Shaw Gidley - Insolvency and Reconstruction

The Voluntary Administration or VA as it is often referred to provides sufficient protection and flexibility to restructure a business with the view to save as much of the company's business as possible and achieve a better outcome for the company, its creditors and shareholders than would occur if the company entered directly into liquidation.

This type of administration was introduced to encourage directors of insolvent companies to take early action and is a mechanism for companies facing financial distress to obtain breathing space. It also provides directors with protection from personally guaranteed corporate debts during the VA term.

During the Voluntary Administration process there is a moratorium period of approximately 5 weeks (six weeks at Christmas and Easter) in which creditors, subject to a number of exceptions, are prohibited from taking any action against the company to recover debts, enforce charges or have the company wound up without the consent of the Administrator or the Court.

The Administrator will convene two meetings of creditors during the administration. The first meeting will be held within 8 business days of the Administrator’s appointment at which creditors may vote to replace the Administrator and/or appoint a committee of creditors. The second meeting of creditors will be held within 25 or 30 business days after the Administrator's appointment at which creditors may vote to decide the Company’s future.

The Administrator’s role is to take control of the affairs of the business, investigate the financial affairs of the company, report their findings and recommend to creditors one of the following three courses of action:

1. That the company enter into a Deed of Company Arrangement;

2. That the administration cease (and control of the company be returned to the directors); or

3. That the company be wound up in insolvency.

A Deed of Company Arrangement (DOCA) can best be thought of as a contract between the company and its creditors to allow the company to restructure and trade the company out of its financial problems. Creditors may vote to accept a DOCA put forward by the company and/or its directors as an alternative to liquidation. Often the DOCA will ask creditors to comprimise its claims. The terms of a DOCA can be very flexible; however, it should offer creditors a better return than the alternative of liquidation. Ultimately the creditors must decide whether or not to accept a DOCA that is proposed.

For further information on this type of administration and a timeline of the process, please click here.

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Deed of Company Arrangement

The Deed of Company Arrangement process, or DOCA as it is referred to in the profession, is a means to salvage and restructure an insolvent or near insolvent company and provide creditors with a better outcome than they would experience if the company was to directly enter liquidation.

The DOCA must follow a voluntary administration or VA. A DOCA is proposed by the Directors during the VA. The Administrator investigates the DOCA during the VA and makes a recommendation about whether company creditors should accept or reject the proposal. As a rule of thumb the DOCA needs to offer creditors a better outcome than if the company was liquidated.

There are a number of commercial considerations that need to be taken into account when drafting a DOCA. It is not just a simple case of a company seeking to compromise debts with creditors. Often the company will need to make significant changes in the way it does business for a DOCA to have a chance of success. In addition, the company and its directors will need to have some goodwill left with a majority of its creditors, as it is the creditors that will ultimately decide the company's future.

At Shaw Gidley we have had extensive experience administering successful DOCAs.

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Members Voluntary Liquidation

A Members Voluntary Liquidation or MVL is a process that facilitates the winding up of a solvent company and distribution of its assets to shareholders. A MVL may be used in situations where a company has sold its business and is no longer trading or required to trade. A Liquidator can distribute pre CGT assets held by the company, tax free and shareholders can utilise other Small Business CGT concessions to minimise their tax liability. It is also an effective and independent way to resolve disputes between directors and shareholders, but more often a means to rationalise defunct corporate entities and ensure assets are distributed to shareholders in the most tax effective manner.

To initiate a MVL, the following steps are required:

A directors’ meeting is held at which a majority must resolve that the company is solvent and that a general meeting of members be convened to consider whether the company should be wound up.
A declaration of solvency must be lodged with ASIC prior to the members notice being issued. Members are generally given 21 days notice of the meeting.
At the members meeting, resolutions that the company be wound up and the appointment of a liquidator should be passed.
The Liquidator will then attend to the sale of any assets of the company, payment of creditors and then the in specie distribution of assets to the shareholders. In order to streamline the liquidation process, we often recommend that the affairs of the company are wound down prior to our appointment.

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Creditors Voluntary Liquidation

The Creditors’ Voluntary Liquidation process or CVL is a fast effective means by which directors of an insolvent company can comply with their statutory duties regarding insolvent trading and quickly mitigate further losses to themselves and creditors. The process is voluntarily instigated by the directors, members and creditors of the company once they have determined that there is no prospect of saving the business. Alternatively a CVL can follow a voluntary administration. The Liquidator’s primary functions are to investigate and report the reasons for corporate failure, and secure, realise and distribute company assets to creditors.

Recent amendments to the Corporations Act now make the CVL process an option available to Director's attempting to avoid liability for a Director's Penalty Notice issued by the Commissioner of Taxation.

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Official Liquidation

The appointment of an Official Liquidator is a forced measure usually initiated by an aggrieved creditor and most often because a company is insolvent, although a number of other grounds exist as the basis for the appointment. The aggrieved creditor can select a Liquidator of their choice. The Liquidator needs to consent in writing to acting and must be free from any conflict.

The role of the Official Liquidator is to take control of the company, realise the company assets, and where possible return funds to the company creditors. The Official Liquidator will also report to the Australian Securities and Investments Commission in relation to the conduct of the directors and reasons for the failure of the company.

Once an application to wind-up a company has been made to the Court the applicant may in addition seek the appointment of a Provisional Liquidator to protect the company's assets until the winding-up order has been made.

