Liquidation of a company – also known as winding-up – means a liquidator is brought in to sell off and realise assets, pay creditors, and wind up the business in an orderly, cost-effective way.
During the process, the control of business assets, operations, and financial affairs transfers to the liquidator, and bank accounts are frozen and employees might be terminated. Liquidation is not to be confused with bankruptcy, which applies only to individuals.
If it’s an insolvent business, the liquidator will investigate what went wrong. In these cases, the liquidation process is typically initiated via a court order the company for a creditors’ voluntary liquidation. Liquidation might be the only solution for companies that can’t pay their debts. In rare cases, the liquidator could decide to continue trading the business for a short period if it’s in the best interest of the creditors.
Although liquidation is an insolvency procedure, solvent companies can utilise it voluntarily to permanently shut down the business in an orderly manner – via a members’ voluntary liquidation. This can be a tax-efficient way of distributing pre-CGT distribution to shareholders tax-free.
When a company is liquidated, the liquidator will realise all company assets to repay creditors. The exact process can vary depending on the type of liquidation, but secured creditors will typically be paid before employees owed entitlements are paid. Then unsecured creditors will be paid before shareholders if funds are available. The company is then deregistered with ASIC so it’s no longer in existence.
Once a company goes into liquidation, unsecured creditors can’t commence or continue legal action without a court’s permission. The liquidator takes over the company and he/she will investigate and report to creditors about the company’s operations. If he/she discovers fraudulent activity or potential offences, the liquidator will submit a report to ASIC. Company directors have an obligation to assist the liquidator by helping them find company property, providing records and books, and offering other types of help.
In a liquidation, once the liquidator makes his/her final report to ASIC, the liquidation is complete and the company will be deregistered.
In a liquidation, secured creditors and employees have the highest priority so they’re paid first. If there are funds leftover, unsecured creditors, including the ATO if there’s any outstanding tax debt, are paid. Lastly, shareholders are paid next if funds are available.
For money paid out to employees, the liquidator will pay outstanding wages and super contributions first, before personal injury compensation. The third is leave entitlements and last is redundancy payments. Caps apply to excluded employees (directors or their spouses/relatives). Employees who have unpaid entitlements and wages could receive government compensation through the Fair Entitlements Guarantee (FEG).
While the liquidation process follows specific steps, there’s no fixed time frame for how long it might take and no time limit on how quickly the liquidator has to wind up the company. The liquidator will take as long as required to complete all matters. Some liquidations could conclude in as little as three to six months from start to finish; others might take years depending on the size of the company and the complexity of its affairs.
For an average-sized business, the liquidation process could take 12 to 18 months or more. Factors like company structure and dealings before liquidation can impact the time frame.
Yes, a company in liquidation could continue or resume trading. Generally, this only occurs if the liquidator thinks continued trading is in the best interests of the creditors. It’s most common in cases where the liquidator considers the business to be a going concern or where he/she decides the company should keep trading to complete and sell works in progress.
The liquidator might rehire any terminated employees temporarily to support the return to trading or enhance asset recoveries such as debtors ledgers. However, this is temporary and it doesn’t mean the company will return to normal trading.
If the liquidator decides to continue trading, employees might remain employed for a short period, though in most cases the employees will, unfortunately, lose their jobs. For payment of outstanding wages and entitlements, employees rank as priority creditors – above unsecured creditors. The government’s Fair Entitlements Guarantee may provide some compensation for entitlements for eligible employees.
Secured creditors and employees will be paid first from different types of assets. Unsecured creditors are next in the order of priority, and shareholders are usually paid last if funds are available. The liquidator isn’t obliged to update shareholders during the process and shareholders don’t have a right to vote on the progress of the liquidation like creditors. Unsecured creditors are usually unable to pursue legal action for debt recovery unless they have permission from a court or a liquidator
As for company directors, they are required to cooperate with the liquidator by assisting with information like the location of property and records. The liquidators will review the operations and check for any inappropriate dealings, including by directors.
If you’re a director of a company in liquidation, you might already know credit reporting agencies do record directors of businesses that enter liquidation. When a lender conducts a credit record search, the names of any companies liquidated in the last seven years with you as a director will come up. This won’t apply if it was a solvent company entering members’ voluntary liquidation, however.
So, lenders can see that your company was liquidated but, depending on the lender’s criteria, it might not be a significant concern, especially if you’re applying for personal financial products rather than business loans. Personal bankruptcy and/or criminal or civil penalties relating to insolvent trading would likely have a bigger impact.
Note: liquidation is different to bankruptcy, as bankruptcy applies only to individuals and liquidation is a specific winding-up process for insolvent (and sometimes solvent) companies.
For solvent businesses, liquidation (members’ voluntary liquidation) offers an orderly way to realise assets and wind up a company before permanently ceasing trading it can also be a tax-effective way of distributing pre-CGT asset recovery to shareholders tax-free. If the company has been dormant, liquidation allows it to be deregistered.
For insolvent businesses, it could be a way to avoid insolvent trading. Given directors have a duty to prevent insolvent trading, entering liquidation could be the right option if the company has no prospects for returning to viability and solvency. So liquidation can prevent the company from incurring further debt and reduce the risk of directors facing the serious penalties associated with insolvent trading.
Additionally, liquidation brings in an outside expert (the liquidator) for an independent review of the company’s operations. Creditors and other stakeholders can find out what’s going on and get back all or some of their debt. Outstanding debts are written off and the stress of running a business in financial strife will be eliminated. Note: in some cases, businesses won’t choose to go into liquidation, but be ordered by a court to do so.
Provisional liquidation is a specific type of emergency insolvency process designed to protect the company’s assets. It can start when a court decides to appoint a provisional liquidator or appoints one in response to an application from creditors, shareholders, or other stakeholders. In terms of timing, provisional liquidations tend to occur (if they do) in between the lodgement of a wind-up application and the court hearing for the application.
Usually, a provisional liquidation arises if creditors are concerned the debtor company is hiding assets or making them unavailable, or if the shareholders are worried about directors acting recklessly or not in the best interests of the company. Sometimes provisional liquidations happen because the directors are involved in a dispute or if the company is insolvent and needs protection until the formal liquidator is appointed.
