The principal aim of the Voluntary Administration procedure is to provide financially troubled companies with an alternative to the traditional types of insolvency administrations, enabling such companies to either:
- continue to exist and trade; or
- facilitate a better return to creditors than if the company was to be wound up.
The process commences by a meeting of directors of the company at which it is resolved that the company be placed into Voluntary Administration as the company is or is likely to become insolvent.
The Voluntary Administrator convenes two separate meetings of the company’s creditors and at the second meeting, known as the proposal meeting, creditors resolve either to:
- accept a proposal for a Deed of Company Arrangement (“DOCA”);
- place the company into liquidation; or
- return control of the company to the directors.
During the period of Voluntary Administration, creditors are prevented for taking action against the company and are also prevented from enforcing any personal guarantees.
A DOCA is a binding agreement with creditors, usually where creditors accept a return of less than 100 cents in the dollar. The company is returned to the control of the directors and a liquidation is avoided.
For a DOCA to be accepted by creditors, the proposal should offer a better return to creditors than a liquidation. This may be done by, for example:
- the directors or another investor injecting funds to pay creditors
- creditors are paid over time from future trading profits
- directors and related parties agreeing not to claim under a DOCA
A Liquidator is appointed voluntarily by an insolvency company or by order of a Court.
A Liquidator’s duty is to maximise the return to unsecured creditors and to conduct proper investigations into the circumstances surrounding the failure of the company.
Such investigations include:
- selling any assets and recovering debtors
- investigating any insolvent trading by the directors
- recovery of any payments to some creditors ahead of others (“preference payments”)
- recovery of any uncommercial transactions entered into by the company
The proceeds of the funds recovered are generally paid equally to all unsecured creditors. Some creditors, such as employees’ entitlements, are paid in priority to others.
A Members Voluntary Liquidation (“MVL”) is a process whereby the members (or shareholders) of a ‘solvent’ company pass a resolution to appoint a Liquidator.
The Liquidator then sells the company’s assets to enable a distribution of the net sale proceeds to the shareholders. Or, the assets can be distributed in-specie to the shareholders.
A MVL is often utilised to make tax-effective distributions to shareholders. The tax benefits can include a return of capital, accessing the small business CGT concessions or the distribution of pre-capital gains tax reserves.
A MVL can only be commenced after the company’s directors make a ‘declaration of solvency’. The Liquidator will only make the distribution to shareholders after all the company’s debts have been paid and after the ATO provides formal ‘clearance’ for the shareholder distribution.
A secured creditor or a Court can appoint a Receiver and Manager, a Receiver or a Controller.
The power given to a secured creditor to make such an appointment comes from the contract between the borrower company and the financier/secured creditor.
The Receiver’s role is to maximise the return primarily for the secured creditor whilst always giving due consideration to the position of all other creditors affected by the company’s demise.
The Receiver must determine the best method to maximise this return. This may occur by:
- continuing to trade the company under receivership for the long term
- continuing to trade the company until such time as an orderly sale on a going concern basis can be achieved
- closing the business and attempting an orderly sale on an in-situ basis
- closing the business and auctioning the plant and equipment, stock, land and buildings and collecting the debts due.
Generally a Receiver and Manager is appointed by the secured creditor over all of the assets of the company with the power to continue to trade the business if necessary.
A Receiver may be appointed by the secured creditor over a specific asset or be empowered to, for instance, collect rents.
A Controller is generally appointed over just one asset of a company or alternatively the secured creditor may take control of property of a corporation and itself act as controller of the corporation property.
A person may elect to enter bankruptcy voluntarily (by filing a debtor’s petition) or be declared bankrupt by a Court order (creditors’ petition).
Upon bankruptcy, all of the bankrupt’s ‘divisible property’ vests in the bankrupt’s trustee. So too does certain property (eg, lottery wins, inheritances) acquired during the course of the bankruptcy.
During bankruptcy, a creditor can no longer enforce any remedy against the person on property of the bankrupt in respect of a provable debt. Note: provable “debt” does not include fines, HECS and HELP debts, etc.
A bankrupt must complete a Bankruptcy Form (formerly known as a ‘statement of affairs’) detailing all assets and liabilities. Note: penalties apply for non-disclosure and the 3-year discharge period does not commence until the Bankruptcy Form is lodged and accepted.
A bankrupt may be liable to pay income contributions to the Trustee if more than a prescribed level of income is earned during the bankruptcy.
Debtors (whose assets, liabilities and income fall within prescribed thresholds) may enter into a proposal under Part IX of the Bankruptcy Act.
The proposal must identify the property to be dealt with and specify how it will be distributed. Usually, a certain amount from the person’s future income is committed to the proposal. A person is nominated to oversee the proposal distributions.
The creditors vote by way of special resolution to accept or reject the proposal.
These involve arrangements with creditors without the necessity of bankruptcy.
Commonly, the arrangement involves a friend or family member of the debtor providing funds (that would not be available in a bankruptcy) and permitting a greater return to creditors than they would receive in a bankruptcy.
The debtor appoints a registered trustee (known as the controlling trustee) to take control of the debtor’s property for the duration of the appointment, and to call a meeting of creditors at which a proposal is put before the creditors.
Once the proposal is passed by more than 75% in dollar value and more than 50% in number of those creditors attending the meeting and voting, and the terms of the proposal are met, the debtor is no longer subject to administration.