Corporate insolvency has for the last 4 months received a considerable amount of media attention in Australia. We have seen the collapse of many large and longstanding businesses that are well known brands and household names. Their collapse has appeared to be almost instantaneous.
The very meaning of insolvency is the inability to pay debts as and when they are due.
By extension Corporate Insolvency is when a company (business) does not have the ability to pay its debts. Where a company is unable to pay its debts, it is critical that the directors understand what options are available, and what their obligations may be.
It is illegal under the Corporations Act to continue to trade a company that is insolvent. The law also outlines directors’ duties such as acting in good faith and not trading whilst insolvent. Read more on directors’ duties HERE.
The law has recently been relaxed regarding insolvent trading during the Coronavirus pandemic and this is no longer illegal. The law will undoubtedly reverse at some stage and if your company is experiencing financial difficulty you will have to make decisions about the company’s future.
If you have concerns about your company’s solvency it is imperative to obtain accurate legal advice from an experienced insolvency lawyer.
Generally speaking, one of three things will occur where a company is insolvent. They are as follows:
1. the company will be placed into Voluntary Administration;
2. the company will be placed into Liquidation; or
3. the company will be placed into Receivership.
Voluntary Administration is a simple and quick process which is designed to assist with determining the best course of action and the company’s future direction.
An external Administrator is appointed over the company. The Administrator’s role is to take full control of the company. They will undertake investigations and decide if there is a way to save either the company or its business. The ultimate aim of the Administrator is to take steps to administer the affairs of the company in a way which provides better returns to creditors than what would be available if the company was placed straight into liquidation.
It is very important to understand that a liquidator or administrator DOES NOT act for you.
They are independent and have to report to ASIC and may in that report recommend ASIC take further action against you. ASIC may choose to apply fines or penalties to directors or company secretaries if they have breached their directors’ duties or have not complied with requests from the liquidator or administrator.
Only an insolvency lawyer will be acting in your interests and only their advice will be to protect you throughout insolvency. Therefore, it is crucially important to obtain legal advice from an experienced insolvency lawyer.
A liquidation is where a liquidator is appointed to take control of the company and to wind up/finalise the affairs of the company in a way that benefits the company’s creditors. This involves a liquidator undertaking investigations into the company’s affairs, calling in debts which may be due to the company by its debtors, identifying potential claims the company may have against other entities or individuals (including directors and shareholders), and valuing and subsequently disposing of company assets.
A liquidation will either be a director-initiated process or a creditor-initiated process.
Receivership is in some regard very similar to liquidations and administrations however the role of the receiver is different. The role of Administrators and Liquidators is to act in the best interest of creditors. More often than not, a receiver will only act in the interest of a specific secured creditor that has appointed the receiver.
As secured creditor is an individual or an entity with a security interest in the company. The security interest is usual in the form of a general security agreement which secures the debt owed by the company. A properly drafted general security agreement will identify default events or circumstances which allow the appointment of a receiver.
When a company is in receivership it may continue to trade.
Mostly, where a company is in financial trouble the end result is its winding up and liquidation.
Amongst identifying company assets and liabilities, a liquidator will also identify what, if any, claims are available to be made against the company’s directors. The liquidator is entitled to make the following claims against company directors:
• Insolvent Trading Claims
These are claims which are made in relation to debts the company has incurred during a period of insolvency. If the liquidator succeeds in proving this claim the director of the company becomes personally liable for debts incurred during the period of insolvency.
• Uncommercial Transaction Claims
These claims are made where the liquidator can identify transactions to which the company is a party that a reasonable person in the company’s circumstances would not have entered into. If the liquidator succeeds in such a claim it will be entitled to recover any amount which would be determined to make the transaction commercial.
• Unfair Preference Claims
These claims are made by a liquidator against the company’s creditors (including the company’s director if appropriate). The underlying basis of the claim is to establish that a particular creditor or creditors received a payment greater than they would have received through the liquidation process. If successful, the liquidator will be entitled to recover this amount from the company’s creditor.
• Director Loan Account Claims
These are claims made by a liquidator against the director of a company in circumstances where the director has borrowed or taken company funds for an ulterior purpose but failed to repay the company. If successful, the liquidator will be entitled to recover this amount from the company’s director.
• Breach of Directors’ Duties
Directors owe numerous duties to a company; a liquidator is entitled to bring a claim against a company’s director. If the director is found to have breached a duty, they may be liable for pecuniary penalties up to $200,000 and/or a term of imprisonment.
There are a considerable number of businesses who advertise themselves as “restructuring experts” and “credit repair experts”. More often than not they prey on vulnerable businesses and individuals and their directors. If your circumstances warrant intervention from an insolvency practitioner (Administrator or Liquidator) you will often receive advice and a referral.
If you believe your company is facing solvency issues, we strongly recommend that you immediately obtaining legal advice from an insolvency lawyer. Under normal circumstances engaging a lawyer will provide for some protection such as safe harbour provisions which allow you more time to turnaround the company and trade whilst insolvent. Read more about Safe Harbour Provisions HERE.
In short, yes. Certain aspects of the creditor driven insolvency process have been impacted by the COVID-19 pandemic.
Traditionally in order to apply to the Court for an order to wind up a company, a creditor needed to establish:
(a) the debt exceeded $2,500.00; and
(b) the debtor company was served with a Creditor’s Statutory Demand for Payment of Debt; and
(c) the debtor company did not resolve the matter or make an application to set aside the demand within 21 days of service.
For 6 months commencing from 25 March 2020 the government as part of its economic response to Covid-19 has increased the applicable thresholds as follows:
(a) the minimum amount of debt has been increased from $2,000 to $20,000; and
(b) the time frame to respond to a Creditor’s Statutory Demand for Payment of Debt has been increased from 21 days to 6 months.
1. The potential aftermath of personal or corporate insolvency can be disastrous;
2. Always make sure that you obtain advice at the earliest possible opportunity; and
3. Always obtain advice from someone who has expertise in insolvency.
Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.
© PCL Lawyers 2021