The provisional liquidator has similar powers to a regular liquidator during a liquidation. His/her responsibilities include preserving and protecting the company’s assets. once he/she takes charge, the company directors no longer control the company.
Liquidators are external experts responsible for managing the winding up of a company by realising assets and distributing the proceeds. The liquidator will typically also investigate the affairs of the business and report to ASIC if there’s evidence of misconduct. Liquidators can be appointed for solvent or insolvent businesses. To be registered as a liquidator, you must be registered with ASIC and typically a practising accountant.
Once a liquidator has been appointed, he/she takes over the business and the directors relinquish their control. He/she will then sell off/realise assets and distribute the proceeds to secured creditors/employees, unsecured creditors, and shareholders, in that order.
Unlike administrators, liquidators aren’t concerned with assessing and recommending alternatives like the possibility of returning to trading. His/her task is to wind up the company. The liquidator has a duty to act honestly and impartially with care and skill and to avoid conflicts of interest.
Company directors have an obligation to cooperate with the liquidator. This could include providing records, offering information about the location of assets and company accounts, and attending meetings to help the liquidator give creditors necessary information about the company and liquidation process. The director should answer any queries from the liquidator and meet with him/her to discuss them if necessary. Directors must not obstruct the liquidator’s work.
Once the liquidator has been appointed, the director needs to provide the liquidator with a Report on Company Activities and Property (ROCAP) within five working days (creditors’ voluntary winding up) or 14 days (court-ordered liquidation). The ROCAP is a written report on the business, property, and financial circumstances of the company which is lodged with ASIC.
If it’s a solvent company, the process is a members’ voluntary liquidation and will start with the directors making a declaration of solvency. Once the right forms have been lodged with ASIC, a notice of the meeting is sent to members so they can consider the wind-up before passing a special resolution to liquidate the company. The liquidator can then be appointed and start the wind-up process.
If it’s an insolvent company, it might start with a court order by the liquidator’s appointment. The liquidator then takes control of the company, sells/realises the assets, and distributes the proceeds to creditors, and shareholders where funds are sufficient.
The liquidator will also investigate the company’s affairs and look for inappropriate dealings. He/she might hold creditors’ meetings to keep the creditors updated on the process.
Following this, the liquidator submits final lodgement with ASIC and the company is formally dissolved and deregistered. Note: liquidators aren’t obligated to do any work beyond a statutory level if there are insufficient company assets to cover his/her costs before creditors and others are paid.
If your company is in liquidation and has outstanding tax debt, the ATO is considered an unsecured creditor and the company’s unpaid tax will be treated as such.
Keep in mind your company might need to consider the ATO’s rules relating to commercial debt forgiveness if you end up having debt cancelled because of the liquidation. For example, you could have your prior income year revenue losses, net capital losses from earlier years, and other items reduced as a result.
Also, directors could be held personally liable for tax debt where it involves outstanding pay as you go withholding or superannuation guarantee charge amounts where the required lodgements have not been made within the timeframes.
Once a liquidator has been appointed, the company directors need to hand over control to the liquidator. The liquidator needs to observe his/her duties to act in the interests of the creditors to sell off and realise the company’s assets and pay the proceeds to creditors.
As for company directors, they should assist the liquidator and not obstruct his/her work. Directors should provide the liquidator with information about records and business operations, and any other relevant details. As a company director, your obligation is to assist with the liquidator’s queries.
Directors can be personally liable for company debts, including some tax debts, even after the liquidation is complete and the company has been deregistered. The relevant tax debts are outstanding pay as you go withholding, GST and superannuation guarantee charges. While this is not specifically an obligation arising during the liquidation, it’s something that’s relevant to consider ahead of time for any director to a company that’s in liquidation.
Once the assets have been sold or realised and the proceeds distributed, the liquidator submits final lodgements to ASIC and the company will be deregistered. The company is then completely dissolved, but directors might be personally liable for some debts where personal guarantees have been given, Director Penalty Exposures to the ATO for late lodgements and possibly insolvent trading exposures. Outstanding debts can be written off as far as the company is concerned, but directors might be personally liable for some DPN expenses as well as any insolvent trading findings. If the director gave personal guarantees for company debt, he/she could also be liable.
In the aftermath of a liquidation, some creditors might have recovered all, some, or none of their outstanding debt. Employees will have lost their jobs and possibly some of their entitlements. If the realisation of assets yielded sufficient funds, employees might have recovered some of these lost entitlements. Employees could receive compensation through the government’s Fair Entitlements Guarantee.
While companies are considered separate legal entities, situations exist where company directors could be held personally liable for unpaid debts and liabilities. This liability can extend to you after your company is shut down and deregistered.
Insolvent trading is probably the best example of the personal liability of directors. The duty to prevent insolvent trading means you could be found personally liable for any losses incurred after your company has become insolvent. In addition, you could be subject to civil and criminal penalties.
As for personal liability for tax debts relating to pay as you go (PAYG) withholding, GST and the superannuation guarantee charge (SGC), voluntary administration only suspends some of the ATO’s recovery actions (in the case of non-lockdown director penalty notices). When the voluntary administration process is over, the director may continue to face recovery actions. And for PAYG and SGC liabilities that are unreported and unpaid(where “lockdown” director penalty notices apply) the ATO can continue recovery action personally against directors even during voluntary administration.
Also, if you have a personal guarantee over a business loan or other interest for your company, you could end up having to pay the debt amount (or lose your home or other property used as security) if the company defaults on the debt.
Yes, your liquidator has to be a registered liquidator under the Corporations Act 2001, through ASIC’s Register of Liquidators and with a Registered Liquidator Number.
In addition, they need to be free of bias and not have or have had a close personal or business relationship with anyone involved in the insolvency. Your liquidator cannot have any interest, personal or private, in conflict with their duties.
Liquidators can’t be a debtor or creditor of the company, and they can’t be auditors, officers, or employees of the company.
Speak with the expert liquidators at TPH Advisory today to discuss your business needs.
