A range of formal mechanisms exist to deal with a company that is experiencing financial difficulties.
Small Business Restructuring (SBR)
An SBR allows eligible small businesses to compromise their debts with creditors' agreement and maximise their chances of trading profitably into the future. The business owner remains in control during the restructuring period, making it a highly economical option. Eligibility criteria include creditors of less than $1 million, all employee entitlements paid and all ATO lodgments completed. It provides a highly flexible solution and a range of proposals can be formulated for creditors consideration. Acceptance requires a majority in value of creditors who participate in a vote. The restructure period will generally be completed within around 35 days.
Voluntary Administration (VA)
Voluntary Administration provides for a flexible mechanism to restructure an organisation usually with view of continuing to 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. An 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. The outcome of a VA is determined by creditors (a majority in number and value is required) and is generally either a Deed of Company Arrangement or Creditors Voluntary Liquidation. During the VA period the company is protected from unsecured creditors, legal actions, enforcement of director guarantees, and recovery by lessors. This enables the Administrator to formulate the restructuring plan relatively free from external pressures and influences.
Deed of Company Arrangement (DOCA)
The restructuring plan formulated under a VA is presented to a meeting of creditors in the form of a DOCA. Should the DOCA be acceptable to the required majority in number and value of creditors, all unsecured creditors will be bound by the terms of the DOCA. Secured creditors are only bound by the DOCA to the extent separately agreed. Generally, a DOCA will need to provide a greater return to creditors, and can secure the ongoing viability of the organisation for the benfit of all stakeholders. The DOCA is a highly flexible mechanism allowing for individually tailored solutions. Should the DOCA fail, either it may be varied, or the company may proceed into Creditors Voluntary Liquidation.
Creditors Voluntary Liquidation (CVL)
Creditor Voluntary Liquidations are generally undertaken when a company is insolvent and there is no prospect of recovery or likelihood of a plan being formulated that would be acceptable to stakeholders. A CVL can be initiated immediately with the support of directors and shareholders. In some circumstances, this can prevent legal actions against the company and stakeholders involved. The primary role of the Liquidator is to realise the assets of the company for the benefit of the creditors, and to investigate the affairs of the company and conduct of the officeholders. A CVL will allow access to the Fair ENtitlement Guarantee Scheme (FEGS) which will provide for the payment of employees fdrom Government monies. Actions may be instigated by a LIquidator to recover void dispositions and antecedent transactions including insolvent trading, preferential payments and uncommercial transactions. The Liquidator will report recoveries and findings to stakeholders. A report must usually also be issued to the Australian Securities and Investment Commission outlining outcomes of investigations and any offences committed.
Members Voluntary Liquidation (MVL)
An MVL 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. MVL is a preferred option to company deregistration to ensure finalisation of the company's affairs and 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 company for the greatest return to creditors, and to investigate the affairs of the company and conduct of the officeholders.
As in a Court appointed Liquidation, the Court orders the appointment, however usually there a circumstances requiring some urgency of 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 preserve the status quo and ensure the assets are not dissipated and allow the Provisional Liquidator to conduct investigations into the affairs of the company 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.
Court Appointed Receiver
The Court, in circumstances where concerns exist regarding dissipating assets and the conduct of the company may appoint a Receiver, or a Receiver and Manager to a company. 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 a 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.