The following are the key types of
insolvency options in Australia:
External Administration/External Administrator
This term applies to companies, the control of which,
either total or in part, has been taken out of the
hands of the directors and placed in the hands of an
External Administrator. The External Administrator
is usually a company but in the case of a controller
can be a corporation.
An Insolvency Practitioner is usually a person but
can be a company (in the case of a controller) appointed
generally to take over the control (either completely
or partially) of a company from its directors - either
for a short time or until the company ceases to exist.
Broadly speaking, this is when a company or individual
is unable to pay its debts when they are due for payment.
Liquidator is a term that is used in Australia to
refer to a person who acts in relation to companies
that are being wound up. In the case of a Members Voluntary
Liquidation no qualification is required to become
the Liquidator, in the case of a Court Winding Up the
person must be an official Liquidator (with the Court).
In the case of a Creditors Voluntary Liquidation or
administration the person must be a Liquidator registered
Restructuring Without Liquidation
There are two ways that a company can re-structure its affairs without liquidation.
This is usually to give the company a chance of continuing in existence - frequently
to enable it to continue to carry on business but sometimes for other reasons,
for example, ones driven by taxation considerations:
a. A Scheme of Arrangement - is the oldest way of
restructuring a company. It involves the Court being
approached for permission to call a meeting of creditors
to consider a proposal outlined to the Court, then
put to the creditors to consider the proposal. Finally,
the matter goes back to court for its final approval
after it has been informed of what happened at the
creditors' meeting and to hear any objections to the
scheme being approved that any creditor/member may
wish to make.
The process is very complicated and expensive. Because
of the introduction of the alternative procedure of
Deeds of Company Arrangement (under the Voluntary Administration
provisions), which is quicker and cheaper and does
not require any court involvement, schemes of arrangement
are used very rarely these days for insolvent companies.
They are used more for solvent company corporate restructures.
b. Deed of Company Arrangements - were introduced
into the Corporations Law in 1993 as a cheaper, quicker
way of letting a company come to an arrangement with
its creditors without going into liquidation and without
having to meet the many and expensive requirements
and procedures of a Scheme of Arrangement. A Deed of
Company Arrangement must be preceded by a Voluntary
Secured creditors are usually banks or other financial
or lending institutions although they can be smaller
companies or individuals that give financial assistance
to a company and have taken a security (like a mortgage)
over the assets of the company. The security usually
gives very extensive powers that let the secured creditor
take the control of the whole of the company, or some
of its more important assets, with a view to selling
them so that the debt owed to the secured creditor
can be forcibly repaid. For this database these have
been put into two categories:
a. A Receiver - is a person from a firm of accountants
who is a liquidator registered with ASIC.
b. A Controller - can be a person or a company, and does not need to be a registered
liquidator although the majority are. A controller is put in control of a certain
part of the property of a company for the purpose of selling it and paying
the proceeds to the secured creditor - up to the amount owed. The term controller
is used in this database to include an agent for the mortgagee in possession.
Voluntary Administration (VA)
This is the most common type of appointment for a
company that is in financial difficulties. It is usually
a half-way house to a Creditors' Voluntary Liquidation
or a Deed of Company Arrangement.
In a very few cases the Voluntary Administration simply
ends and the company is returned to the control of
its directors. The Voluntary Administration must end
fairly quickly by the company going into a Creditors
Voluntary Liquidation, a Deed of Company Arrangement
or being returned to the control of its directors.
The duration of an administration is usually about a month - but can be extended
by the creditors or the Court.
Winding Up (WU)
The purpose of a Winding Up is to sell or otherwise
realise all of the assets of a company, and to finalise
all of its affairs with a view to then bringing the
company's existence to an end - a corporate death.
There are four main ways that this happens:
a. Creditors Voluntary Liquidation (CVL) - is a common
way for companies that are insolvent to have their
affairs dealt with by an insolvency practitioner. The
essential condition for a Creditors Voluntary Liquidation
is that the company is insolvent. A Creditors Voluntary
Liquidation comes about either as the end result of
a Voluntary Administration or as a direct result of
the members of the company determining that the company
should go into liquidation in circumstances where it
will not be able to pay its creditors within 12 months
of going into liquidation.
Although the members of the company choose the liquidator
(insolvency practitioner), the creditors can change
the liquidator (insolvency practitioner) at a meeting
of creditors that follows, usually within an hour or
so, the meeting of members at which the company is
put into liquidation.
b. Court Winding Up (CWU) - occurs as the result of
a court order. Most often the order is made because
the company is insolvent. Orders are also made for
many other reasons such as a dispute between the directors
of the company that cannot be resolved making the management
of the company unworkable.
c. Provisional Liquidation (PL) - this is a temporary
situation for a company. The court appoints a PL usually
where it is convinced that there is an urgent need
to have somebody protecting the assets of the company.
It can either proceed into liquidation from provisional
liquidation or it can be returned to the control of
its directors once the court has heard all of the evidence
and determined not to make an order winding the company
up. The usual outcome is a Court Winding Up.
d. Members Voluntary Liquidation - this does not (or
should not) involve a company that is insolvent. Usually
such a company is wound up where its use is no longer
required. For example a family business that was conducted
by the parents through a company and they have now
retired and closed or sold the business off. Another
common situation is where a large corporation no longer
needs one of the companies in its group.