Generally, the liquidator’s fees are paid out of the proceeds from the company’s assets before any payments are made to creditors. Sometimes liquidators will arrange for a third party such as a director to cover shortfalls if the company doesn’t have sufficient assets. Liquidators are also entitled to reimbursement for out-of-pocket expenses incurred while carrying out their duties.
The liquidator’s fees can’t be paid until the creditors, a committee of inspection (a committee formed to assist the liquidator in a liquidation), or a court approves it. The liquidator might prepare a report detailing how the costs were calculated when seeking approval. Liquidator’s fees can be challenged in court after they’ve been paid.
It’s not illegal for companies to sell their assets before a liquidation, but you should seek expert advice before doing so if your company is insolvent or potentially insolvent.
The sale should be at market value, ideally based on an independent valuation. Proceeds of the sale should be deposited into your company’s bank account, not a creditor’s bank account or a personal account.
Additionally, be careful when selling assets to a related party. Such a sale should always be conducted at arm’s length, or you could be at risk of illegal phoenix activity, which is when directors transfer assets of a company to a new company without paying market value and getting the former company into debt before liquidation. This is an (unlawful) strategy sometimes used to defeat creditors and their claims.
If you’re contemplating the sale of assets or going ahead with such a sale before the liquidation, make you seek advice. It could be best to wait until the liquidator has been appointed and allow him/her to dispose of the assets rather than selling them yourself when you know the company is going to enter liquidation.
Voluntary administration is a type of insolvency process for struggling businesses. It starts when an external administrator is appointed to take control over a company and investigate its affairs. Voluntary administration offers a chance for a company to hit pause and have a temporary break from most types of creditor actions. It’s also a way for directors to avoid insolvent trading without putting the company into liquidation right away.
The administrator will identify the best course of action for the company, ideally to save the company. If the company can’t be saved, then the administrator will recommend the best course of action for creditors than if the company were placed directly into liquidation. The creditors then vote on the administrator’s recommendation.
The three possible outcomes of voluntary administration are returning the company to the control of the directors, entering into a deed of company arrangement, or liquidation. Typically voluntary administrators are appointed by company directors when they’re concerned the company is likely to become insolvent or is already insolvent.
The voluntary administrator is an external expert brought in to manage the voluntary administration process. The voluntary administrator must be a registered liquidator with ASIC in order to be eligible for an appointment. His/her duties include taking control over the company, investigating the company’s finances and operations, and recommendations, which may include a plan to help save the company or for the best outcome for creditors.
The administrator will hold creditors’ meetings to keep them informed and allow them to vote on recommendations, provide reports on his/her investigations, and carry out the decision from the creditors’ vote. This could be returning control to the company’s directors (rare), executing a deed of company arrangement, or liquidation.
Voluntary administrators can be appointed by directors, creditors, or a court. He/she has all the powers of the company’s directors, including the power to sell assets in the lead-up to the vote by creditors. Also, the administrator might report to ASIC on any evidence of fraud or offences by people involved in the company.
To speak with the expert administrators of a TPH Advisory, contact us today.
While voluntary administrators must be registered liquidators with ASIC, the role of the liquidator is different to the role of a voluntary administrator. The liquidator’s key focus is realising the company’s assets, paying the proceeds to creditors, and winding down the company. In contrast, the voluntary administrator is charged with finding the best possible option moving forward for saving the company and failing that, the best outcome for creditors.
If the creditors vote for the company to go into liquidation at the end of the voluntary administration process, a liquidator will then be appointed.
By law, voluntary administrators must be on ASIC’s register of liquidators. Voluntary administrators are usually appointed by a company’s directors after the directors agree the company’s at risk of becoming insolvent or is already insolvent. Sometimes, though less commonly, voluntary administrators are appointed by a liquidator or provisional liquidator (who thinks the company has a chance of survival and can be saved), a secured creditor, or a court.
The voluntary administrator must be independent. They need to disclose any relevant relationships they might have with the creditors. To be independent means not to be biased to any person or group or have close personal or business relationships with anyone involved in insolvency. It also includes things like conflict between personal or business circumstances with duties as external administrator.
Also, the party appointing the creditor might look for highly experienced administrators with professional memberships like Chartered Accountants Australia.
If you’re an employee, you might be paid your outstanding wages, super, leave entitlements, and other benefits after the voluntary administration process is complete. How and when you’ll be paid will depend on the outcome of voluntary administration. Outstanding means wages and benefits incurred before the voluntary administration process started. As for during the voluntary administration process, the administrator is responsible for paying your wages if the company keeps trading in the interim.
Administration can result in three possible outcomes. First, if the company returns to trading under the control of the directors, the company directors will be responsible for paying your wages. Second, under a deed of company arrangement how your entitlements are paid could vary depending on the terms of the deed.
Third, if the company goes into liquidation, you might get paid some of all of your wages and benefits depending on how much funds are available. In a liquidation, employees rank as priority creditors. Also, you could get some compensation through the government’s Fair Entitlements Guarantee.
The administrator works to strict time frames for certain milestones and a voluntary administration will typically last for around six to eight weeks. For example, once he/she is appointed, the administrator needs to call the first creditors’ meeting within eight business days and the second creditors’ meeting within 25 or 30 business days of appointment. That second meeting can be adjourned to extend the timeframe of the Voluntary Administration.
Once the creditors’ vote (for liquidation, deed of company arrangement, or control to revert back to the company directors) and the chosen option is finalised, the voluntary administration effectively comes to an end. Certain things – like the company having up to 15 days to sign a contract for a deed of company arrangement – can shorten or lengthen the administration process by days or weeks.
Voluntary administration usually starts internally when the company’s directors initiate administration through board resolutions. External or “involuntary” administration (technically still voluntary administration), on the other hand, is typically commended externally, by a court or secured creditor seeking to recover money owed by the company. Sometimes directors appoint a voluntary administrator as a result of a wind-up application to avoid liquidation which causes shutdown of the business’ assets and recover the proceeds.
In both cases, the parties seeking voluntary administration are usually doing so because the company’s insolvent or likely to be insolvent. Both types of administration see an external administrator appointed to make recommendations. Either type of administration could result in three possible outcomes as voted on by the creditors: a deed of company arrangement, liquidation, or more rarely, return to trading to company directors.
