee of inspection


WHAT IS THE ELIGIBILITY CRITERIA?

In order to commence a SL process, a company must first enter into CVL and have the following criteria:
• Total liabilities of less than $1 million
• Company is unable to pay its debts within 12 months of the commencement of CVL
• Tax lodgements must be up to date
• Company has not undergone Small Business Restructuring (SBR)
(some exceptions) or SL in the past 7 years
• Current or former director (within 12 months) has not been a director of a company that has undergone a SBR or SL in the past 7 years unless it began less than 20 business days before the process commenced

In order to commence a SL the directors of a company will need to declare that the company is eligible.


HOW IS THE SL PROCESS ADOPTED?

Liquidator has 20 business days to adopt the SL process
• May be rejected by 25% of unrelated creditors in value
• Is subject to the liquidator’s ongoing determination of eligibility, including where instances of fraud or dishonesty by the company or its directors are identified

Despite its title, the SL is not without its complexities. The above is only short summary of the process and therefore professional guidance should be sought as to the full extent of the issues to be addressed.

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Other Appointments

Trustee for Sale under Section 66G Conveyancing Act 1919 (NSW)

What is the Trustee Appointed Over?

Section 66G of the Conveyancing Act allows the Court to appoint trustees for sale over real estate (property) where the co-owners of the property are in dispute.

How do you make an Application?

The Court will consider the appointment of trustees following an application by one of the co-owners. The application sets out the nature of the dispute with the other co-owner(s), seeks the appointment of trustees to control the sale of the property and orders for the distribution of the surplus. The application must also include the proposed trustee’s consent to act and an affidavit of good character of the proposed trustees.

Who Does the Property Invest In?

The property vests in the trustees and the trustees can effectively take steps to market and sell the property once an order is made.

What Happens to the Sale Proceeds?

Any secured debt and the costs of sale are deducted from the sale proceeds. The remaining funds are held on trust to be distributed by the trustees to the co-owners.

When is the Procedure Used?

The procedure is often used in bankruptcy proceedings, family law disputes and general property disputes.

Court Appointed Receivership

Why Does the Court Appoint a Receiver?

The Court may appoint a receiver where it appears to be just and equitable and where an appointment is required to preserve the assets. Insolvency is not a pre-requisite.

An appointment may be made where:
• there is a dispute between two or more owners of property, including real estate; or
• there is a dispute between two or more owners of a business, such as partners in a partnership; and
• if a receiver was not appointed, the property or the partnership and its business and assets would be at risk of proper management.

What is the Role of a Court Appointed receiver?

The primary role of a Court appointed receiver depends on the specific order made by the Court.

Who is in Control of the Assets?

Generally, but subject to the extent of the Orders, following the appointment of a Court appointed receiver the powers of the business owners are suspended and they will be excluded from the management of the business. Therefore, the receiver is in control of the business, where the orders of the Court afford such powers.

Mortgagee in Possession

What is a Mortgagee in Possession?

A mortgagee in possession (MIP) may be appointed when the secured creditor takes possession of real estate (property) or other assets subject to the security instrument following a default in relation to the loan agreement.
The MIP may appoint an agent to act on its behalf.

What is the Role of an Agent for the MIP?

The role of the agent is to:
• take control of the property
• realise the property
• account to the mortgagee for the net proceeds

When is this Type of Appointment Appropriate?

This type of appointment is appropriate when:
• there are relatively few assets subject to the security instrument
• there is no business to operate

What are the Advantages of this type of Appointment?

There are two key advantages to this type of appointment, outlined below:
• the mortgagee is in control of the realisation of the property or other assets subject to the security instrument
• the cost of the procedure can be relatively inexpensive as the mortgagee in possession is able to control the appointment

How is an Appointment Initiated?

An appointment is initiated when:
• the owner of the property is in default of the terms of the security
• a notice has been issued to the owner to rectify the default and the owner has failed to rectify the default
• notice is given at the end of the default period that the mortgagee will take possession of the property or assets

What is the Priority of Repayment?

The net proceeds from the sale of the property or assets will be applied in reduction of the applicable loan account and/or mortgage facility. Any surplus would be available for the owner of the property or assets.

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Directors' Duties and Obligations

The modern business environment requires a high level of skill and ethics to be practised by directors and officers of any size company. Tough economic conditions impose stringent obligations on directors and officers.

Directors and officers who ignore these obligations quite often find themselves facing significant fines, liability, and/ or prohibition from holding the role of director.

General obligations imposed by the Corporations Act 2001 (Cth)
on directors and officers ofcompanies

• Exercising powers and duties with the care and diligence that a reasonable person would exercise. This includes the director taking steps to ensure he/she is properly informed about the financial position of the company.
• Exercising powers and duties in good faith in the best interests of the company and for a proper purpose.
• Not to improperly use the position as director to gain an advantage personally or for someone else, or to cause detriment to the company.
• Not to improperly use information obtained through the position to gain an advantage personally or for someone else, or to cause detriment to the company.

