When A Company Is In Financial Difficulty

When a company is in financial difficulty, it might find itself subject to a voluntary administration, receivership or liquidation. There are important differences between these processes, as outlined below.

Voluntary Administration

Under Part 15A of the Companies Act 1993, an administrator (‘Administrator’) may be appointed to a company by:

• its Board;
• a liquidator or interim liquidator, where the company is in liquidation;
• a chargeholder with an enforceable charge over all, or substantially all, of a company’s property; or
• in certain circumstances, the Court.

The Administrator takes control of the company from the directors and reviews the operation of the company during a 20 working day period.

After this period, a meeting of all of the creditors of the company is called by the Administrator. This meeting is called a ‘watershed meeting’ and is held to decide the future of the company. By this time, the Administrator will have considered the interests of the creditors of the company moving forward.

At the watershed meeting, the creditors may decide that:

a)  the company execute a ‘deed of company arrangement’ governing how the company’s affairs are to be dealt with, and dealing with creditors’ claims;

b)  the administration should end; or

c)  a liquidator be appointed, where one has not already been appointed.

Depending on the outcome of the voluntary administration and the watershed meeting, this process may allow the company to resume all or some of its business, and provide real benefit to the company in terms of a satisfactory compromise with creditors and a clear plan for the future direction of the company.

Receivership

Where a company has provided security over all or some of its assets to a creditor, and the company is in default of its obligations under the terms of that security, the secured creditor (eg. a bank with a General Security Agreement over the assets of the company) may appoint a receiver (‘Receiver’).

The Receiver acts for the benefit of the secured creditor in respect of the secured property. Other creditors should be mindful that the Receiver does not act for their benefit.

The Receiver’s powers are governed by the Receiverships Act 1993 and the terms of the appointing creditor’s security agreement. For example, the Receiver may demand and recover the income of any secured property from a company.

Importantly, even where an Administrator has been appointed for a company, in some circumstances a Receiver may still be appointed by a secured creditor.

Liquidation

Where a company is unable to pay back its debts, it may go into liquidation. This is the point of no return.

A liquidator (‘Liquidator’) can be appointed by the shareholders, board of directors or creditors of a company, or by Court order.

The Liquidator takes control of a company’s assets, primarily for the benefit of unsecured creditors. The appointment of a Liquidator does not affect the rights of a secured creditor in respect of secured assets.

The Liquidator’s primary role is to bring in all the assets of the company and distribute them to the creditors of the company in accordance with the Companies Act 1993. The Liquidator also has further duties, such as duties in respect of providing reports to the creditors and shareholders of the company throughout the process.

During the liquidation process, the directors of the company have very limited powers. The net effect of a liquidation is that the company is ultimately struck off the Register of Companies, and can no longer trade.