Corporate Insolvency
Receivership
Receivership is an external administration where a receiver (or receiver and manager if given the power to manage the company’s affairs) is appointed over some or all of a company’s assets either by a secured creditor or by an Order of the Court. A receiver will be a qualified insolvency practitioner and registered liquidator.
A receiver will take control from the directors, although the duties of directors continue. A receiver will usually collect, protect and sell the company’s secured assets to repay the debt owing to the secured creditor, or deal with company assets as set out in the Court Order, depending on the type of appointment. Where there is an operating business, the receiver must quickly decide whether to continue trading (if appointed as a receiver and manager) and try to sell the business as a going concern. When selling company property, a receiver has a statutory duty to take all reasonable care to sell property for not less than market value. At the conclusion of the receivership control of the company reverts to its directors. If the company is insolvent at this time, the directors must then decide whether to place the company in liquidation.
The powers of a receiver are set out in the security agreement and the Corporations Act 2001. The role and powers of the receiver will depend on the terms of the security or the Court Order. In a Court appointment the company may not be in financial difficulty and the appointment could arise from a director and/or shareholder dispute. A Court Order can also appoint a receiver to a specific asset (e.g. land) or to a business partnership.
Agent for Mortgagee in Possession
As an alternative to receivership, a secured creditor might take possession of secured assets a mortgagee, if the security documents allow this. In doing so, a mortgagee would usually appoint an independent experienced Insolvency practitioner to be the Agent for Mortgagee in Possession, especially to ensure any recovery action taken complies with the provisions of the Corporations Act 2001.
At Ferguson Hannam, our two Registered Liquidators are very experienced in complex receivership appointments and acting as agents for mortgagees in possession and can readily assist in explaining these processes in detail and in taking these types of appointments.
Small Business Restructuring
Small Business Restructuring (“SBR”) was introduced by the Federal Government in 2021 to assist company directors of small businesses resolve financial distress.
In general terms, using SBR, directors can remain in control of the company and continue to operate the business while a Restructuring practitioner (a qualified insolvency practitioner and registered liquidator) will:
- assist the company to prepare a restructuring plan/proposal, and
- present the director’s restructuring proposal to creditors to allow creditors to vote on the proposal
If the plan/proposal is accepted by creditors the Restructuring practitioner will implement the terms of the plan, realise funds in accordance with the plan and pay the dividend to creditors.
However, to use SBR, strict eligibility criteria must be met including:
- Total liabilities of the company must not exceed $1 million
- The company, a director of the company, or a person who has been a director of the company in the 12 months before the appointment of a Restructuring practitioner, must not have been involved in another SBR in the preceding seven years, unless exempt under the Regulations
- Wages & employee entitlements, due and payable, must have been paid
- All ATO returns (Income Tax, BAS etc) must have been lodged (Note that the ATO debts do not need to have been paid but the returns must have been lodged).
At Ferguson Hannam, our two Restructuring practitioners will assist you to decide whether SBR is the best option, and if so, to help you assess your company’s eligibility to use SBR.
Voluntary Administration
Voluntary Administration (“VA”) is an external administration where a financially troubled company that is insolvent or likely to become insolvent, appoints a Voluntary Administrator. A Voluntary Administrator will be a qualified insolvency practitioner and registered liquidator. The VA process is more suited to larger companies where there is a sound underlying business, despite the financial predicament, to give the business a ‘second chance’ and provide ongoing employment. The Corporations Act 2001 sets out the VA process in detail, with tight timelines and strict reporting requirements for the Voluntary Administrator. It can be a complex and not inexpensive process.
The Voluntary Administrator will take control of the company, investigate the company’s affairs and report to creditors recommending one of the following courses of action:
- Creditors accept a proposal by the company’s directors which would usually specify a return to creditors (expressed as cents in the dollar on creditor claims) at a point in time or over a specified period, or
- The company be placed in liquidation, or
- Control of the company revert to the directors and the Voluntary Administration end
If creditors accept the proposal by directors, the company becomes subject to a Deed of Company Arrangement (“DOCA”) and control of the company reverts to the directors.
The Voluntary Administrator will then administer the terms of the DOCA, realise the DOCA funds and pay a dividend to creditors included in the DOCA. At Ferguson Hannam our two Registered Liquidators can readily explain the VA process and its suitability and consent to act when required.
Liquidation (both solvent and insolvent)
Solvent Liquidation (Members’ Voluntary Liquidation)
A Members’ Voluntary Liquidation is where a solvent company is no longer required, for example, when a business is sold or there is a corporate restructure. The process can be used for small family companies or large public companies. A Members’ Voluntary winding up is completed when all creditors are paid 100 cents in the dollar and the surplus assets have been distributed to shareholders in accordance with the company’s constitution.
In a Members’ Voluntary, the appointment of a liquidator (usually a qualified insolvency practitioner and registered liquidator) is made by the shareholders and the liquidation is carried out in accordance with the provisions of the Corporations Act 2001. At Ferguson Hannam we have many years of experience providing Members’ Voluntary windings up for both smaller family companies and large publicly listed groups.
Insolvent Liquidation
There are two types of liquidation in insolvency:
- Court Liquidation
- Creditors’ Voluntary Liquidation
A Court Liquidation is normally where a creditor applies to Court to have the company wound up by Court Order, because of unpaid debts.
A Creditors’ Voluntary Liquidation is instigated when directors determine a company is insolvent or likely to become insolvent and convene a meeting of shareholders who will then resolve to appoint a liquidator to the company. The appointed liquidator will be a qualified insolvency practitioner and registered liquidator.