Voluntary administration and liquidation are both insolvency procedures that could or will result in a winding-up, but they’re completely different processes. Voluntary administration gives companies a chance to rehabilitate while liquidation in most cases represents the end for companies through winding up and eventual deregistration.
With voluntary administration, an external administrator is appointed, and he/she will investigate the company to make a recommendation as to the best option. Whether that’s a deed of company arrangement, liquidation, or resuming trading under the control of the company directors, the creditors will vote before the voluntary administration ends. Liquidation also is technically an external administration but it usually means the company is already committed to a winding-up.
So the key difference between the two is liquidation typically means it’s the end for the company while with voluntary administration a company avoids liquidating right away and still has a chance at rehabilitating, though liquidation itself is one of the three possible outcomes.
Companies could choose to go into voluntary administration or be forced to enter this particular type of insolvency process. Whether the voluntary administration starts with the directors passing a board resolution, through a court order or, by the actions of secured creditors, it offers specific advantages for different stakeholders.
For company directors of financially distressed companies, it can be a way to avoid insolvent trading risks. It allows the company to have some time off with an external expert (the administrator) recommending the best future direction, including the prospect of continuing trading during voluntary administration if the administrator thinks it best or a return to profitable trading after the administration process. The company get a chance to do this in a temporary, postponement period suspending action from most creditors, landlords, suppliers, personal guarantee holders, and other parties.
For creditors, it offers a way to have the business be investigated by an administrator and vote on a solution that could give them the best chance to recover their money, whether that’s through a formal agreement in the form of a deed of company arrangement, liquidation, or a return to the directors.
Voluntary administration can start with company directors, secured creditors, a liquidator or provisional liquidator, or a court initiating the process. Once the voluntary administrator has been appointed, he/she takes control of the business: its operations, finances, and assets. The first creditors’ meeting takes place within eight business days of appointment. At the meeting, the creditors (and employees), can vote to replace the administrator and/or to create a committee of inspection to oversee the administration process.
Then the administrator will investigate the company’s affairs and finances, seeking help from directors as necessary. He/she will report to the creditors on alternatives before the second creditors’ meeting, which is held within 15 or 25 business days of the administrator’s appointment. At this meeting, the creditors vote on the administrator’s recommendations, which could be returning the company to the control of directors, entering a deed of company arrangement (DOCA), or liquidation. Creditors can adjourn the second meeting and vote for up to 45 days for further investigations or for DOCA amendments.
Financially challenged businesses can use voluntary administration to get breathing space from most creditor actions. Instead of going straight to liquidation, you have the chance to have an independent expert to come in to explore different options. Ultimately, companies can use the inherently collaborative mechanism of voluntary administration to decide on the company’s future direction.
For example, entering a deed of company arrangement (DOCA) could help return the company to profitable trading eventually, especially if the DOCA includes terms for reduced or deferred debt. At the same time, however, the risk for creditors voting for liquidation is real, while the third and final possibility of returning to control of the directors occurs rarely.
Voluntary administration can protect company directors from the personal liability for insolvent trading as well as civil and criminal penalties associated with their duty to prevent insolvent trading. By hitting pause and allowing the administrator to take over, directors of troubled companies are no longer responsible for further debt accumulated after voluntary administration starts.
Starting voluntary administration can limit personal liability and the risk of civil and criminal penalties for insolvent trading for directors. However, it doesn’t protect directors for debt incurred from insolvent trading prior to voluntary administration commencing and the company is ultimately liquidated.
As for personal liability for tax debts relating to pay as you go (PAYG) withholding and the superannuation guarantee charge (SGC), voluntary administration only suspends some of the ATO’s recovery actions (in the case of non-lockdown director penalty notices). When the voluntary administration process is over, the director may continue to face recovery actions. And for PAYG and SGC liabilities that are unreported and unpaid(where “lockdown” director penalty notices apply) the ATO can continue recovery action personally against directors even during voluntary administration.
When it comes to personal guarantees for company debt, enforcement or recovery action against directors can be suspended during voluntary administration but can resume when voluntary administration comes to an end, including if the company goes into liquidation.
A company’s creditor is anyone the company owes money to because goods or services or were provided and/or loans were given to the company. For example, your company might have received goods from a supplier whose invoice you haven’t yet paid. A customer might have paid for goods or services in advance but you haven’t delivered them yet. Your employees might have outstanding wages, salaries, or other benefits and entitlements. Someone who successfully sues a company can be a creditor – a contingent creditor – if their settlement remains unpaid.
Note your creditors can be secured or unsecured. Secured creditors are those who hold assets in your company over the amount you borrowed from them, while unsecured creditors have no security interest in your assets.
The first creditors’ meeting is about informing the creditors and giving them a chance to vote on changes. Creditors can vote on whether they want to replace the voluntary administrator and who they want as the replacement. They’ll vote on whether they want a committee of inspection to assist the administrator and if yes, who should be on the committee.
At the second creditors’ meeting, the administrator will present his/her recommendations for the company’s future direction via a previously written report. The creditors will then vote on the recommendation, whether it’s liquidation, a deed of company arrangement (DOCA), or return to control of the company directors.
Creditors will get a detailed report on the administrator’s findings before the second meeting. The report will cover other things like any offences uncovered and the appropriateness of different options. Note the creditors don’t have to decide at the second meeting but can choose to adjourn for up to 45 days to allow for, say, further investigations or amendments to a DOCA.
Voluntary administration has a different impact on directors, creditors, employees, and other stakeholders. Company directors must give up control to the administrator once he/she is appointed. Voluntary administration could limit personal liability and the risk of civil and criminal penalties for directors by putting a stop to insolvent trading or the potential of it happening. Directors might be temporarily free from personal ATO actions to recover certain types of unpaid company debt.
Most secured and unsecured creditors won’t be able to commence or continue with legal recovery action against the company whilst the voluntary administration is in process unless they have the administrator’s or a court’s permission. However, the VA gives them a chance to decide on the company’s future direction and choose an option that gives them the best chance of recovering their money.
Employees won’t necessarily lose their jobs when voluntary administration happens. They can vote at creditors’ meetings like other creditors. Whether, how, and when they’re paid for any outstanding wages and benefits from before the voluntary administration depends on the outcome of the voluntary administration.
