Corporate Insolvency

Non-Liquidation Arrangements

• Schemes of Arrangement
   
• Receivership and its effects on a company
   
• Voluntary Administration
   
• Deed of Company Arrangement

Schemes of Arrangement

A Scheme of Arrangement is a way to deal with the insolvency of a company between the company and its creditors. The scheme allows for an arrangement which would otherwise require the consent of every person affected by the schemes operation. The court can order a meeting of the members concerned and the creditors and if the meeting approves the scheme by a majority of at least 75% in value the court can order that the scheme be binding on all creditors and members.

This schemes is not just for insolvent companies it can be used between solvent companies and its members in order to restructure a large corporate group.

The type of arrangements the scheme can offer are simple moratoriums which are set for a certain period, this allows for a freezing of claims in order to allow the debtor to trade and trade efficiently. It can also offer a composition of creditor's claims this is where creditors agree to accept a lower sum than is owed to them. Another example would be an agreement whereby the debtor is to pay the debts owed through instalments as well as interest free periods.

There are also formal arrangements which are used for complex insolvency arrangements however these arrangements are to be sanctioned by the court. Such an arrangement must be accepted by the majority and once it is approved by the court it binds all the creditors.

The following procedure is to be completed to implement the scheme:

• The preparation of an explanatory statement of the proposal;

• An application is made to the Court;

• There is a meeting of creditors;

• An acceptance of the proposal;

• Court hearing where formal approval is given;

• Share splitting and

• Filing

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Receivership and Its Effects On a Company

 What is receivership?

It is a form of administration which can apply to corporations, partnerships and individuals. The most common receivership is a corporate one and it is usually associated with insolvency; this usually sees a secured creditor appoint a receiver to a company because of a default under a loan contract.

Generally speaking the role of the receiver with regards to corporations is to take control of the property, or to get it in so the rights of the entitled party can be protected. They are generally appointed by a secured creditor when the company's assets are under threat which is the result of the company's insolvency or financial instability. However receivers can also be appointed privately and by the court with varying roles and positions.

What triggers a receivership?

Any of the following may trigger a company into receivership:

• Company's liquidity problems;
• Continual financial losses;
• Disputes amongst the directors;
• If the lender requests an investigation;
• A voluntary administration or the appointment of a liquidator;
• The directors/shareholders may have charge or
• The failure to repay loan repayments or erosions security.

The receiver's role is to:  

• Collect and sell enough of the charged assets to repay the debt owed to the secured creditor;

• Pay out the money that is collected in the order required by law, and

• Report any irregularities of possible offences to ASIC

 Privately appointed receiver- effects

It must firstly be noted that a company still continues to exist as a separate legal entity, but it does have effects on the following:

• Company officers- because the appointment of a receiver and manager will mean that the company's officer's authority will be superseded as well as his or her management powers;
• The control of assets is removed from directors;
• The receiver is usually given control over the property;
• Creditors- although they can commence recovery proceedings there is a limitation because the proceedings are subject to a charge. Also only creditors with a priority over the relevant assets can initiate any proceedings;
• The receiver becomes the agent of the company which can affect employees if for example the appointment is accompanied by the sale of the business or the company;
• The company must indicate the receiver's appointment in every public document and
• The lender recovers part or all of the funds

 Court appointed receiver- effects

Much of what is listed above will apply to court appointed receivers as well as the following:

• Interference with a court appointed receiver may see the person being liable for contempt of court;

• The directors powers to administer property will be suspended and

• Any pre-receivership contracts that impose active obligations from the company will be terminated  

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Voluntary Administration

A voluntary administration starts when an administrator is appointed and it usually terminates upon the execution of a deed of company arrangement or a resolution by the creditors that the company should be wound up. It can also be triggered through a realisation by the creditors that the company is insolvent or is likely to become insolvent or through the enforcement of a company guarantee. The general purpose of voluntary administration is to resolve the company's future direction and to do so quickly. The appointment of an administrator may be done by the company, the charge or the liquidator and the effect is immediate. This independent person then takes full control of the company to try to save it and if this is not possible then the administrators aim is to administer the company's affairs in a way which will bring the best return to creditors.

The most important effect of administration is that the company's business, property and affairs come under the control of the administrator and during that period can only be dealt with by the administrator, or with written consent or by the leave of the court. The administrator's role is also to investigate the company's financial circumstances and to make recommendations for the company's future.

Some of the other effects of the administration are:

• The shareholders position is frozen;
• Contracts are not automatically terminated but it will depend on the terms of the contract and
• Winding up proceedings and execution against the company cannot be commenced or continued by creditors.

Some of the benefits of administration are:

• To maximise the company's chances of being saved;
• To maximise the return to creditors;
• That it allows time for the preparation of a proposal;
• It prevents creditors acting to the detriment of the company because assets cannot be removed;
• Director's personal PAYG responsibility can be avoided;
• The company is controlled by an independent person and 
• It is a simpler and less costly option rather than a formal scheme

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Deed of Company Arrangement

As a corporate rescue measure administration only serves as a preparation to the Deed of Company Arrangement. The deed follows on from voluntary administration and it may result in a successful reconstruction of the company or it may be a useful way to maximise the benefits of the creditors of the company however the legislation does place limitations on the types of deeds that can be executed.

If the creditors vote for a proposal to enter a deed of company arrangement the company must sign the deed within 15 business days of the creditor's meeting and if it does not, the company will automatically go into liquidation and the voluntary administrator will become the liquidator.

This arrangement binds all unsecured creditors, even if they voted against the proposal. The agreement also binds owners of property, those who lease property to the company and secured creditors, if they voted in favour of the deed.

The deed can be varied by the deed administrator at any time by calling a creditor's meeting where the proposed variation will be considered.

The advantages of these deeds can be separated into two parts, namely for the company and its directors and for the creditors.

The company and its directors:

• It can continue to trade with its usual customers;
• There is no pressure from creditors;
• There is no liquidator investigating and
• There are tax benefits such as carrying forward past losses

The creditors

• There is a potential for a better dividend then if the company went into liquidation;
• Can select own deed administrator based on industry experience and
• Creditors can keep a customer for future trading

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Our dedicated team consists of specialists who can assist you with all your non-liquidation needs. Complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.