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Restructuring, Insolvency & Voluntary administration 

 

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  1. Voluntary administration

  2. Deed of company arrangement (DOCA)

  3. Liquidation

  4. Personal Property Securities Register (PPSR)

  5. Director's duties

  6. Personal bankruptcy 

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Restructuring & Turnaround Management

 

Restructuring involves changing the legal, financial, or operational structure of a business to improve its performance and viability.

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Restructuring and turnaround management

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Restructuring and turnaround management are two related but distinct concepts that deal with the recovery of a business that is facing financial or operational difficulties. Restructuring involves changing the legal, financial, or operational structure of a business to improve its performance and viability. 

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Liquidation 

Liquidation is the process of winding up a company that is insolvent, meaning it cannot pay its debts when they are due. There are two types of liquidation in Australia: creditors’ voluntary liquidation and court liquidation. In both cases, an independent liquidator is appointed to take control of the company’s assets and distribute them among the creditors according to a legal order of priority. The liquidator also investigates the company’s affairs and reports any possible misconduct or offenses to the relevant authorities. Liquidation ends when the liquidator has completed their duties and the company is deregistered. For more information, you can refer to the following sources:

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Sidney Cityscape

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Section 588G Corporations Act 2001 (Cth)

S 588G sets out the director’s duty to prevent insolvent trading by a company. Insolvent trading occurs when a company incurs a debt while it is unable to pay its debts as and when they become due and payable.  A director who fails to prevent insolvent trading may be liable for civil penalties, compensation orders, or criminal charges. key tests in applying s588G are; 

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  • The company was insolvent at the time of trading or became insolvent by incurring debt or several debts, and

  • At the time of incurring debt, there were reasonable grounds for suspecting that the company was insolvent, and

  • The director failed to prevent trading or incurring of debt.

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Safe Habour Rule in Australia 

A safe harbour rule in Australia in the context of alleged insolvent trading, is a legal provision that reduces or eliminates the liability or penalty for a certain conduct, as long as some conditions are met.  the purpose of the rule is to protect directors from being liable for insolvent trading, if they can show that they were developing a plan to restructure the company and improve its financial situation

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According to the Corporations Act 2001 (Cth), the conditions for the insolvent trading safe harbor are:

  • The director must suspect that the company is or may become insolvent;

  • The director must start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than liquidation;

  • The debt must be incurred directly or indirectly in connection with the course of action;

  • The course of action must be implemented within a reasonable period of time;

  • The director must inform the company’s employees, creditors, and shareholders of the course of action and its progress;

  • The director must meet the company’s tax reporting and payment obligations;

  • The director must not engage in any dishonest or fraudulent conduct.
     

If the director meets these conditions, they can rely on the safe harbor as a defense against any claim of insolvent trading. However, the safe harbor does not protect the director from other liabilities or obligations, such as breach of fiduciary duty, fraud, or misconduct.​

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Voluntary administration
Voluntary administration is a process that allows a company that is facing financial or operational difficulties to appoint an independent administrator to manage the company’s assets and liabilities. The administrator will try to find a way to save the company or its business, or to get a better outcome for the creditors than if the company was liquidated. During the voluntary administration, the company is protected from legal actions by its creditors, and the creditors have a say in the future of the company. ​

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Deed of company arrangement (DOCA)

DOCA stands for Deed of Company Arrangement, which is a binding agreement between a company and its creditors that is made after the company enters voluntary administration. The purpose of a DOCA is to save the company or its business, or to provide a better outcome for the creditors than liquidation.

A DOCA is proposed by the director or a third party and is administered by a deed administrator. A DOCA affects the rights and obligations of the company, the creditors, and the owners of the property. 

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Benefits of entering into a DOCA

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Personal bankruptcy 

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Bankruptcy law in Australia is the area of law that regulates the process and consequences of declaring oneself or being declared unable to pay one’s debts. Bankruptcy law is governed by the Bankruptcy Act 1966 (Cth) and administered by the Australian Financial Security Authority (AFSA). Bankruptcy law aims to balance the interests of debtors and creditors, and to provide relief and a fresh start for debtors, while ensuring fair and equitable distribution of their assets among creditors.

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Several commonly adopted options for a debtor within a bankruptcy regime are:

 

  1. Temporary debt protection (TDP)

  2. Debt agreements

  3. Personal insolvency agreements (PIA)

  4. Bankruptcy

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Bankruptcy law covers various aspects.

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  1. The types and eligibility criteria of bankruptcy and other insolvency options, such as debt agreements, personal insolvency agreements, and temporary debt protection;
     

  2. The roles and responsibilities of bankruptcy trustees, who manage the affairs of bankrupt individuals or companies;
     

  3. The rights and obligations of bankrupt individuals such as reporting income and assets, making compulsory payments, and complying with restrictions on travel, employment, and business activities;
     

  4. The effects and duration of bankruptcy on the financial and personal situation of bankrupt individuals or companies, such as the discharge of most debts, the loss of certain assets, the impact on credit rating, and the permanent record on the National Personal Insolvency Index;
     

  5. The grounds and procedures for challenging or setting aside certain transactions that may be considered voidable or fraudulent, such as uncommercial transactions, unfair preferences, or creditor-defeating dispositions.

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Consequences of bankruptcy 

bankruptcy also has serious consequences that can affect one's financial and personal situation for many years. Some of the consequences of bankruptcy in Australia are:
 

Bankruptcy is not the only option to deal with unmanageable debt. There may be other alternatives, such as debt agreements, personal insolvency agreements, or informal arrangements, that suit your situation better. You should seek professional advice before you decide to apply for bankruptcy.

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