Corporate Insolvency

Company Liquidation

A company will commonly be placed in liquidation either voluntarily by its shareholders or by the Court, usually upon the application of one of its creditors. The most common creditor who makes applications to the Court to place companies in liquidation is the Australian Taxation Office (ATO) for unpaid tax debts.

The liquidation of a company is the orderly winding-up of its affairs by an independent person, the Liquidator. The Liquidator will:

Sell or realise a company’s assets;
Carry out investigations regarding the company, including investigating whether any recovery claims are available, such as claims for insolvent trading;
Pursue any commercially viable recovery actions;
Report to creditors; and
Distribute any surplus funds available, after payments of cost, among creditors.

In some circumstances where a company owes a tax debt it is unable to pay, there is no alternative but for the company to be placed in liquidation. Sometimes this may actually result in the best outcome for a company’s directors as it may avoid directors’ liability under Director Penalty Notices or minimise claims which may be made for insolvent trading.

Voluntary Administration

Voluntary administration is a process whereby the directors of a financially troubled company, often which owes unpayable tax debts to the ATO, appoint a voluntary administrator to the company. The purpose of voluntary administration is for the company’s directors to put a proposal to the company’s creditors by way of a Deed of Company Arrangement to compromise creditors’ debts so that the company can continue without having to be placed in liquidation.

The voluntary administrator takes control of the company’s assets, investigates the company’s aﬀairs and prepares a report to creditors regarding the company. As part of this report to creditors the administrator recommends whether or not creditors should accept any proposal by the directors or another party for a Deed of Company Arrangement.

Deeds of Company Arrangement

A Deed of Company Arrangement is a binding arrangement between a company and its creditors which is agreed to after a company is placed in voluntary administration. A Deed of Company Arrangement can take many forms however it should aim to maximise the chances of the company continuing, or to provide a better return for creditors than an immediate liquidation of the company. In Deeds of Company Arrangement for many SMEs, funds are advanced to an insolvent company by the directors or a third party which would not be available in liquidation so as to improve the return to creditors.

Creditors get to vote on a directors’ proposal for a Deed of Company Arrangement at a meeting of creditors which is convened and if the proposal is accepted (which usually requires a majority in value and number of creditors attending the meeting to vote for the proposal) then control of the company is returned to the directors. If a proposal for a Deed of Company Arrangement is not accepted then a company will commonly be placed in liquidation.

For a company which has incurred a large tax debt it cannot pay, but which can trade profitably in the future, the voluntary administration process and a proposal for a Deed of Company Arrangement may be a way of compromising the company’s debts including its debt to the ATO so that the company avoids liquidation and can continue to trade in the future.

ADVICE AND ASSISTANCE

If you or your company has a tax debt which it is unable to pay you should urgently obtain appropriate advice and assistance to avoid the ATO taking recovery action in respect of its debt.

If you would like us to assist you, please don’t hesitate to contact us for an initial no obligation free consultation.

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Company Liquidation

Voluntary Administration

Deeds of Company Arrangement

ADVICE AND ASSISTANCE

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