Restructuring when insolvent – a detailed review
This is a long article as there are many issues to cover in order to gain an insight into the technical issues involved in undertaking an insolvency appointment.
A summary of the various types of appointments is also attached as an overview of the information set out below. Click here for this summary.
We have tried to keep the content at a non technical level wherever possible – we hope you feel we have succeeded!
INFORMATION FOR DIRECTORS
When it appears that a business cannot pay its debts as and when they fall due, under Australian law there needs to be some form of formal restructuring.
Formal restructuring involves the appointment of an external administrator approved by ASIC.
The benefits for directors in pro-actively implementing a formal restructuring program may include:
The ASIC website has provided excellent information on the technical processes involved in a Voluntary Administration and Liquidation. Click here for links to ASIC. Whilst it is written for the information of creditors, it provides a good understanding of all the technical issues involved in these processes.
Where directors of a company believe there is a possibility the business can be restructured and continue to trade after an administration has ceased, an appropriate form of external administrator is a Voluntary Administrator (see below).
If the directors are of the view that they do not want to stay involved in the business or the business has no viable future, then the most cost effective solution may be the appointment of a Liquidator (see below). When effected by directors, this process is called a Creditors Voluntary Winding Up.
However, if directors receive legal advice that an appointment of an administrator should happen immediately, then even if the directors do not want to stay involved in the business or the business is not viable, it may be preferable to appoint a Voluntary Administrator rather than a Liquidator.
The benefit of appointing a Voluntary Administrator compared to a Liquidator is that the appointment can be made immediately the directors reach their decision (i.e. there is no lag time until the Voluntary Administrator’s appointment is effected).
With the appointment of a Liquidator via the Creditors Winding Up process, the appointment is not effected for at least a minimum of 7 days as there needs to be notice of the meeting given to creditors.
APPOINTING A VOLUNTARY ADMINISTRATOR
The appointment of a Voluntary Administrator is undertaken by the directors at a meeting of directors.
After the appointment, the Voluntary Administrator takes control of the company and the directors are not personally liable for any debts incurred by the Voluntary Administrator (however, the Voluntary Administrator is now liable – making this type of appointment potentially high risk for the insolvency practitioner who accepts the appointment).
Within five days of the Administrator’s appointment, a first meeting of creditors is required to be called under the Corporations Act to consider the Administrator’s appointment and determine whether a Committee of Creditors should be appointed.
The Voluntary Administrator has a relatively short period (typically less than a month) in which to investigate the company’s affairs and report back to creditors on the results of their investigation and their view of any proposed Deed being put forward for creditors to consider. This report is tabled at the second meeting of creditors (often called the Proposal Meeting as it is at this meeting that a Deed is required to be proposed).
A Deed is an agreement reached between the company and creditors and is typically proposed by the shareholders/directors of the company).
If a Deed is going to be proposed by the shareholders/directors of the company (or some other party), it must be available for tabling by the Voluntary Administrator at the Proposal Meeting.
If a Deed is proposed at this meeting and it is approved by creditors, the insolvency process moves from a Voluntary Administration appointment to a Deed of Company Arrangement appointment.
The Deed is a binding agreement between all creditors without security (unsecured creditors) and the insolvent company.
Whilst there are certain standard clauses in a Deed (as governed by the Corporations Act), the operative clauses can be very flexible.
Generally, a Deed will propose to pay creditors either less than 100 cents in the dollar’ of their claim and/or pay creditors’ claims over an extended period of time.
Funds to make these payments to creditors can come from one or more of the following sources:
If a Deed is not proposed or creditors do not vote in favour of the proposed Deed, then, unless the company is solvent, it will be placed into liquidation. If the company is solvent, it can be returned to the control of the directors.
APPOINTING A LIQUIDATOR
If the directors and members of a company are of the view that a Liquidator should be appointed, then following meetings of the directors (then members and then creditors), the appointed Liquidator takes control of the company and the directors relinquish their control.
The first task of the Liquidator is to sell the company’s assets. As the company cannot continue to trade for more than 1 month after the Liquidator’s appointment, the Liquidator will act swiftly to try and sell the assets, particularly if there is a possibility the business can be sold as a going concern.
It is also the responsibility of the Liquidator to investigate the company’s affairs and take action, where commercially viable, to recover moneys from parties who have received a preference over creditors in the period leading up to the liquidation. The Liquidator’s rights to make any recoveries against other parties is governed by the Corporations Act.
If the party which has received a benefit is a related party to the insolvent company, the period in which the Liquidator may go back in time to recover this benefit is generally longer. (Note: a Voluntary Administrator and Deed Administrator do not have these rights of recovery although they do have the right to investigate and make a report to ASIC on any issues they believe should be brought to the attention of ASIC).
The realisations from the sale of the assets and any recoveries made from the Liquidator’s investigations (net of the costs of the Liquidator), are distributed to creditors in accordance with priorities laid out in the Corporations Act (see section 556 of the Act for more details).
THE RIGHTS OF CREDITORS
The ASIC website provides excellent information for creditors on the technical processes involved in a Voluntary Administration and Liquidation.
Some specific things you might like to know are set out below.
OPTIONS FOR CREDITORS WITH SECURITY
Where a creditor has security over a company’s assets and there has been a default pursuant to the terms of the charge, the creditor is able to take whatever action is allowed by the terms of its charge documentation.
Commonly, when a company fails to pay its debts in accordance with the terms of the charge, pursuant to the terms of the charge document, the creditor is able to appoint a Receiver or Receiver and Manager to realise the assets the subject of its charge (the appointment of a Receiver and Manager relates to when the charge covers the business and undertakings of the company as well as specific assets).
WHAT IS SECURITY?
Security and charges – these are legal terms which don’t necessarily mean a lot to a creditor – unless you have one to protect the amount you are owed! However, with changes to the law in January 2012, things have changed a lot (and also changed little) with the introduction of the Personal Property Security Act (PPSA) and its accompanying register, the Personal Property Security Register (PPSR).
The explanation which follows is not meant to be a legalistic view of these terms, but rather, a layman’s view so you can grasp the basic issues you need to understand. You should consult with a legal practitioner if you require a complete understanding of these issues.
A charge is a legally binding document which, amongst other things, gives a creditor specific rights (as documented in the charge), to recover the money it is owed by being able to sell those assets which are the subject of the charge or security.
Under the PPSA, personal property generally includes all property (tangible and intangible) other than land, fixtures, most water rights and some statutory licences. It includes goods or inventory, intellectual property, shares, debts and contractual rights.
Charges need to be registered under the Personal Property Securities Register. A typical example is the charge held by a bank over the assets of a business securing the amount the bank has lent to its customer. Not much has changed in this regard from the old way in which these charges were registered.
The new changes are the registration of all leases including all motor vehicle finance agreement. These too must be registered on the PPSR.
Retention of Title and the PPSR
A whole new category of security also now needs to be registered and this is of relevance to many creditors who don’t normally think of themselves as having security. All agreements for Retention of Title (ROT) now need to be registered under the PPSR. ROT agreements have typically been an agreement which did not need to be registered to be effective. That is no longer the case.
ROT agreements must be registered on the PPSR to be effective. An ROT agreement is a way for a trade supplier to recover amounts owing by a customer by securing some rights to any stock still on hand on the customer’s premises. ROT clauses can be a bit more complicated than that and they can include other rights for the supplier but that is the essence of what they try to achieve.