Insolvency

The Corporations Act provides the legal framework for a company that is insolvent or likely to become insolvent, to obtain some breathing space to enable the directors to formulate a plan to reorganise the financial affairs of the company thereby avoiding liquidation.

The legislation requires the appointment of an independent and suitably qualified person to act as Voluntary Administrator and this results in full control of the company passing to the Administrator whilst he trys to work out a way to either save the company or its business.

If it is not possible for the Voluntary Administrator to save the business, the aim of the Act is that the companys affairs be administered in such a way as to ensure a better return to creditors than they would have recieved if the company had been placed straight into liquidation.

A Voluntary Administrator is usually appointed by a company's directors after they decide the company is, or is likely to become insolvent.

Occassionally, a Voluntary Administrator is appointed by a secured creditor or a liquidator.

A Voluntary Administration normally lasts 35 days.

However if a matter is complex and the Voluntary Administrator requires additional time to adequately report to creditors, the court can extend the time to hold the second meeting of creditors that will determine the company's future.

The effect of the appointment of a Voluntary Administrator is to provide a company with some breathing space while its directors, in consultation with the Administrator, to formulate a plan to resturcte the financial affairs of the company, if possible.

While the company is in administration;

• a creditor holding a personal guarantee from a director cannot act on the guarantee without court approval
• a court application to wind up the company cannot be commenced
• owners of property used or occupied by the company can't recover their property
• creditors can't continue to enforce claims against the company without the administrators or court approval

The Voluntary Administrator takes control of a company's assets and then investigates and reports on the company's business, property, affairs and financial circumstances to the creditors of the company.

There are three options available to creditors in a Voluntary Administration and they are;

• End the Voluntary Administration and return control of the company to the directors
• Approve a Deed of Company Arrangement through which the company will pay all or part of its debts
• Liquidate the company

The Voluntary Administrator is required to provide creditors with his opinion on each of the options and recommend which option, in his opinion, is in the best interest of creditors.

The role of the Voluntary Administrator includes taking on all powers of the company and its directors and this will necessarily involve the power to sell assets or close down the company's business in the lead up to the creditors meeting and decision on the future of the company.

The role of the Voluntary Administrator also includes reporting possible offences and breaches of the Corporations Act to the ASIC.

There are at least 2 meetings required in the Voluntary Administration period.

The first meeting of creditors must be convened and held within 8 business days after the Voluntary Adminstration begins and decides;

• whether a committee of creditors is to be formed, and
• whether the existing Voluntary Administrator is to be replaced

The second meeting of creditors is usually held 35 days after the company enters Voluntary Administration and decides;

• Whether the administration is to end and control of the company is returned to the directors
• whether to approve a Deed of Company Arrangement - if one is proposed
• whether to place the company into liquidation

The Voluntary Administrator must notify as many creditors as is pratical, in writing, and must also advertise the appointment and the meeting of creditors in a daily newspaper circulating in the states and territories in which the company conducts its business.

In addition to the foregoing, the Voluntary Administrator must forward to creditors, before the second meeting,

• a detailed report as to the company's business, property affairs and financial circumstances, and;
• a statement about any proposal for a Deed of Company Arrangement

There are three options available at the conclusion of the Voluntary Administration period;

• To end the administration and return control of the company to the directors
• To resolve to accept a Deed of Company Arrangement
• To place the company into Liquidation

Resolutions at meetings of creditors are passed firstly on the voices however, if a poll is demanded, a resolution will pass if;

• more than 50% in number and 50% in value of creditors attending and voting at the meeting vote in favour of the resolution

It is noted that in the case of a deadlock, the chairman has a casting vote and will usually exercise the casting vote in accordance with his recommended course of action as outlined in the report to creditors.