A company is insolvent when it is unable to pay its debts when they become due and payable and it is a director’s duty to prevent insolvent trading pursuant to section 588GA of the Corporations Act 2001 (NSW), by placing the company in administration or liquidation.
This primary position, has been altered by the safe harbour reforms that came into effect on and from 19 September 2017. The reforms are designed to protect directors who actively attempt to better the outcome for the creditors of the company, through an established strategy and proper professional advice.
The reforms provide that
- if, when a director starts to suspect the company may become or be insolvent,
- the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome (i.e. not the immediate appointment of an administrator or liquidator),
- the director will be protected from any insolvent trading in performance of such a course of action.
The Court will consider, among other things, the below conduct in determining whether the director’s course of action was reasonably likely to result in a better outcome for creditors:
- if they informed themselves of the company’s financial position and maintained appropriate financial records;
- if they prevented misconduct by company officers and employees;
- if they obtained proper professional advice; and
- if they developed and implemented a restructuring plan.
It is important to note are that the company must continue to pay all of its employee entitlements and lodge all reports in relation to tax.
Please contact Walker & George to either discuss how we may assist your company or advise you in your capacity as director to ensure you are protected under the safe-harbour provisions.
Receivership, administration and liquidation all involve another party being appointed to manage the affairs of the company in place of the directors or board of the company.
A receiver can be appointed either by a secured party pursuant to a security agreement or by the Court. Typically, it is the former. The receiver is appointed to preserve and, or realise the secured assets of the company.
The difference between a receiver and an administrator or liquidator, is that the receiver’s primary responsibility is the interests of the secured party who appointed them. Whereas an administrator or liquidator’s responsibility is to the company including its creditors and shareholders.
An administrator may be appointed by the company’s directors, a secured creditor or the Court to prepare and implement a restructuring plan for a company that results in a more favourable outcome for the company’s creditors.
During the administration, it will be necessary for the administrator to consider any deed of company arrangement (DOCA) put forward by the director/s or a third party. Subject to a vote by the creditors (in which the administrator may have the deciding vote) the administrator will then typically become the deed administrator. If the DOCA is not approved then the administrator will likely cause the company to be placed into liquidation.
A liquidator may be appointed either by the shareholders, creditors or the Court.
The role of the liquidator is to realise and distribute the assets of the company and to investigate and report on the affairs of the company. Subject to the liquidator’s opinion and, either being funded or having funds available to them, the liquidator may pursue debtors of the company and the company’s directors personally for breach of duties or voidable transactions.
It is important to realise that various stakeholders may have an interest in a company. The above roles are typically appointed to a company when a controlling or majority of stakeholders (including the Australian Taxation Office or the Australian Securities and Investments Commission) no longer believe the company is operating profitably and, or appropriately.
Please contact Walker & George to discuss how we may assist your company if you find yourself in these circumstances.