What is Voluntary Insolvency?

Insolvency is a term that generally applies to businesses that can no longer repay their debts. In Australia, insolvency is considered a serious matter, and there are strong penalties for directors who allow their company to continue incurring further debt while insolvent. Voluntary insolvency refers to the situation where a company is no longer solvent and its directors take steps towards formal administration. This usually means one of three options: liquidation, voluntary administration, or receivership.

Liquidation

If your business is no longer solvent and you want to stop trading, you can choose to appoint a registered liquidator – an independent, qualified individual who takes control and oversees the orderly winding up of the company so creditors can be paid from the proceeds of asset sales if possible. When a liquidator takes over the directors no longer have any control over the company and its assets.

The process of liquidation could begin with you contacting an insolvency practitioner, and holding a vote between all shareholders or members invested in the company towards further action. If insolvency is agreed as the best course of action, then begins the process of voluntary liquidation.

Note that companies which are solvent can also opt for voluntary liquidation. As part of the liquidation process, the company is deregistered. The main difference between voluntary and Involuntary liquidation is during the latter the court orders the company to be liquidated and appoints a liquidator to oversee the process.

The liquidator is then charged with identifying the assets of the company, investigating the company’s financial affairs, and distributing assets to creditors if available, among other things. There is no fixed time limit for the liquidation process, although liquidators usually try to proceed as quickly as possible.

Company shareholders or members might opt for liquidation because it ensures the ceasing of trading, and encourages the deregistration process to proceed in an orderly manner, managed by an independent party – the liquidator. Selling a company to pay creditors, in contrast, does not dismantle the company structure. During the liquidation process, the liquidator might decide to have the company continue to trade for the interim, usually so it can be sold and the creditors can be repaid.

A voluntary liquidation concludes with a final joint meeting of creditors, shareholders and members before the deregistration of the company by ASIC. Parties involved in a liquidation should be clear about their duties and obligations. Just as the liquidator has a duty to protect the interests of the creditors, the company directors have an obligation to assist the liquidator by providing records and assisting in other ways as required.

Voluntary administration

Voluntary administration is another option for companies that are insolvent (or near insolvent) and need to pause and review their position. Putting a company into voluntary administration results in the appointment of a voluntary administrator who will then take over the business to decide on its next step. Usually the administrator, after investigating and reporting on the company, makes a recommendation that could result in the creditors deciding to enter into a Deed of Company Arrangement, put the company into voluntary liquidation, or return the company to the control of its directors.

In order to formally place the company into voluntary administration, the board simply resolves the company is insolvent, or likely to be become insolvent, and recommend an administrator should be appointed.

If the administrator recommends the company should entered into a deed of arrangement, this means getting creditors to agree on how the company should proceed from that stage in order to obtain a better return, and hopefully avoid voluntary liquidation.

As such, voluntary administration provides considerable flexibility to possibly turnaround the business, and works to try and ensure its creditors are paid before liquidation. Its benefits include allowing directors of financially distressed companies to take action quickly, and giving the company breathing space with a moratorium period, during which creditors are generally unable to take most debt recovery or wind-up actions against the company.

Receivership

Receivership is another possible outcome of insolvency. Typically companies go into receivership when a secured creditor who holds security over some, or all, of the business’s assets, appoints a receiver. The receiver then collects and sells charged assets to repay the debt owed to the creditor. Sometimes receivers are appointed by a court. Note that receivers can be appointed while a company is being liquidated, or has been placed into voluntary administration.

The receiver is required to pay out any proceeds in the order required by law, and they’re obliged to let the ASIC know about any irregularities they might come across. Once the receiver has successfully collected and sold enough assets to pay the secured creditor and fulfil their other duties, the receivership will end. Control of the company will then usually be returned to the company directors.

Which option or outcome is right for my business?

If your company is insolvent, or likely to become insolvent soon, you should explore all your options by seeking advice from qualified professionals in a timely manner. Whether you decide to place your company into voluntary liquidation or administration, or if you think your company might be entered into receivership, there could be different ways you can resume trading or achieve the best outcome for creditors and all other parties, so it’s important to get advice as soon as possible.