A company is insolvent when it is unable to pay its debts when they fall due and payable and there are statutory processes in the Corporations Act 2001 (Cth) to follow when this occurs.
The Corporations Act 2001 provides for several ways by which a company may be placed into liquidation or administration as discussed further.
1. Voluntary Administration / Liquidation
Voluntary administration occurs when a company’s directors resolve that the company is insolvent and appoint an administrator. Directors are obligated to appoint a director if the company is insolvent or risk trading insolvent, for which a director can be pursued by a liquidator for. However, to a certain extent, directors are protected from insolvent trading by the safe harbour provisions.
2. Members’ Voluntary Liquidation
Subject to the directors passing a resolution that a company is solvent, a company’s shareholders, or members, can pass a resolution to liquidate a solvent company. This may occur for a number of reasons including:
- where a company has ceased trading;
- group restructuring; and
- retirement of company members and, or officers.
3. Deed of Company Arrangements
A deed of company arrangement is to assist a company to resolve its debts that results in a better return to creditors than if the company was wound up.
In order for a deed of company arrangement to be effected a company will already have been placed in administration and the administrator’s position would be that without the provision of funds, the company ought to be put into liquidation. At this stage the directors will propose an arrangement that will include the provision of funds, either from their own personal resources or third parties, to be disbursed to the company’s creditors. A vote will then take place by the company’s creditors as to whether the company will be placed into liquidation or if the deed is approved.
If the deed is approved, the company’s creditors will only receive what has been provided for them in the deed, and their debts will otherwise be discharged. This essentially provides a clean slate for the company, subject to its obligations under the deed, to continue trading on.
4. Creditors’ Voluntarily Liquidation
A creditors’ voluntarily liquidation ordinarily occurs in the following circumstances:
- at the end of a voluntary administration where the creditors vote for the company to be placed into liquidation; or
- when an insolvent company’s shareholders resolve to liquidate the company.
This type of liquidation can not occur if an application for the company to be wound up in insolvency has been filed or the Court has ordered that the company be wound up in insolvency.
5. Winding Up by the Court / Insolvency
The winding up of a company by the Court, or in insolvency, typically arises when a creditor has served a company with a creditor’s statutory demand that the company has not complied with.
After being served with a creditor’s statutory demand a company has 21 days to respond. If the company does not respond, then for the three months succeeding the expiry of that initial 21 day period, the company is presumed insolvent. In those circumstances, the creditor, can file an application in the Federal Court of Australia seeking the winding up of the Company.
During the course of business it is common for businesses and companies to obtain finance, loans and credit facilities. Depending on the size of the loan, these loans are often secured against the company’s property or assets. If the business or company breaches the terms of the loan, usually by failing to pay, the secured party may be entitled to appoint a receiver over the secured property.
The role of the receiver will be to realise the secured property to settle the security interest, and may include trading the business with a view to eventually selling it. Similar to an administrator, a receiver has a statutory process to follow during the receivership, however their primary role is to maximise any return to the secured creditor as opposed to all creditors, such as in the case of an administration.