As well as these general duties, directors have a positive duty to prevent a company from incurring a debt if the company is insolvent or will become insolvent by incurring that debt. A company is insolvent if it is unable to pay all its debts when they are due and payable. This means that before the company incurs a new debt, the director must consider whether he/she has reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

A company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company complies with these requirements contravenes the Corporations Act.

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Questions for Directors

A director is obliged to be constantly aware of the company’s financial position.
An understanding of the financial position of the company only at the time that a director signs off on the company’s financial statements is insufficient.

Does the director:

• Have information at their disposal to regularly form the view that the company is solvent?
• Monitor the financial affairs of the company and make sufficient inquiries into its financial affairs on a regular basis?
• Rely on a third party to provide information about the solvency of the company and, if so, does the director make diligent and timely inquiries of them?
• Understand the indicators of insolvency that a reasonable person should take into account in determining whether the company is insolvent?
• Take positive steps to confirm the company’s financial position and realistically assess the options available to deal with any of the company’s financial difficulties?

Is the company:

• Continually making losses?
• Unable to realise current assets and facing cash flow difficulties?
• Not paying creditors in accordance with its terms?
• Not paying tax and superannuation liabilities?
• Subject to accumulating debt with excess liabilities over assets?
• Defaulting on loan or interest payments?
• Subject to increased monitoring and/o rinvolvement by its financier?
• Experiencing difficulties in obtaining finance?
• Entering into instalment arrangements to repay creditors including the ATO?
• Subject to judgement debts?
• Disorganised in its internal accounting procedures?
• Deficient in financial records?
• Losing key management personnel?

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Risk of Personal Liability for Directors

Breaches of the Corporation Act by directors of companies may result in personal
liability. Serious breaches may also result in criminal liability.

Insolvent trading

If some or all of the following events are present in a company and the company is subsequently placed into liquidation, then the director may be at risk of
prosecution by a liquidator.

• Overdue Commonwealth and/or Statetaxes
• A poor relationship with its financier,including an inability to borrow further funds
• No access to alternatefinance
• An inability to raise further equity capital
• Continuing losses
• A liquidity ratio below 1
• Suppliers placing the company on cash on delivery (COD) or otherwise demanding special payments before resuming supply
• Creditors remaining unpaid outside of trading terms
• Issuing post-dated cheques
• Dishonoured cheques or electronic payments being returned unpaid
• Special arrangements with selected creditors
• Receipt of solicitors’ letters, summonses, judgements or warrants issued against the company
• Payments to creditors of round sums which are not reconcilable to specific invoices
• An inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

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Director Penalty Notices

 

Taxation Administration Act 1953 (Commonwealth)

Directors have a legal responsibility to ensure that the company meets its pay as you go (PAYG) withholding, GST and superannuation guarantee charge (SGC) obligations.

If the company fails to meet a PAYG withholding, GST or SGC liability by the due date,the director automatically becomes personally liable for a penalty equal to the unpaid amount. When a PAYG withholding, GST or SGC liability remains outstanding, the ATO may issue a Director Penalty Notice, which is necessary to start legal proceedings to recover thepenalty.Even without issuing a notice, the ATO can collect the penalty by other means, such as withholding a tax refund.

Directors’ Penalty Regime

The Commissioner has the power to commence recovery action against company directors under the Director Penalty Notice (DPN) regime for unpaid company taxation liabilities that remain unpaid or unreported after three months of becoming due.If a company fails to comply with its obligations under the PAYG withholding system, GST (from 1 April 2020) or the Superannuation Guarantee Charge (SGC) provisions, then the company directors are held personally liable for the amount the company should have paid.

There are two types of DPNs, being:

• Non-lockdown DPNs – Non-lockdown notices are issued to company directors who have lodged business activity statements( ‘BAS’), instalment activity statements within three months of their due date or superannuation guarantee statements within 28 days of the due date for lodgement, but the PAYG withholding, GST, and/orSGC debts remain unpaid. The notice gives directors 21 days to take certain actions, which results in the penalty being remitted – that is cancelled.
• LockdownDPNs – Lockdown notices are issued to company directors where a company has failed to lodge its BAS, instalment activity statements, within three months of their due date or superannuation guarantee statements 28 days of their due lodgement date. In this case, the penalty permanently locks down on the director and there is no ability to remit, that is, cancel, the penalty other than by paying the debt in full.

The ATO may also serve a copy of a DPN on the company director at his or her tax agent’s registered address.

When does a director become personally liable for penalties?

Where the company fails to report its PAYG withholding or GST within the three months of the due date or SGC liabilities (from and including 30 June 2012), within 28 days of the due dates and the director penalties cannot be remitted, directors will be personally liable for unpaid PAYG withholding , GST or SGC amounts. This liability continues even where an administrator or a liquidator is appointed.

It is advisable for directors to ensure their address details are up to date with ASIC in the event that a DPN is issued.

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Receivership

What is a receivership?