Other stakeholders like landlords will also be subject to a moratorium when it comes to evicting the company and recovering their dues unless the action began before voluntary administration commenced.
Usually a voluntary administration ends when the decision is made to proceed with one of the three possible outcomes: give control back to the company directors to resume trading, execute a deed of company arrangement (DOCA), or liquidation.
However, voluntary administration could end in other ways. A court could order it to end or appoint a liquidator for the company to be wound up. Voluntary administration can also end when the second creditors’ meeting isn’t arranged within the mandated time frame or when the DOCA isn’t signed within 21 days of the second creditors’ meeting.
When a company is put into voluntary administration, the goal is typically to explore its prospects for survival and resuming trade, with the administrator recommending an option and the creditors’ voting on it. One of the three contemplated outcomes is returning the company to the directors’ control and resuming trading, though this rarely happens. Another is executing a deed of company arrangement (DOCA) with specific repayment terms to creditors and possibly forgiving some of the debt. DOCAs involve a returning to trading and they might be the outcome for around a third of voluntary administrations. Third, the company could be put into liquidation.
In the best case scenario, a voluntary administration helps save or preserve the goodwill and value of the company. Ideally it should preserve employee jobs while paying a good portion of unsecured creditor debt. In reality, this might be harder to achieve than directors and other stakeholders expect.
A deed of company arrangement (DOCA) is a binding agreement between a company and its creditors that allows the company a way to return to solvent trading while fulfilling its debt obligations to creditors. Its key purpose is to create better outcomes for the company, creditors, and other stakeholders than going directly to liquidation.
A DOCA could lay out new repayment timelines and terms, debt forgiveness, moratoriums on creditor actions, and how and when the DOCA will terminate. The DOCA will specify who acts as deed administrator (usually the voluntary administrator), the person responsible for ensuring the company carries through with the DOCA. A DOCA will detail things like assets and properties to be used to repay creditors, which debts will be cleared, and the order of repayments to different creditors.
DOCAs can end up giving companies a second chance at survival, or they could end up serving to delay eventual liquidation to allow the creditors to maximise their returns. If a DOCA isn’t signed (executed) by the company within 15 business days after the creditors vote for it, the company goes automatically into liquidation.
Creditors play a key role in the outcome of the voluntary administration process, and this happens largely at the creditors’ meetings. At creditors’ meetings, the chairperson (usually the administrator or a member of his/her team) can take a simple vote based on the voices or by a show of hands. If this gives an inconclusive result or if the creditors request it, the chairperson can put the vote to a poll.
The poll outcome is based on a majority in both numbers and value (value of debt). This means for a poll to pass a resolution, first, more than half the creditors have to vote for the resolution and, second, creditors who are owed more than half the total debt owed vote in favour of the resolution. If there’s a tie, the resolution fails unless the administrator exercises his/her discretion to make a casting vote to determine the outcome.
Restructuring in a business sense refers to reorganising the financial, debt, legal, ownership, operational, and/or other elements of a business in order to improve profitability. Additionally, you could restructure due to a transfer of ownership or buyout, to respond to a crisis, because of repositioning or change in the nature of business, or to respond to the risk of insolvency. The restructuring can be in response to internal or external conditions or both.
For example, a debt restructure reorganises a business’s liabilities, typically to help the company repay its debts. This type of restructure could involve consolidating debt and modifying the terms of the debt. Operational restructures could involve lay-offs and asset sales to cut costs.
Any type of restructuring could support a business in becoming more efficient, leaner, and more focused. The restructuring process is usually formal and involved, with financial, legal, or other qualified advisors such as TPH Advisory brought in to plan the process.
When a business undergoes a turnaround, it shifts from performing poorly – and usually facing significant financial (or even survival) challenges – towards financial recovery and improved profitability. Like restructuring, turnarounds tend to be deliberate processes that include a plan: assessment of problems, review of strategy for improvement, and implementation. For example, it could involve raising new finance and overhauling the capital structure. And, like restructuring, the turnaround plan is often overseen by outside experts.
Turnarounds might be planned in response to challenges in processes, financial management, market conditions, and other factors that led to the initial decline of the business. They’re typically short-term processes designed to enhance business performance for the longer term.
Business restructures can be implemented to address poor financial performance and profitability, by changing internal functions and operations to improve efficiency. However, they could, alternatively, be undertaken to facilitate growth or expansion into other products, services, or overseas markets. You might restructure your business to protect assets or to effect a change in ownership, like taking on new partners.
Other reasons to restructure include addressing high operating costs, high labour costs, poor productivity, and specific financial goals like cash flow health. Some businesses restructure to downsize and simplify operations. Organisations might also restructure as part of a proactive strategy in anticipation of changing consumer and market conditions, increased competition, or new technology and disruptive innovations.
Insolvency means the business can’t pay its debts when they fall due. Potential causes of business insolvency include poor cash management, excessive expenditure to support growth, lower than expected sales performance, and increased competition. Left unaddressed, insolvency can lead to insolvency proceedings and legal action like liquidation. Company directors have a duty to prevent insolvent trading, meaning businesses need to address the prospect of insolvency in a timely manner.
In contrast, a business restructure isn’t specifically concerned with the inability to pay debts when they become due. Restructuring involves the reorganising of the business to enhance profitability, so it could help businesses that are at risk of becoming insolvent. The key difference is a restructure is a plan to improve an organisation’s profitability, while insolvency describes a particular state the business is in: unable to pay its debts as they fall due.
The different types of restructuring can include:
- business restructuring
- legal ownership restructures
- operational restructuring
- cost restructuring, and
- financial restructuring.
- These can overlap.
Corporate restructuring is even broader, and it can include things like mergers, acquisitions, takeovers, demergers, spin-offs, split-offs, recapitalisation, and divestitures.
A business restructure involves changing any element in an organisation. For example, you could undertake legal ownership restructure, financial restructure, operations restructure, or another type of restructure. Restructures can include reducing the number of employees in your business.
The goal of a business restructure typically is to make the business more efficient, effective, organised, and profitable. Business restructuring is an involved process and organisations pursuing a restructure will usually have a detailed plan for the entire process.
