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Insolvency

How Directors Can Commence Insolvency Processes?

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When a company faces insolvency, directors must act promptly and seek professional advice. Directors can navigate the complex landscape of insolvency procedures in Australia with the right help from an insolvency expert guiding the way.

For business owners and directors facing the reality of a grim financial situation, understanding the insolvency procedures available is crucial to making informed decisions about the future of their company.

This article provides a concise guide on how directors can commence insolvency procedures. Ensure compliance with regulations while safeguarding your business interests on time.

Recognising Financial Difficulty

The first step for directors is to acknowledge the signs of financial difficulty. A ‘head in the sand’ approach rarely yields positive outcomes. Insolvency can be complex, and consulting a registered liquidator, accountant, or lawyer early on is recommended.

When a director suspects their company cannot pay its debt as it is due, they should act immediately. Procrastination rarely leads to positive outcomes, and early intervention increases the chances of the company’s survival.

A registered liquidator or qualified adviser can conduct a solvency review and outline options, such as refinancing, restructuring, or appointing an external administrator.

Options for Directors

Once financial distress is identified, directors should know the available options. It is crucial not to allow the company to incur further debt unless there is a viable plan for restructuring or recapitalisation. If an insolvent company continues to trade, there are severe consequences for directors.

Director-Initiated Liquidation

If insolvency is inevitable, directors can initiate a voluntary liquidation. This involves meeting members to vote on winding up the company and appointing a liquidator. While the standard notice period for convening a shareholders meeting is 21 days, if all shareholders sign a “Statement of Resolutions” under section 249A of the Corporations Act 2001, the resolutions take effect when the last shareholder signs.

Alternatively, shareholders holding more than 95% of the company shares can consent to a shorter notice period.

Directors may lose control of the company during voluntary administration or liquidation, emphasising the importance of understanding the implications of each decision.

It is possible to place a company into voluntary liquidation at relatively short notice. However, this largely depends upon the number and composition of the company shareholders.

Voluntary Administration (VA)

Directors can initiate voluntary administration (VA) by passing a resolution when the company is insolvent or likely to become insolvent. Directors appoint a voluntary administrator, which can be done in writing at concise notice.

The benefit of a VA is that it doesn’t necessarily lead to the cessation of the company.

This appointment allows a Deed of Company Arrangement (DOCA) to be proposed, allowing the company to continue operating under new terms. If a company goes from voluntary administration into a DOCA, the return of the director’s powers will depend on the DOCA’s terms. When the DOCA is completed, the directors regain full control of the company unless the DOCA allows the company to go into liquidation.

During voluntary administration, directors are relieved from further debts, reducing the risk of insolvent trading claims.

Company shareholders have no involvement in appointing a voluntary administrator, which is in contrast to a voluntary winding-up of an insolvent company.

Creditors Voluntary Liquidation (CVL)

Contrary to the name, CVL is initiated by directors passing a resolution that the company is insolvent. It requires a general shareholders meeting to pass a particular solution for winding up. This can happen in the same two ways as mentioned in Director-Initiated Liquidation.

In the current economic climate, where businesses face challenges like rising interest rates and increased material costs, a CVL may provide directors with a strategic way to navigate financial hardships and protect against director penalty notices.

Court Liquidation

If other debt recovery options fail, a director may initiate a court liquidation process by serving a Statutory Demand on the company. If the company fails to pay its creditors within 21 days, the creditors may proceed to make a winding-up application via court. Directors should consider the commercial benefits before choosing this route, as it can be costly.

Following a winding-up hearing, the court may order the appointment of a liquidator.

Directors Can Navigate Insolvency Confidently

Navigating insolvency is a challenging process that requires careful consideration and professional advice.

Directors must act promptly, seeking the assistance of registered liquidators, insolvency accountants, or lawyers to conduct a solvency review and outline available options.

By understanding the ins and outs of these options, directors can make informed decisions that align with their company’s and stakeholders’ best interests.

Before making any moves, consult an expert and ensure the option you are leaning towards is the best for your circumstances.

Clout Advisory’s insolvency service offers an experienced and highly skilled team of registered liquidators in Coffs Harbour and Gold Coast.

We act for business owners, company directors, banks, creditors, legal advisors, investors and regulators.

Contact Clout Advisory at coffs@cloutadvisory.com.au or call (02) 6650 5888.

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