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Receivership

A Receiver is usually appointed by a creditor holding a valid registered charge over the assets of the company. The charge must allow for the appointment of a Receiver. The charge can be fixed over specific assets, floating over all assets or a combination of both. The Receiver acts on behalf of the secured creditor, rather than the creditors in general, although must not infringe on the rights of other classes of creditor in achieving the objectives of his or her appointment.

Alternatively a Receiver can be appointed by the Court on application by a relevant party. The Court Order will determine the objectives of the appointment. This process is more often than not used as a remedy for irreconcilable dispute, and a means to protect the assets and business of a company that may be in jeopardy although the entity may not be insolvent.

We have substantial experience in private and court appointments having been appointed Receiver numerous times by major banks and private lenders over the past 13 years. We have developed a reputation with secured lenders by consistently achieving the objectives of the appointment in a cost effective professional manner.

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Provisional Liquidation

Provisional Liquidation is an interim appointment and is usually forced upon the company by Court application. A winding up petition must be current but the hearing date is sometime in the future and key stakeholders are concerned about the safety of the company's assets and affairs during the interim period. A creditor, member of the company, or the company itself through a director may apply to the Court for the appointment of a Provisional Liquidator. The applicant can choose the liquidator however the liquidator must be free from any conflicts and consent in writing.

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Bankruptcy

An individual or debtor as one is referred to in the profession, facing personal insolvency can enter bankruptcy either voluntarily, by executing a debtors petiton, or be forced into bankruptcy by a creditor, pursuant to a sequestration order mabe by the Court.

The debtor is usually unable to pay his or her debts and is left with no alternative. Bankruptcy has several purposes: -

To relieve the debtor of financial distress by stopping creditors pursuing the debtor;
To publicly bring to account by way of investigation and reporting the debtor's assets and affairs;
To recover, realise and distribute any assets of the debtor's estate available for that purpose.

Other options exist to debtor's unable to pay their liabilities such as small debts arrangements and personal insolvency arrangements. When you seek advice from a Registered Trustee these alternatives will be explained and considered for your circumstances.

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It is also recommended that you visit the ITSA website.

Personal Insolvency Arrangements

Individuals experiencing financial difficulty and wishing to avoid bankruptcy should consider a Personal Insolvency Arrangement (PIA) regulated by Part X of the Bankruptcy Act.

A PIA, as it is commonly referred to in the profession, is designed to allow the debtor to propose an arrangement with his or her creditors. The content of the proposal is very flexible and is often less onerous for the debtor than bankruptcy.

The following outlines the PIA process: -

Execution of Form 13, s188 authority commences the process;
A Registered Trustee must consent to act as the Controlling Trustee (CT) of your affairs at that time;
You will need to complete a statement of your affairs and provide a draft proposal to the CT;
The CT conducts an investigation of your affairs which culminates in a report and recommendation to your creditors;
A meeting of creditors is held, no more than 35 days from when the s188 Authority was executed;
Creditors by special resolution vote to accept or reject your proposal;
If the proposal is accepted it is executed by you and the CT, and enforced by the Trustee;
If it is rejected, the controlling trusteeship usually comes to an end.

Executing a s188 Authority is considered an Act of Bankruptcy, so in the event that your proposal is rejected a creditor can use it as a grounds to force you into bankruptcy. In most instances however, where a proposal fails, the individual will consider entering voluntary bankruptcy.

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It is also recommended that you visit the ITSA website.

Agent for the Mortgagee

Agent for the Mortgagee in possession is similar to the Receiver process in that the appointment is made by a financier pursuant to powers contained in a contract between a company and a financier, usually taking the form of a registered security interest such as a mortgage or charge. The company has usually defaulted on the finance arrangement being the subject of the security interest, whether it be real property, plant & equipment or some other form of asset with a realisable value. The financier will be seeking to recover money lent to the company by appointing an indivdual to secure, realise and distribute the funds to the secured creditor.

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Court Appointed Trustee

A Court Appointed Trustee relates to the affairs of individuals and includes: -

A Trustee appointed to real estate under the Conveyacing Act; and
Court Appointed Receiver

Both of these processes are used as remedies where disputes exist between individuals which cannot be commercially resolved and in circumstances where there is valid concern that assets in question may be in jeopardy.

In both instances, the duties and activities of the Trustee and Receiver will be determined by a Court Order. Any appointment under the Conveyancing Act will usually involve real estate, for example a family dispute over a deceased estate, whereas the Court Appointed Receiver will be over a broader range of assets and affairs, for example a partnership dispute.

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Consulting

At Shaw Gidley we provide a range of insolvency and reconstruction related consultancy services from informal workouts through to assisting creditors defend recoverable transaction claims. The consultancy services we provide can be summarised under the following headings: -

Invesitgative Accountants Reports
Recontruction and Rationalisation
Litigation support/expert reports
Commercial dispute resolution and mediation
General consulting

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Hospitality Services

Shaw Gidley has extensive experience in the pubs and clubs industry. Headed by Paul Gidley, we have been involved with numerous formal and consulting exercises assisting pubs and clubs with financial difficulties. Shaw Gidley are members of ClubNSW and the Australian Hoteliers Association.

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Download: Shaw Gidley Hospitality Brochure October 2009.pdf