Whether your business is facing financial problems or you wish to wind up your business after it ceases trading, there are some options available to you. The first important distinction, however, is to determine whether your company is solvent or insolvent.
A business is solvent if it can pay all debts when they fall due for payment. A business is insolvent if it is not in a position to pay all debts when they fall due for payment. Whether your business is solvent or insolvent will affect your options available for winding up the business. This article will examine your options if your business insolvent (i.e. is unable to pay its debts when they fall due).
Important Note: The consequences for a director of trading while insolvent are serious and can include civil penalties, compensation proceedings and criminal charges.
Voluntary Administration When Insolvent
If it is not possible to recapitalise, refinance or restructure the company, a director’s option is to appoint a liquidator or a voluntary administrator. On the appointment of an administrator, the directors no longer have control of the company.
The appointment of an administrator takes place so that companies in financial trouble, insolvent or likely to become insolvent, have the opportunity to restructure. This arrangement is called a deed of company arrangement, or otherwise to plan for a sale of assets by the appointment of a liquidator. While an administrator is appointed, creditors cannot make claims against the company unless allowed by the courts.
The voluntary administration process is as follows:
- The appointment of an administrator must take place. This appointment can be decided by the directors of a company through a board meeting or written resolution;
- Once the resolution of the board has been passed, a voluntary administrator can be appointed by the board, and the voluntary administration process begins;
- First Meeting: Within eight business days of the voluntary administrator’s appointment (at least five business days’ notice is required), creditors must meet unless the courts allow an extension of time. The creditors will be required to vote to either create a committee of creditors or replace the administrator;
- A primary role of the administrator will be to investigate the company’s affairs and report to the creditors;
- Second meeting: Within 25 business days of the voluntary administrator’s appointment (at least five business days’ notice is required), a further meeting between the creditors needs to decide the company’s future unless the courts allow an extension of time. At this second meeting, the creditors can decide to:
a. return the Company to the directors;
b. accept a deed of company arrangement, or
c. place the Company into liquidation.
- If creditors agree to accept a deed of company arrangement, then the Company should sign a deed within 15 business days. Deed administration will begin unless the court allows an extension of time; and
- If the creditors decide to put the Company into liquidation, then immediately, the administrator becomes liquidator for the Company.
A director initiated liquidation involves calling a meeting of members to vote on winding up a Company and the appointment of a liquidator. During liquidation, all of the company assets are sold, it ceases operation, and the proceeds of the asset sale go to the creditors, and if there are any remaining, to the shareholders. Once a liquidator applies to ASIC to deregister the Company, it no longer exists.
If you believe your company is insolvent and would like advice or assistance on your director’s duties and options in winding up your company, contact LegalVision today.