CORPORATE EXPERIENCE

Liquidation

The process of liquidation results in the legal and financial termination of a company’s existence.  Liquidation can be involuntary or voluntary from the company’s perspective.

An involuntary liquidation usually occurs when a creditor, or possibly a shareholder, applies to the court for an order that the company be liquidated.

Voluntary liquidation is instigated by the Directors and generally with the approval of shareholders and creditors.  It is basically used to wind up the affairs of dormant solvent companies, or to deal with the financial difficulties of an insolvent company.

Liquidation of a company can have many consequences, including:

  • sale of all company assets by the Liquidator either as a result of the closure of the associated business or, less often in the case of a liquidation, its sale as a going concern; and
  • Liquidator deals with the claims of creditors, eliminating any further recovery action on the part of creditors, except where personal guarantees or other liabilities apply.

Liquidation can be an appropriate method to deal with company debts when informal arrangements have failed and the Directors are interested to bring a conclusion to the business operations in an expedient manner.

In some cases it is appropriate for Directors to obtain independent advice in relation to their personal liability for guarantees they may have provided for company debt, or liability for taxation debts. See Personal Insolvency Experience.

Over many years we have helped dozens of Directors and companies avoid liquidation, through the use of the Voluntary Administration provisions of the Corporations Act.


Voluntary Administration and
Deed of Company Arrangement

The Voluntary Administration (“VA”) process is designed to allow insolvent companies to continue in business, or of this is not possible, to give a greater return to creditors than they would otherwise receive if the company was liquidated.

A VA is generally instigated when the Directors believe the company is insolvent, or is likely to become insolvent in the future ie. the company is unable to pay its debts as and when they fall due.  Once the Directors have decided this, they can promptly commence a VA appointment which has the effect of immediately suspending creditors’ claims against the company.

Once the VA process has commenced, the Directors then work with the Voluntary Administrator to implement a proposal for the company’s future, which deals with how it will operate, what assets will be sold or retained, how creditors will be paid, etc.  This proposal is then put to creditors at a meeting, in the form of a proposal for a Deed of Company Arrangement (“DOCA”).

A few examples of DOCAs accepted by creditors and administered by us are listed below.   In each case creditors received a greater return than would have been available in liquidation, and in the majority of cases the company continues to trade.


Cowaramup Earthmovers
This family company experienced cash flow difficulties primarily due to slow debtor recoveries and bad debts.  It needed ‘breathing space’ in dealing with its creditors.  The company exited VA on the back of creditors having accepted a DOCA proposal which provided for the payment of 100c in the dollar over 18 months.  The DOCA sum (approximately $600,000) was to be sourced from future profits and the sale of surplus equipment.

C Restaurant
The Directors put the company into VA following intense pressure from creditors. A DOCA was approved which allowed sufficient time for the trading performance to improve, and the business was sold in an orderly manner over a period of approximately 6 months. This maximised the selling price and the final return to creditors. If the company had been liquidated, the lease would have terminated and there would have been no business to sell as a going concern. Creditors received a full return plus 5% interest.

Northern suburbs tavern
A prominent tavern in Perth’s northern suburbs was being traded by a company experiencing significant cash-flow difficulties. The Directors put the company into VA and a DOCA was proposed providing for payment of $360,000 over 3½ years. This was accepted by creditors with claims totalling $670,000. During the 3½ years in which the DOCA payments were payable, the Directors elected to sell the tavern. As a result, creditors received an expedited dividend approximately 10 months after the initial VA appointment.

Truck washing business
Prior to the appointment of a Voluntary Administrator, the company had sold its business, however liabilities totalling $714,000 remained unpaid which included a substantial debt due to the ATO. The ATO had also issued a Director’s Penalty Notice in respect to unpaid tax, so the appointment of the Voluntary Administrator enabled the Director to avoid personal liability. The Director subsequently put forward a DOCA proposal which provided for the payment of $114,000 in 60 days. The offer was duly accepted by the creditors.

Regional Supermarket
The company had a deficiency of assets to liabilities of approximately $700,000. The company owed the ATO approximately $350,000, as well as $400,000 to the company’s Directors and $150,000 to trade creditors. All creditors resolved to accept a DOCA which provided for the payment of $180,000 over a two year period, and for the Directors not to claim, which improved the expected return for ordinary creditors from nil (in a liquidation scenario) to twenty-two cents in the dollar.