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Insolvency

Insolvency Appointment Options For Australian Businesses

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In the ever-changing landscape of the Australian business world, many companies face periods of underperformance or financial distress.

It is important to remember not to panic. There are restructuring options available to help struggling businesses regain their financial footing.

However, if you wait too long or rely too much on the safe harbour law, the business will need to shift gears. This will be when you need to start thinking about insolvency options.

Section 588G of the Corporations Act 2001 provides a ‘safe harbour’ regime allowing directors to continue trading while the business is distressed if said actions lead to better financial standing. The section protects directors from personal liability for debts incurred by an insolvent company. However, it will not come into effect if the business is made solvent by gaining further obligation elsewhere.

When a business finds itself in a predicament where the outcome is no longer projected upward, management must understand the various insolvency appointments available.

There are multiple different insolvency appointments available to Australian businesses. We delve into each while providing insights into when to choose each one.

Different Types Of Insolvency Appointments

1. Voluntary Administration (VA)

Voluntary administration is a formal process that allows company directors to make an appointment, often in consultation with an insolvency practitioner. A VA is an appointment to formally restructure a company through a Deed of Company Arrangement (DOCA).

An independent registered liquidator takes complete control of the company to try to work out a way to save it.

This appointment provides breathing space to a troubled business, attempts to protect its assets, and assesses the options available.

The registered liquidator reports to creditors where they need to accept any proposed DOCA to put the company into liquidation or hand it back to the directors.

Voluntary administration is typically the preferred option when:

  • A company faces temporary financial difficulties.
  • Directors believe that the business is viable in the long term with some restructuring.
  • Creditors wish to maximise their chances of recovering their debts without pushing the company into liquidation.

Example: A retail company experiencing a temporary downturn in sales due to seasonal fluctuations may opt for voluntary administration to restructure its operations, negotiate with creditors, and emerge more substantial for the next peak season.

2. Receivership

Receivership involves the appointment of a receiver whose primary role is to collect and sell enough company property to repay the debt owed to the secured creditor. This appointment is often done by a secured creditor holding a charge over specific assets or the entire business.
Receivership is usually chosen when:

  • A business has defaulted on secured debt obligations.
  • The appointment aims to maximise the recovery for the secured creditor.
  • There is a need to sell specific assets to repay the debt.

Example: A manufacturing company facing insurmountable debt defaults on its loan secured against its machinery. The bank appoints a receiver to sell the machinery and recover as much of the outstanding debt as possible.

3. Liquidation

Whether voluntary or court-ordered, liquidation marks the end of a business’s life. It involves selling all assets, repaying creditors, and winding up the company.

This appointment is made to sell off assets, investigate director conduct, and potential voidable transaction recoveries. The result is the payment of any available distributions to creditors and the ultimate deregistration of the company.

Liquidation is the choice when:

  • The business is not viable or cannot be rescued.
  • Creditors seek to recover outstanding debts.
  • Directors acknowledge the company’s insolvency and want to avoid further obligations.

Example: A construction company facing severe financial losses, mounting debts, and no prospects for recovery opts for liquidation. The company’s assets are sold, and the proceeds are distributed to creditors based on their priorities.

4. Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a formal agreement between a company and its creditors to restructure its debts and continue trading. It is an excellent choice when:

  • The business is viable with the proper financial restructuring.
  • Directors wish to avoid liquidation while providing creditors a better chance of recovering their debts.
  • A company needs time to repay its debts in a manageable manner.

Example: A restaurant chain with multiple locations faces financial difficulties due to the economic downturn. The company enters a CVA to renegotiate lease agreements, reduce debt burdens, and continue operating, ultimately returning to profitability.

Next Steps for Underperforming Businesses

Understanding the various insolvency appointments available is crucial for Australian businesses facing financial underperformance.

Each appointment serves a unique purpose and should be selected based on the business’s specific circumstances.

Whether it’s voluntary administration, receivership, liquidation, or a Company Voluntary Arrangement, making the right choice can mean the difference between business recovery and dissolution.

Professional guidance from insolvency practitioners is often invaluable in making this crucial decision.

By assessing the financial health and potential for recovery, businesses can choose the insolvency appointment that best aligns with their objectives. The following steps set themselves on a path toward financial stability and success.

If you want to know the best appointment for your circumstances, contact us at coffs@cloutadvisory.com.au or call (02) 6650 5888.

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