*A range of formal mechanisms exist to deal with a company that is experiencing financial difficulties.*
Voluntary Administration provides for a flexible mechanism to restructure an organisation with the general view of continuing trade. In doing so, the future of the organization and all key stakeholders, including creditors and employees, are considered within the restructuring plan to ensure the greatest benefit to all. A Voluntary Administrator is appointed in circumstances where an organisation is undergoing financial stress and is either insolvent or likely to become insolvent at some future time. Generally, the organisation will continue to trade while the restructuring plan is developed. The outcome of a Voluntary Administration is determined by creditors and is generally either a Deed of Company Arrangement or Creditors Voluntary Liquidation. During the Voluntary Administration period an organisation is protected from unsecured creditors, legal actions, enforcement of director guarantees, and recovery from lessors. This enables the Voluntary Administrator to formulate the restructuring plan relatively free from external pressures and influences.
Deed of Company Arrangement
The restructuring plan formulated under Voluntary Administration is presented to a meeting of creditors in the form of a Deed of Company Arrangement for their consideration. Should the Deed be acceptable to the required majority of creditors, all unsecured creditors are bound by the terms of the Deed. Secured creditors are only bound by the Deed to the extent separately agreed. Generally, a Deed will facilitate a greater return to creditors, the continued and ongoing viability of the organisation in some form, and will provide an ongoing future for all stakeholders. The Deed is a flexible mechanism allowing for individually tailored solutions. Where the Deed of Company Arrangement fails, either the Deed may be varied, or the company proceeds to Creditors Voluntary Liquidation.
Creditors Voluntary Liquidation
Creditor Voluntary Liquidations are generally undertaken when the organisation is insolvent and there is no prospect of recovery or likelihood of a plan being formulated that is acceptable to stakeholders. The Creditors Voluntary Liquidation, with the support of directors and shareholders, can be instigated immediately. In some circumstances, this can prevent legal actions against the organisation and stakeholders involved. The primary objective of the Liquidator is to realise the assets of the organisation for the greatest return to creditors, and to investigate the affairs of the organisation and conduct of the officeholders. Actions may be instigated to recover antecedent transactions such as insolvent trading, preferential payments and uncommercial transactions. The Liquidator will report recoveries and findings to stakeholders. A report must also be issued to the Australian Securities and Investment Commission outlining outcomes of investigations and any offences committed.
Members Voluntary Liquidation
Members Voluntary Liquidation is appropriate when shareholders elect to wind up a solvent company’s affairs, and potentially receive tax advantaged distributions. The Liquidator will realise the assets, and distribute in cash or in specie to members. Members Voluntary Liquidation is a preferred option to company deregistration to preserve the tax benefits of the Liquidator’s distributions that may not otherwise be available to shareholders.
Court Ordered Liquidation
The Court in circumstances where the organisation is legally considered insolvent orders the appointment of a Liquidator. An application is generally made by a creditor seeking satisfaction of a judgement debt, though may also be triggered by directors or shareholders in instances of equity or other disputes such as suppression of minority interests. The primary objective of the Liquidator is to realise the assets of the organisation for the greatest return to creditors, and to investigate the affairs of the organisation and conduct of the officeholders.
As in a Court appointed Liquidation, the Court orders the appointment. The applicant may be a creditor, a shareholder, an officer of the company or a government agency. Whilst the Court Order may be broad in terms, the primary objective is to ensure the assets are not dissipated and allow the Provisional Liquidator to conduct investigations into the affairs of the organisation and office holders, and to submit a report to the Court.
Receiver and Managers & Controllers
A Receiver and Manager or Controller is usually appointed by a secured creditor to act primarily on their behalf rather than for creditors generally. The power to appoint and powers of the Receiver and Manager are derived from a valid security document. The Receiver and Manager’s responsibility is to realise secured property for the benefit of the secured creditor. The Receiver and Manager will frequently trade the organisation.
Court Appointed Receiver
The Court, in circumstances where concerns exist regarding dissipating assets and the conduct of the organization, may appoint a Receiver or a Receiver and Manager to the organisation. The powers of the appointee are determined by an Order of the Court.
Investigating Accountants Reports
An Investigating Accountants Report will provide lenders and potential stakeholders with a specialist review of the organisation. The report will focus upon our SWOT analysis, the management of the enterprise, the industry specific KPI’s, the perceived longevity and risk assessment of the enterprise, its future directions, insolvency indicators, and our recommendations.
Whether corporate or personal, it is possible to negotiate with creditors in formulating an informal arrangement whereby trade terms are varied or debts are compromised.