Three types of corporate insolvency appointments

When a company faces financial turbulence and directors confront the looming possibility of discontinuation, exploring corporate insolvency appointments becomes crucial. There are three common types of insolvency appointments available:

Creditor’s Voluntary Winding Up

A creditors’ voluntary winding up arises when the company is insolvent. It generally arises when the members (shareholders) form the view that the company is insolvent or likely to become insolvent and a liquidator should be appointed. This process does not require a court application or sanction.

Such an appointment can occur very quickly and almost invariably results in the sale of the company’s assets and/or closure of its business.

Appointing a liquidator in a creditor’s voluntary winding up allows for the orderly wind down and investigation of a company’s affairs by an independent liquidator. Interestingly there is no requirement for a meeting of creditors in a creditors’ voluntary winding up, although creditors can request a meeting or contact the liquidator with any queries or issues.

Voluntary Administration

The voluntary administration regime is outlined in Part 5.3A of the Corporations Act 2001 (Cth) (the Act).

The purpose of Part 5.3A is to administer the business, property and affairs of a company in a way that either:

• maximises the chances of the company, or as much as possible of its business, continuing in existence; or
• results in a better return for the company’s creditors and members than would result from an immediate winding up, if it is not possible for the company or its business to continue in existence.

There are three possible ways an administrator may be appointed under the Act:

• by resolution of the board of directors that in their opinion the company is, or is likely to become, insolvent (this is the most common method of appointment);
• a liquidator or provisional liquidator of a company may, by writing, appoint an administrator of the company if the liquidator is of the opinion that the company is, or is likely to become, insolvent; and
• a secured creditor who is entitled to enforce security over the whole or substantially whole of a company’s property may, by writing, appoint an administrator if the security interest is over the property and is enforceable.

Once appointed, an administrator has complete control of the company’s affairs and personal liability (subject to some minor exceptions) for all ongoing trading and liabilities incurred by them. The powers of the directors with respect to the company’s affairs cease upon the appointment of an administrator.

Where a company appoints an administrator there are certain moratoriums granted to the administrator whilst he or she examines the affairs of the company and makes decisions regarding ongoing operations:

• a statutory moratorium restricts the exercise of rights by third parties under leases and security interests and in respect of litigation claims, including a five business day rent free period; and
• a secured creditor with security over the whole or substantially the whole of the assets of the company has 13 business days following the appointment of the administrator to exercise its right under the security granted in its favour (i.e., appoint a receiver).

There are two meetings over the course of a voluntary administration. The first meeting of creditors must be held within eight business days which confirms or replaces the appointment of the voluntary administrator and potentially establishes a committee of creditors. The second creditors’ meeting is typically convened 20 business days after the commencement of the administration (or 25 business days if it begins in December or is less than 25 business days before Good Friday). However, this can be extended by creditors resolution, by court application or by the administrator.

At the second meeting, the administrator provides creditors with a report on the affairs of the company and outlines the administrator’s views as to the best option available to maximise returns. There are three possible outcomes that can be put to the meeting regarding the future of the company:

• enter into a deed of company arrangement (DOCA) with creditors;
• wind the company up; or
• terminate the administration.

This is a creditor driven process and the creditors will dictate the future of the company. Where there is a stalemate in voting the chairperson of the meeting (the administrator) holds a casting vote, ensuring a resolution is reached so there will always be an outcome.

The administration terminates according to the outcome (resolution by creditors) at the second meeting, either progressing to liquidation, execution of a DOCA or returning the company and its business to its directors (though this is rare and seems to offer little benefit).

When the voluntary administration terminates, a secured creditor that was estopped from enforcing a security interest because of the statutory moratorium provisions is entitled to commence steps to enforce that security interest unless the secured creditor voted in favour of the approved DOCA.

Deed of Company Arrangement (DOCA)

A DOCA is effectively a formal compromise between the company and its creditors and can only occur after a voluntary administration. It is its own stand-alone appointment where the rights and obligations of creditors and company differ from those under a voluntary administration.

A DOCA may incorporate very wide-ranging terms and obligations which can provide for things such as a moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of outstanding debts. It can also involve the issuing of shares and can be used to achieve a debt-for-equity swap.

Entering into a DOCA requires the approval of a majority of creditors, both by dollar value and number voting at the second creditors’ meeting. A DOCA binds the company, its shareholders, directors and unsecured creditors. Whilst a DOCA can bind all creditors, it cannot prevent a secured creditor from dealing with their security interest so long as the secured creditor does not vote in favour of the DOCA.

Once a company and the deed administrator execute a DOCA (within 15 business days of the resolution by creditors to enter into a DOCA), the voluntary administration process terminates.

The DOCA is dictated by the terms of the DOCA and once a company has fulfilled its obligations under the DOCA, the DOCA comes to an end.

In rare circumstances where a DOCA does not achieve its goals or is challenged by creditors, it may be terminated by creditors, the court, or the deed administrator pursuant to the terms of the DOCA.

Conclusion

To effectively navigate the different types of appointment options suited to their needs, directors should actively seek professional guidance and consult with experts at Vincents.

If you wish to discuss any type of possible solvency issues you are welcome to contact our Restructuring and Recovery experts at Vincents who would be happy to discuss with you on a no obligation basis.

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