Operational restructures focus on optimising the daily processes of a business to enhance efficiency, costs, and ultimately profits.
Operational restructures can be highly targeted to specific areas of the business. For example, you might address specific functions like sales, marketing, and customer service. In other cases, an operational restructure might be broader in its scope and could involve reorganising entire divisions and their operations.
A financial restructure reorganises the capital structure of the business, usually to address financial problems like excessive debt and high costs. In this case, the financial issues could be significant, constraining growth and profitability. Alternatively, they could be serious to the point of being detrimental to the viability of the organisation.
The capital restructuring could involve refinancing to reduce interest. It could mean having a portion of debt converted to equity, moving debt around, or assigning equity to new owners. An effective financial restructure should help with improving the company’s bottom line.
Voluntary administration is an insolvency process for companies in significant financial trouble. It typically lasts around a month, during which the business gets a break from most creditor recovery actions. During this time, the company can – with the help of an external administrator who takes control of the company – decide on the best course of action, whether it’s liquidation, implementing a Deed of Company Arrangement (DOCA), or giving control back to the company directors. This happens with the input of the creditors.
Voluntary administration can be the better option when the directors are at risk of trading insolvent or when you need a time-out to deal with significant creditor issues. It could be preferable to go directly to restructuring if executing a DOCA with outside experts could pave the way to a business restructure leading to the best outcome for creditors.
Ultimately voluntary administration can be a better option than restructuring if you need to hit pause and have some time to reassess the optimal strategy going forward. It might be the more appropriate option for businesses facing an emergency and in serious financial strife, with the directors at risk of insolvent trading.
If you’re restructuring your business, an updated business plan (in addition to your restructure plan) is ideal as it lays out how your business will proceed, under the proposed structure, to achieve your stated objectives. It gives you a detailed, methodical plan for how you restructure will support your business strategy and goals. These can include performance standards, financial goals, and debt reduction.
You might be targeting a specific breakeven or profit point, or restructuring in anticipation of new marketing conditions and opportunities. If you’re restructuring for a sale, merger, or buyout, the business plan can also support your aims.
Any major deliberate organisational change like a restructure should ideally include diagnosis, planning, and implementation stages. A business plan can be used to address details like operational and strategic considerations. Restructures are complex schemes, and drawing up a clear business plan – and following it – could ensure you get it right.
In larger businesses, having a business plan can help you sell the change to everyone from customer service and IT teams to line managers, who can help reinforce the changes. Finally, since restructures tend to mean significant changes to your organisation, a new business plan is a good idea because your former business plan will likely be outdated and will no longer serve your needs when you commence your business restructure.
If your business restructure involves a change in business entity, you’ll likely need to apply for a new ABN (Australian Business Number).
For example, if you’re changing from a sole trader structure to an incorporated entity, you’ll need to apply for a new ABN (as well as a new Australian Company Number or ACN). ABNs can’t be transferred to other entities, so in this case, you need to cancel your sole-trader ABN when you get your new ABN. The same applies to changes from partnership to a company or any other business-entity changes.
If your restructuring involves changing your current registered trademarks or logos, you will need to update your trademark with IP Australia. If you need a new trademark, you’ll also need to contact IP Australia to register it.
If your restructure involves a change of business entity, you might need to contact IP Australia to transfer ownership of the trademark to the new business entity.
You won’t necessarily have to find a new business name when you’re restructuring your business. However, if you’re changing your business name as part of the process, then you need to cancel your old name and register a new one. You might also need to transfer your business name if you’re changing legal entities as part of your restructure. This ensures your business name is associated with the new business entity and not with the former business entity.
It’s a good idea to review your tax obligations and get advice from your tax advisors during the restructure process, as a business restructure could impact how much tax you pay as well as how you do your tax reporting.
This is especially true if you’re changing your business-entity type, such as from sole trader to company, from partnership to company, or from company to trust. Check with your accountant or the experts at TPH Advisory to make sure you’ll be fully compliant on tax reporting during and after the restructure.
Business restructures are known by a range of different terms, and some of these refer to different types of restructuring, though they can overlap at the same time. Terms like corporate restructuring, operational restructuring, organisational restructuring, and financial restructuring are variations of business restructuring. As an example, you can have a financial restructuring without impacting operational changes.
While they often overlap, these types of restructure focus on different elements in the business and they usually have slightly different goals even though the general aim is to improve the business and boost profitability.
So, what happens once you decide to turn around your business? A business turnaround could see your organisation going through the following stages.
Start with an assessment of your business so you can pinpoint how and why your business has struggled. Work out how much debt you owe and whether it’s low margins, poor customer retention, mismanagement, or something else that’s driving failure. You could end up with a short-term or preliminary action plan to address urgent issues like cash flow and excessive costs. With a realistic, clear appraisal, you can then proceed with a workable, effective plan for turning things around.
(ii) Emergency action
In cases of serious financial strife, your business turnaround could include an emergency action stage. This follows on from the preliminary plan in the assessment stage, and the emergency action is designed to help the business regain control, improve its cash flow situation, and raise cash if needed. You might need to collect accounts receivable, negotiate with suppliers, and realise unused assets. You could take advantage of opportunities to quickly boost revenue.
(iii) Implement turnaround plan
After you’ve assessed your business and taken necessary emergency action, you can move forward with your turnaround plan. You might need to rethink everything from your strategy, business model, and debt structure to your current employees and team, marketing, and operations. This should take place with the advice from turnaround experts, who can assist with designing a plan that puts the focus back on restoring viability as well as profitability.
(iv) Return to normal
Once implementation happens, your business ideally starts returning to normal. At this stage, the priority is to institutionalise the new changes so they’re embedded in your daily operations as well as your strategic framework. At this stage, your business has resolved the crisis and is on the way to stability, growth, and profitability.
If you own a group of companies, you can usually choose to restructure by keeping some and liquidating others. For example, you could shut down several unprofitable, unviable subsidiaries, but keep the others that are growing and profitable. You might have a holding company as the ultimate owner of five or six separated registered companies although the whole group trades under the same business name. Generally, you’ll be able to opt to close down one or more of the five or six companies.
