It is important for company directors and shareholders to understand the difference between voluntary administration and liquidation and the consequences of each of those processes. This is particularly so in circumstances where directors or shareholders are required to make difficult decisions about the future of a company in financial distress.
Voluntary administration is the process where a qualified third-party insolvency professional (administrator) is appointed to take over control of a company and investigate its business, property and affairs with a view to dealing with the company’s financial difficulties in a way that maximises the chances of the company continuing in existence.
Who can appoint an administrator?
An administrator can be appointed by:
- the board of directors of the company if they resolve that:
- the company is insolvent, or is likely to become insolvent at some future time; and
- an administrator of the company should be appointed;
- a liquidator or provisional liquidator of the company if he or she thinks that the company is insolvent or may become insolvent at some future time; and
- a secured party (creditor) if:
- they are entitled to enforce a security interest in the whole, or substantially the whole, of a company’s property; and
- that security interest has become, and is still, enforceable.
A company is insolvent if it is unable to pay all debts as and when they become due and payable.
What is the role of the administrator?
The administrator acts as the company’s agent and has control of the company’s business, property and affairs and may:
- carry on the business and manage its property and affairs;
- terminate or dispose of all or part of that business, and may dispose of any of the property; and
- 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.
While a company is under administration, the powers of the company’s directors and other officers are suspended. However, the company continues trading.
After the administrator is appointed, the voluntary administration process begins. This process includes the following:
- Within 8 business days after the administration begins, the administrator must convene a meeting of the company’s creditors. The purpose of this meeting is to determine whether to appoint a committee of creditors and if so, who will be its members.
- If a committee of creditors is appointed, it will consult with the administrator and consider reports by the administrator on the company’s business, property, affairs and financial circumstances.
- The administrator must convene a second meeting of creditors either:
- 20 business days beginning on the day after the administration begins; or
- if the administration begins in December or less than 25 business days before Good Friday, 25 business days beginning on that day.
At this second meeting, the creditors may resolve:
- that the company execute a deed of company arrangement (DOCA). A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with; or
- that the administration end; or
- that the company be wound up (i.e. the company is ‘liquidated’).
Creditor’s Voluntary Liquidation
A creditors’ voluntary liquidation is the process where a company’s members resolve to voluntarily wind up the company and appoint an independent registered liquidator to take control of the company so that its affairs can be wound up in a fair way to the benefit of the company’s creditors.
Who can appoint a liquidator?
In a creditors’ voluntary liquidation, the shareholders appoint a liquidator to the company. This can occur when:
- the company’s shareholders resolve by special resolution to liquidate the company and appoint a liquidator if they believe the company is insolvent, or likely to become insolvent; or
- at the end of a voluntary administration, creditors resolve that the company should be wound up; or
- a DOCA is terminated.
What is the role of the liquidator?
The liquidator’s main functions are:
- to take possession of and sell the company’s assets;
- to investigate and report to creditors about the company’s affairs;
- to inquire into the failure of the company;
- to determine the debts owed by the company and pay its creditors;
- to distribute to shareholders any assets left over after paying the company’s creditors; and
- finally, to have the company deregistered.
After the liquidator is appointed, the process involved in the liquidation of a company is that:
- Within 10 business days after their appointment, the liquidator must notify the creditors of their appointment and advise them of their rights;
- Within 3 months after their appointment, the liquidator must send a report to creditors about:
- the company’s estimated assets and liabilities;
- inquiries undertaken and further enquiries required;
- what happened to the company’s business;
- the likelihood of the creditors receiving a dividend; and
- possible recovery actions.
- a creditors’ meeting may be held by the liquidator or the request of the creditors from time to time. The meeting can allow the creditors to approve the liquidator’s proposed course of action;
- a committee of inspection may be formed to assist and advise the liquidator.
- The liquidation of the company begins, and usually includes:
- Selling or closing the business;
- Identifying and selling the company’s assets.
- contacting and receiving claims from creditors
- sending progress reports to creditors
- investigating possible criminal offences or inappropriate transactions
- making payments to creditors (dividends).
- The liquidation ends once the liquidator has realised and distributed all the company’s available property and reported to ASIC. The liquidator must lodge a final account of their receipts and payments (called an ‘end of administration return’) and lodge it with ASIC. ASIC will then deregister the company 3 months after the end of administration return is lodged by the liquidator.
Our team at Lionheart Lawyers is experienced in navigating businesses through voluntary administration and/or liquidation processes. Contact us at (02) 9299 0112 to discuss further.
Important Disclaimer: The material contained in this publication is of general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you require further information on the content of this publication, please contact our office on 9299 0112.