In windings up of insolvent companies, the role of liquidator is to investigate the financial affairs of the company, the reasons for its failure, to realise assets, make recoveries pursuant to the provisions of the Corporations Act 2001, receive and adjudicate creditor claims and, if funds permit, admit creditor claims and pay dividends to creditors in the order of payments set out the Corporations Act 2001. The liquidator must also report to the corporate Regulator, ASIC, and consider whether insolvent trading actions against the directors should be commenced. At Ferguson Hannam, our two registered liquidators take appointments either jointly or severally and can explain the liquidation process in detail.
Safe Harbour
The Corporations Act 2001 contains laws allowing directors of financially distressed businesses a ‘safe harbour’ to turn around a financially troubled business, reducing the worry of being personally pursued for insolvent trading. However, to use the Safe Harbour provisions directors must:
- Get their statements of financial performance and position in order
- Get expert help from a properly qualified adviser, for example, a Registered Liquidator
- Determine if this process is reasonably likely to lead to a better outcome for the company and its creditors
- Develop and implement a restructuring plan for the company
At Ferguson Hannam, our two registered liquidators can explain the Safe Harbour provisions to help you decide if Safe Harbour is appropriate for your company.
Personal Insolvency
Bankruptcy (Creditor's Petition & Debtor's Petition)
Bankruptcy is a formal personal insolvency process performed pursuant to the provisions of the Bankruptcy Act 1966. There are two main types of bankruptcies, being:
- Creditor’s Petition
- Debtor’s Petition
Bankruptcy by Creditor’s Petition occurs when a creditor makes an application to Court to have a Sequestration Order (an order for bankruptcy) made against a debtor, making that person a bankrupt. The Court will appoint a Registered Trustee to be trustee of the Bankrupt Estate. If no Registered Trustee has consented to be Trustee, the Official Receiver is appointed trustee of the Bankrupt Estate.
Bankruptcy by Debtor’s Petition is where a person lodges a debtor’s petition with the Bankruptcy Regulator (AFSA) and declares themselves bankrupt. If at the time of lodging the debtor’s petition the individual has received a consent from a Registered Trustee, that trustee becomes trustee of the Bankrupt Estate. Alternatively, if no Registered trustee has consented, the Official Receiver is appointed trustee of the Bankrupt Estate.
The role of the Trustee is to investigate the financial affairs of the debtor, the reasons for bankruptcy, to realise assets, make recoveries pursuant to the provisions of the Bankruptcy Act 1966, receive and adjudicate creditor claims and, if funds permit, admit creditor claims and pay dividends to creditors in the order of payments set out in the Bankruptcy Act 1966.
Not all debts are extinguished by bankruptcy and a debtor remains liable for these even after bankruptcy. These debts include secured debts, Court penalties and fines, Child Support, Government student loans, debts that were incurred after the commencement of the bankruptcy and unliquidated debts (i.e. debts that have not been agreed between the parties).
The Bankruptcy Act 1966 sets out certain assets that are generally exempt from realisation by a Trustee and can be retained by the bankrupt. Some of these assets are subject to indexed thresholds:
- Household furniture and effects (limited to the Bankruptcy Act 1966)
- Tools of Trade (up to an indexed threshold)
- Motor Vehicles (up to an indexed threshold)
- Superannuation (subject to conditions set out in the Bankruptcy Act 1966)
A bankrupt will be required to make compulsory income contributions to his or her bankrupt estate if annual income exceeds certain thresholds. These thresholds are indexed twice yearly.
There are special provisions in the Bankruptcy Act 1966 if a deceased estate is insolvent or if a bankrupt passes away during the bankruptcy process.
The indexed thresholds are listed at https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts.
At Ferguson Hannam we understand that being unable to pay your debts when they fall due can be a very stressful occurrence. At Ferguson Hannam our Registered Trustee and very experienced personal insolvency specialists can explain the options available and if appropriate, consent to act as trustee to administer the Bankrupt Estate.
Personal Insolvency Agreements
A Personal Insolvency Agreement is an alternative to bankruptcy and is a formal agreement between a debtor and his or her creditors to satisfy the debtor’s debts, usually by a compromise payment to creditors. This agreement is administered by a Registered Trustee pursuant to the Bankruptcy Act 1966. A Personal Insolvency Agreement is also known as a “PIA”, a “Part X” or “Part 10”.
A Registered Trustee will investigate the financial affairs of the debtor, prepare a report to creditors with the debtor’s proposal and recommend to creditors whether the proposal should be accepted. If the proposal is accepted, the Registered Trustee will then realise the funds forming the proposal and pay a dividend to creditors on admitted claims.
If a PIA is accepted by creditors and the terms of the agreement carried out by the debtor, the debtor can avoid bankruptcy, not be required to make income contributions, retain any assets not included in the agreement and the impact on his or her credit rating may be less severe.
Debt Agreements
A Debt Agreement is administered pursuant to Part IX (“Part Nine”) of the Bankruptcy Act 1966 and is somewhat like a Personal Insolvency Agreement.
The main difference between a PIA and a Debt Agreement is that a Debt Agreement has eligibility criteria as it is aimed to assist debtors having smaller debts and limited assets.
To be eligible for a Debt Agreement, a debtor’s unsecured debts, assets and after-tax income must not exceed certain thresholds. Current threshold amounts are listed at: https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts
At Ferguson Hannam our Registered Trustee and very experienced personal insolvency specialists can explain the options available and if appropriate, consent to act as trustee to administer a PIA or a Debt Agreement.