However, it’s important to get advice from restructuring experts to make sure you do this type of restructuring in an optimal way and continue to meet your tax and other obligations.
In Australia, company directors have a duty to prevent their company from trading while insolvent, and directors can be personally liable – and face civil and criminal penalties – for any debts incurred by the company when it’s trading while insolvent.
The safe harbour provisions were introduced in 2017 and 2018 to encourage a restructuring culture, given the tough penalties for directors who engage in insolvent trading. With the safe harbour provision, it’s possible directors might be less inclined to rush to start insolvency processes – and be more likely to explore potentially effective restructuring options for the business.
With the safe harbour provisions, directors will only be liable for debts incurred when the company was trading while insolvent if it’s proven they weren’t developing or pursuing a course of action that was reasonably likely to result in a better outcome for the company. Here, the better outcome in question is assessed against the likely result from going directly to administration or liquidation.
So what does this mean for directors? It means company directors likely have more leeway to stay in control and try to effect plans for improvement when a company is in financial strife even if there’s the risk of insolvent trading.
Note safe harbour is available as a “defence” only if you properly provide for employee entitlements and seek advice from appropriately qualified restructuring advisors, in addition to other conditions.
When it comes to restructuring and turnaround, the safe harbour provisions could apply in the sense it gives the director more room to move in pursuing restructuring and/or turnaround (instead of going immediately into insolvency processes). Even if you’re not pursuing restructuring or turnaround, raising the safe harbour provision (for trading while insolvent) could be an option if you’ve engaged in other types of business-improvement action “reasonably likely” to help the company.
The safe harbour provision is complex and they’re a relatively new rule, so it’s best to get advice from turnaround and insolvency advisors like TPH Advisory if you need to rely on this provision. At TPH Advisory, we’re knowledgeable about how this new provision could be used and we can assist you with raising this provision. If it’s relevant to the situation, we seek to raise it to protect our company-director clients from personality liability if any associated restructuring and/or turnaround haven’t had the intended impact on the business and the company has gone into liquidation.
In the course of providing restructuring and turnaround services, we’re always mindful of the personal situation of company directors and other staff, and we’ll act to protect your personal interests while assisting your business with the best possible course of action.
Insolvency means an individual or business can’t meet its financial obligations towards its lenders (and/or tax obligations towards the ATO) when the debts fall due for payment. For both businesses and individuals, insolvency can lead to legal action. In the case of a business, the risk of insolvency could lead to the business entering informal arrangements with its creditors. Businesses at this stage might look into restructuring and/or turnaround plans.
Beyond that, businesses in financial strife could enter insolvency procedures such as voluntary administration, liquidation and receivership. These could help creditors achieve a better outcome and support the business in returning to profitable trading or, alternatively, in shutting down.
Drivers of business insolvency could include new competition, changing market conditions, poor cash flow management, poor sales and revenue performance, and an increase in costs. Note insolvency is different to bankruptcy, which is a specific legal state for individuals who are insolvent.
The following are some terms commonly used for or associated with insolvency.
Bankruptcy – This is a personal insolvency procedure for individuals, not companies or businesses. If you’re insolvent, you can enter bankruptcy (a legal status) by agreement or court order, and it protects you from creditor actions.
Liquidation – Liquidation is an insolvency process and refers to the orderly shutting down of a business. Assets are sold and the proceeds are used to repay creditors before shareholders. Liquidation is different to insolvency as not all company insolvencies result in liquidation.
Receivership – This insolvency procedure involves a secured creditor appointing an insolvency practitioner as the receiver to the company. The receiver then takes control of the secured assets to repay the creditor’s debt. So receivership is quite different from insolvency as it’s about creditors taking action in response to insolvency.
Voluntary administration – Voluntary administration is another type of insolvency procedure. It involves an external administrator taking charge of the company, investigating its affairs, and making recommendations to creditors about the company’s next steps.
Restructuring – Restructuring can be associated with insolvency but it’s not focused just on the ability of a business to repay debt. It involves reorganisation of ownership, finance, operations, and/or other elements of a company to improve profitability.
Turnaround – Turnaround in a business sense usually means a formal plan, typically with turnaround experts, to revive a struggling business. As such, it’s not the same as insolvency as it’s a specific action plan to address insolvency or the risk of insolvency.
Arrears – If you’re in arrears, you have left at least one invoice unpaid or not yet made on a debt amount that has become overdue. While being in arrears is similar to insolvency, you can be in arrears without being insolvent. For example, your business can afford to repay a debt but your employee forgot to make payment on time. Alternatively, your financial institution had a technical issue, so you’re in arrears but not insolvent.
When it comes to corporate insolvency, there are three common types to be aware of.
Liquidation – Liquidation involves your company being permanently shut down, with asset sales and distribution of proceeds to creditors. The three different types of liquidation are court, creditors’ voluntary, and members’ voluntary (solvent liquidation). Note winding up is often used interchangeably with liquidation.
Voluntary administration – This insolvency process has an external administrator appointed (by directors or secured creditor) to take charge of the company’s affairs. Once the administrator has investigated the business, the creditors vote for the business to enter a deed of company arrangement, go into liquidation, or be returned to the management of the directors.
Receivership – Usually a company goes into receivership when a secured creditor who holds security or a charge over some or all of the company’s assets appoints a receiver. The receiver then sells enough of the company’s charged assets to repay the debt owed to the secured creditor.
These terms are not the same as insolvency as they’re a specific procedure initiated in the event of an insolvent company or likelihood of insolvency. You can be insolvent without any of these procedures taken effect, for example trading whilst insolvent.
Common reasons businesses end up filing for insolvency include cash flow management, trading and downturns, and lack of expertise and experience. The business might have inadequate revenue or spend too much while trying to build up the business.
Clients failing to pay, competition, inadequate financial management, overleveraging, and insufficient strategic management may also contribute to insolvency. An unviable business model, disruptive technologies and innovation, and shifting market conditions can be contributing factors that lead to businesses struggling and eventually ending up insolvent.
Insolvency is when an individual or business can’t fulfil their debt obligations when a debt falls due.