A receivership is a type of insolvency proceeding that provides a creditor, holding a registered security interest over particular assets, to appoint a receiver (or receiver and manager) to take control of those assets, realise those assets or to protect the rights of the creditor entitled to those assets. Where a business is involved, ypically, a receiver and manager usually trade the business with a view to selling it and maximising the return to the secured creditor.

Details of the creditor’s security interest are registered on the Personal Properties Security Register (PPSR).

What is the objective of a receivership?

The procedure exists to protect the interests of the secured creditor. A receiver (receiver and manager) is appointed when the assets are under threat, particularly because of the risk of insolvency.

What is the process of a receivership?

A receiver will administer the property subject to the registered security instrument and if empowered will also manage the business/assets. The receivership will continue until the purpose of the receivership is fulfilled; often when the assets subject to the registered general security interest have been realised and the secured party has been paid in full or as far as possible.

How is a receivership initiated?

The method of appointment is dependent on the general law and the terms of the instrument appointing the receiver.

If an event of default has occurred, there may be a requirement under the registered security instrument that the secured party issue a notice of default before an appointment can be made. If there is a requirement, the demand must provide the debtor a reasonable period in which to pay the sum demanded.

When is a receivership appropriate?

A receivership is appropriate in the following circumstances:

• where the secured property, business and/or assets are in jeopardy and need to be preserved
• where the company is going, or has gone, into voluntary administration or liquidation and the secured property, business and/or assets are considered at risk
• where there is a business subject to the security needing to be operated

What are the effects of a receivership?

The effects of receivership can be as follows:

• a validly appointed receiver will ordinarily supersede the authority and management powers of directors and officers
• directors continue to be obliged to carry out their statutory directed duties and continue to owe duties to the company in receivership
• the directors will have control of assets falling outside of the registered security instrument under which the receiver is appointed
• employment contracts are not automatically terminated by the appointment of a receiver

What are the roles and powers of a receiver?

The primary role of the receiver (receiver and manager) is to preserve and realise the assets for a secured creditor usually when those assets are under threat and are due to the insolvency of the company or as a result of a dispute.

The receiver’s powers, duties and obligations are determined by the registered security instrument and the Corporations Act.

The receiver and manager must take all reasonable care in exercising a power of sale. The receiver must ensure that all care is taken to sell the assets for market value or the best price that is reasonably attainable.

What is the priority of repayment?

The first priority is to repay the secured party. This is achieved from non-circulating assets. The costs of the receivership and employee entitlements are afforded priority of repayment from circulating assets, with any surplus being repaid to the secured party. Any surplus funds from circulating and non-circulating assets, after full repayment of the secured party is returned to the company.

What happens when a receivership ends?

A receivership ends when the receiver has collected and sold all assets to make a repayment to the secured creditor, pursuant to their registered security interest, and has completed all their receivership duties. A receiver resigns or is discharged by the secured creditor, and unless an external administrator has been appointed, full control of the company and any remaining assets goes back to the directors.

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Financial & Operational Review

A Strategic Financial and Operational Review (SFOR) can take a number of different forms, whether it is a pre-lending review, debt restructuring assignment or investigating accountant’s report.

We take a consistent approach to each SFOR, combining technical expertise, relevant industry intelligence and business acumen from across our service lines to efficiently and effectively deliver a high quality SFOR in line with an agreed scope and cost estimates.

Our SFOR team members take time to understand exactly what information your client requires. We seek to fully understand the key drivers of your client.

We will agree a scope, conduct our SFOR, report on our findings, make recommendations for improvement and monitor actual results.

Our SFOR will deliver results.

Financial Modelling & Performance Improvement Platform

Our sophisticated three-way financial model allows a business of any size access to accurate financial modelling to help identify financial issues. We have the expertise to then develop a plan for improvement.

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Mortgagee in Possession

What is a mortgagee in possession?

A mortgagee in possession (MIP) may be appointed when the secured creditor takes possession of real estate (property) or other assets subject to the security instrument following a default in relation to the loan agreement.

The MIP may appoint an agent to act on its behalf.

What is the role of an agent for the MIP?

The role of the agent is to:

• take control of the property
• realise the property
• account to the mortgagee for the net proceeds

When is this type of appointment appropriate?

This type of appointment is appropriate when:

• there are relatively few assets subject to the security instrument
• there is no business to operate

What are the advantages of this type of appointment?

There are two key advantages to this type of appointment, outlined below:

• the mortgagee is in control of the realisation of the property or other assets subject to the security instrument
• the cost of the procedure can be relatively inexpensive as the mortgagee in possession is able to control the appointment

How is an appointment initiated?

An appointment is initiated when:

• the owner of the property is in default
• a notice has been issued to the owner to rectify the default and the owner has failed to rectify the default
• notice is given at the end of the default period that the mortgagee will take possession of the property or assets

What is the priority of repayment?

The net proceeds from the sale of the property or assets will be applied in reduction of the applicable loan account and/or mortgage facility. Any surplus would be available for the owner of the property or assets.

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