Insolvency
Lawyers & Barristers

Voluntary administration is a procedure in which the directors of a company that is in financial trouble or a secured creditor appoints an external administrator (a ‘voluntary administrator’).

The key purpose in appointing an administrator is to try and save the company, if this is not possible, the administrator will be seeking to achieve a better return for the creditors, then they would have received had the company been placed straight into liquidation.

After taking control of the company and investigating the company’s affairs, the administrator will provide the following options to creditors: ending the voluntary administration, approve a DOCA or appoint a liquidator

During voluntary administration, the administrator is not required to report to shareholders.

The voluntary administrator will make recommendations to the creditors whether the company should enter into a Deed of Company Arrangement (‘DOCA’), go into liquidation or be returned to the directors.

A DOCA is a binding agreement between the company and its creditors, determining how the company’s affairs are to be dealt with.

In addition shareholders will be bound to the terms if a DOCA, if in place.

Liquidation also referred to as ‘winding up’, involves selling a company’s assets, distributing the proceeds among creditors and distributing the remaining amongst the shareholders.

A creditors’ voluntary liquidation is initiated by a company, whilst court liquidation is the result of a court order being granted, after an application is made to the court by a creditor.

Creditor’s voluntary liquidation may occur in the following situations:

• Creditors vote for liquidation following a voluntary administration; or
• A company’s shareholders elect to liquidate the company.

In contrast court liquidation occurs when the court appoints a liquidator following an application (usually by a creditor).

The liquidator’s role is as follows:

• Collect up and realise the company assets;
• Investigate and report to the company’s creditors; and
• Distribute the remaining funds after paying the costs of liquidation, first to priority creditors through to unsecured creditors.

Finally the liquidator will apply for deregistration of the company. As the liquidator’s primary duty is to the creditors, shareholders rank below the creditors and are unlikely to receive a dividend.

Receivership occurs when a receiver is appointed by a secured creditor who holds a security or charge over a company’s assets. The primary role of the receiver is to sell enough of the company’s charged assets to repay the debt owed to secured creditor.

A receiver may be appointed by a secured creditor, who has a charge such as mortgage over some or all of the company’s assets, or by the court in some circumstances. The powers of the receiver are usually set out in the Charge Document and the Corporations Act.

The primary role of the receiver is to collect and sell enough of the charged assets to repay the debt owed to the secured creditor. The receiver is also required to report any possible offences to ASIC. During receivership the directors continue to hold their office, however their powers may be limited to the extent of the receiver’s powers. There is no obligation on the receiver to report to the shareholders on the progress or outcome of the receivership.