In contrast, bankruptcy is a legal status and process for insolvent individuals, and it’s a process that could eventually help resolve personal insolvency. You can be insolvent without being declared bankrupt. Companies can’t be bankrupt as bankruptcy applies only to individual people.
As an insolvency procedure, the bankruptcy process starts when the individual applies for it or a court order is made. Once you’re declared bankrupt, you’re released from your debts (exceptions apply) and you can make a fresh start with your finances. However, your bankruptcy stays on your credit file for a number of years and remains permanently on the National Personal Insolvency Index.
In Australia, company directors have a duty to prevent insolvent trading. Insolvent trading happens when a business continues to trade and incur debts even though it’s unable to pay them as they fall due. Generally, unless the company can quickly restructure, refinance or obtain equity funding to recapitalise, the directors should explore options like voluntary administration or liquidation. Above all, getting timely advice from insolvency experts is essential. A breach of the insolvent trading duty can lead to personal liability for company debt, civil penalties, compensation proceedings, and even criminal charges.
Note the directors’ responsibilities will change if the company enters an insolvency procedure such as voluntary administration, receivership, and liquidation. The directors usually need to step aside, cede control, and support the external administrator, receiver, or liquidator with his or her responsibilities.
Trading while insolvent brings with the risk of personal liability for new debt incurred after the company became insolvent, civil penalties, compensation proceedings, and even criminal penalties for directors. Company directors are required to prevent the company from incurring new debt when insolvent.
So what are the options when there’s a risk of insolvency or if the company’s already insolvent? Directors need to ensure the company doesn’t incur new debt. Getting professional advice from insolvency experts is also essential so you can determine the best course of action, whether that’s voluntary administration or some other insolvency procedure.
Creditors, especially secured creditors, may eventually be able to recover some or all of their debt from an insolvent company, but what about the other stakeholders and their rights? These rights can vary depending on the type of insolvency process the company enters into.
Shareholders usually have priority behind creditors when there’s a liquidation. In terms of updates, they’re usually only able to get limited information from any external administrators. In the event of liquidation or administration, the shareholders will need permission from the external administrator or a court before they can transfer shares in the company. For tax purposes, the shareholder might be able to realise a capital loss in certain situations.
Employees are a special class of creditors and during a liquidation your entitlements will rank for payment ahead of unsecured creditor’s claims. If you’re an employee of an insolvent company with serious concerns, consider contacting the ATO about any unpaid super and making a complaint to ASIC. If you have unpaid entitlements, check if you’re eligible for government assistance through the Fair Entitlements Guarantee.
Investors with shares or those in managed investment schemes and unlisted investments like debentures should get financial advice on how non-payment of things like interest and distribution will affect their tax and other personal circumstances. Similarly, get advice if there’s a withdrawal or redemption freeze and always contact the investment company for more information.
If you’re a debenture holder in an insolvent company, you’ll likely be a creditor of the company. In this case, administrator or liquidation will usually result in a freeze of payments to you, but you’ll likely have the rights of a creditor when it comes to order of priority of proceeds.
A Director Penalty Notice (DPN) is the first step for the ATO to recover a company’s unpaid ‘pay as you go’ withholding, or superannuation guarantee charge. A DPN correspondence will outline the unpaid amounts and remission options.
If the ATO has served you with a DPN, you’re personally liable for these unpaid amounts, even if you’re a former director or a new director (after 15 days in the role) and the amounts became outstanding before you became a director. A traditional DPN gives you 21 days to act.
An unsecured creditor is someone who is owed money to a business without securing certain assets as collateral and a registered security interest on the PPSR. A secured creditor, on the other hand, has specific assets identified as collateral. Typically unsecured creditors rank lower than secured creditors and employees in the order of priorities in the event a business becomes insolvent and is liquidated.
A lender who has loaned money to the company without collateral is an unsecured creditor. Other examples of unsecured creditors to a company include customers who’ve paid for goods or services in advance, someone who’s paid a deposit, a holder of a credit note, or a supplier who has provided goods and services to the company.
Statutory demands are a type of legal document (under corporations legislation) sent by creditors to a company owing them money. The demand requests the debt to be paid within 21 days. If the company doesn’t make payment, come to an alternative agreement, or make an application to the court to set aside the demand, the company is presumed to be insolvent. The creditor can then apply to the court to wind up the company. If you’ve received a statutory demand from a creditor, seek legal advice as soon as possible.
If a company has breached its agreement with its secured creditor, is insolvent or in financial strife, a court or a secured creditor could put the company into receivership. Receivership enables an independent expert – the receiver – to take control of all of the company’s assets or some of its assets, usually what’s known as charged assets or assets used as collateral.
The receiver then collects and sells enough of these assets to repay the debt owed to the secured creditor. His or her primary duty is to the secured creditor who appointed them, but they’ll also report to ASIC if they come across any offences or irregular matters.
Once they’ve repaid the secured creditor and completed other duties, they can resign or be discharged by the secured creditor. The company and any remaining assets then return to the control of the directors.
If you’re an insolvent company and want to appoint an insolvency practitioner, there are some alternatives. You could opt for liquidation, which means having a registered liquidator wind up your business in an orderly fashion. The outcome is permanent closure of your business.
Alternatively, you could choose voluntary administration, which might not result in the shutting down of your company. Voluntary administration enforces a monitor on creditor action by having an external administrator take over the business and review its accounts and operations before making recommendations to creditors as to its future. The creditors then vote on the recommendation, whether it’s a deed of company arrangement, liquidation, or return to trade under the control of the directors.
If your business is insolvent and you’re thinking about insolvency processes, get expert advice about your options as soon as possible with TPH Advisory.
If you’re an individual, you declare bankruptcy rather than insolvency. To be declared bankrupt, you’ll need to apply to the Australian Financial Security Authority (AFSA) (or ordered by a court). You’ll need to be eligible to declare bankruptcy, and the AFSA could turn you down if you don’t meet the criteria.
An insolvent business is one that can’t pay debts when they fall due, and insolvent trading is an insolvent business that keeps trading and operating when it can’t meet its obligations. Company directors have a duty to prevent insolvent trading, and if they breach this duty, they could be personally liable for the debt incurred from insolvent trading as well as face civil and criminal penalties.
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