Just like the road to insolvency, the process through it doesn’t happen overnight. There are multiple insolvency options available, each with its own processes. In corporate insolvency, there are three primary formal options: Liquidation, voluntary administration and receivership. Often, insolvency is discussed with these terms being interchangeable, however they are all quite different and eligibility for each varies depending on the specific circumstances of your insolvency. Here’s a breakdown of what happens in each of these insolvency proceedings.
When Liquidation Occurs
Liquidation is when a company is required to cease operation completely, and the assets are sold to repay outstanding and unpayable debts. This is for companies who are unable to pay debts and have no ability to raise funding to adequately restruture. Liquidation can be voluntary, or be court ordered through an application by creditors.
Once it has been identified that liquidation is required, an external liquidation expert will be appointed to take control of and realise all available assets, investigate certain transactions of the company with a view to recovering certain voidable transactions, then distribute the surplus funds to creditors in an orderly manner in certain priorities(outstanding employee payments are typically the highest priority).
Once surplus funds are distributed to creditors the Australian Securities and Investments Commission (ASIC) is notified of the company’s closure and it is deregistered. Company owners can still legally set up trade under a new business structure, however liquidation can affect financial viability in terms of funding and loans.
Voluntary administration offers companies facing insolvency to assess their situation and attempt strategies such as restructuring to repay debts and remain viable, whilst continuing to trade during the process. A proposal known as a Deed of Company Arrangement is prepared and put to creditors to consider. This proposal typically involves creditors compromising a portion of their claims to allow the business to continue trading.Typically on the 25th business day following the commencement of the voluntary administration, creditors will meet to resolve the future of the company and consider any such proposal and its viability.
As opposed to this being a self-managed process, voluntary administration enlists an Independent External Administrator to take control of the company’s finances to secure assets and make recommendations to creditors on the most viable strategies. These strategies could include liquidation, executing a Deed of Company Arrangement (DOCA), or relinquishing control back to the director(s).
What is a Receivership?
Receivership is when a secured creditor is entitled to appoint an insolvency professional to be the receiver of the company to recover amounts owing to them. This is to have a uniquely skilled expert take control of secured assets with a loan agreement that the creditor can conditionally appoint to a receiver.
Trade and debts in receivership processes
The receiver and manager can keep up the trade of the company while it is being investigated by the receiver, while they communicate with and advise creditors should they continue to trade with the company.
Debts that are incurred through trade the receiver authorises during the receivership period is paid from the realised assets.
When receivership ends
Once receivership concludes (when the receiver has satisfied the owed debt to the creditor who appointed them and paid liabilities created during the receivership period), the company either continues trade under the returned running of the company by directors, or the company goes into liquidation or administration, depending on the viability of the company.
Looking for more information on your company’s viability, and how to proceed with burgeoning debt? Contact Shaw Gidley today for a no obligation discussion on your options.