Formal Insolvency Appointments

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

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.

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.

Passing of resolutions by the directors
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

Response time:
Within 10
business days

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

Response time:
Within 3 months
after appointment

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

Response time:
First 20
business days

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.

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

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.

A creditor

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