22 July 2020
COVID-19 has had a vast impact upon Global economy and our Australian economy at home, with small to medium sized businesses being some of the ones who have been most effected having to be forced to shut for up to three months with very limited income, or without income at all. Whilst the Government has provided various businesses with economic stimulus packages to keep afloat, in many instances it has not been enough. If your company has been impacted financially due to COVID-19, this article will provide you with information as to some options to consider for your company including the closing, liquidation, or restructuring of your company.
Your company may have various creditors seeking payment from you and you simply no longer have the ability to pay those creditors even in the near future, once the pandemic passes. As such, you may be considering placing the company into liquidation or administration or simply considering to de-register. It is a director’s duty to ensure that, amongst other things, they act in good faith, avoid conflicts of interest, exercise director powers for a proper purpose, and retain discretion and to exercise reasonable care, skill and diligence. Acting in this way includes ensuring the company does not trade whilst insolvent. While the safe harbour provisions under Section 588GA of the Corporations Act 2001 (Cth), provide some protection for directors who incur debt of the company, due to directors taking a course of action that would lead to a better outcome for the company, one of the options foreshadowed below may be viable to you to avoid breaching the directors duties, if the safe harbour protection provisions do not apply to you. If you are unsure as to whether you have breached your director’s duties or whether the safe harbour provisions apply to you, see our article “Temporary Changes to Safe Habour Provisions” by Kate Witt HERE.
Voluntary administration may be a viable option for your company if there is a prospect to resolve the company’s existing financial distress with a view to continue to trade in the future. The appointment of a voluntary administrator may be affected by either a secured creditor, a liquidator (or provisional liquidator), or most commonly, by a resolution of directors that the company is insolvent, or likely to be insolvent. In these circumstances, the appointment of a voluntary administrator will place the company’s future in the hands of an external professional and qualified person to take carriage of the company’s financial affairs and navigate the period of financial distress.
The main benefits of voluntary administration for the company may be some or all of the following:
Upon the appointment of a voluntary administrator, within 8 days the administrator must hold a first meeting of creditors whereby creditors can vote at the meeting to place the administrator and/or create a committee of inspection. The second meeting of creditors is to take place within 25 days of the appointment where the creditors may make a decision as to the future of the company taking into consideration the options referred to in item g. above. Many companies which enter voluntary administration are able to survive and carry on after the period of administration which makes voluntary administration an appealing option for many directors of companies which are suffering from existing financial distress but have an opportunity to continue to trade long term with good assistance and planning.
Director Initiated Liquidation
If voluntary administration is not a viable option for your company as there may not be future prospect for continual trading of the company, appointing a liquidator to your company will mean that you place the company in the hands of a qualified person to take control and attend to the orderly winding up the company in a fair way for the benefit of all creditors to the company. A director-initiated liquidation will generally a require calling a meeting of members (also known as shareholders) to vote on the winding up of the company and the appointment of a liquidator. Upon the winding up of the company, it is important for the director to understand that upon the winding up, the director no longer has control over the company and that the liquidator has the power to:
The liquidator has a number of legal obligations upon being appointed and it is likely the liquidator will require the director’s assistance in being able to fulfil these some of legal obligations. Accordingly, it is important that directors comply with the liquidator’s requests as to the affairs of the company and producing the company’s books and records, otherwise there may be serious penalties, including fines and criminal charges.
An alternative to the above external administration options, if you are in a position where you do not have any creditors, and are simply seeking to close your company you may be considering to voluntarily deregister to your company with Australian Securities Investments Commission (“ASIC”). In order for you to apply to de-register your company with ASIC, the company must meet the following criteria:
upon confirmation that the company meets the above criteria, you may seek to apply to ASIC for de-registration. ASIC will review the application and process it upon being satisfied that the company fits the above criteria.
The consequences of all types of external administration and/or the deregistration process differ depend upon whether the company is placed into voluntary administration, liquidation or is deregistered, some of which may be consequences imposed upon the directors themselves and can include suspension of directorship, fines or criminal penalty. As such, it is important to obtain independent legal advice and financial advice prior to considering the options foreshadowed above, to ascertain the best option for you, the creditors and the business.
How we can help you
JHK Legal regularly assists various companies in financial distress and with our vast range of expertise having acted for both companies and directors and insolvency practitioners, we can facilitate a legal pathway for you and the future of your company. If you require assistance in relation to determining your company’s future, please reach out to the JHK Legal team.
Written by Hayley Tibbie, Associate