How do directors and shareholders commence a corporate insolvency appointment?

I need an insolvency practitioner…now!

When people approach us to assist a company in financial distress, it is not uncommon for there to be some level of urgency for a variety of reasons.

Given the increase in director penalty notices (DPNs) the Australian Taxation Office (ATO) is issuing to company directors, we are seeing an increase in directors seeking assistance at relatively short notice, to avoid the personal liability associated with ‘non-lockdown’ DPNs.

In one recent case, the company’s accountant called us at lunchtime on the day the DPNs issued to the directors were due to expire!

So, how quickly can a corporate insolvency appointment happen?

Generally, appointing an insolvency practitioner can be made very quickly however, the composition of the company’s directors and shareholders, and in some cases, the level of the company’s liabilities, can dictate the options available.

Voluntary administration

Directors appoint a voluntary administrator and this can be done at very short notice. The directors must resolve that the company is insolvent or likely to become insolvent and that a voluntary administrator should be appointed. The appointment is then made by the directors in writing.

In the DPN-lunchtime-call case mentioned above, the directors held a meeting and passed the necessary resolutions and appointed us voluntary administrator that day—mere hours before the DPN’s 21-day expiry.

Company shareholders have no involvement in appointing a voluntary administrator, which is in contrast to a voluntary winding-up of an insolvent company as discussed below.

Voluntary liquidation

While it’s possible to place a company into voluntary liquidation at relatively short notice, this largely depends upon the number and composition of the company shareholders. While an insolvent voluntary liquidation is known as a “creditors’ voluntary liquidation”, the appointment is actually initiated by the shareholders passing a special resolution to wind-up the company.

A meeting of shareholders is convened in accordance with the company’s constitution to consider a special resolution to wind-up the company. While the standard notice period for convening a shareholders meeting is 21 days, shareholders holding not less than 95% of the issued shares can consent to a shorter notice period. Alternatively, if all shareholders sign a “Statement of Resolutions” under section 249A of the Corporations Act 2001 the resolutions take effect when the last shareholder signs.

Accordingly, where there is only one or a small number of shareholders, passing the required resolutions is quick.

However, in circumstances where two shareholders each hold 50% of the company’s shares and one shareholder does not wish to wind-up the company and appoint a liquidator, (or in some cases, may simply not be contactable or interested in the company affairs) then passing the required special resolution may not be possible.

This can prove problematic; we have seen cases of shareholders’ relationships broken down to the point of no prospect of being able to pass a special resolution to wind-up, let alone at short notice.

Small business restructuring

Appointing a small business restructuring practitioner (SBRP) under section 453B of the Corporations Act is similar to appointing a voluntary administrator. That is, the company can appoint a SBRP where the directors resolve the company is insolvent or likely to become insolvent and that a SBRP should be appointed.

However, in addition to the above, the company must also meet the eligibility criteria for restructuring on the day the appointment is made, these being:

1. That the company’s liabilities are less than $1M.

2. The director (or a person who has been a director in the 12 months prior to the appointment) has not been a director of another company that has been under a small business restructuring plan or has been subject to a simplified liquidation within the previous seven years.

3. The company must not have undergone restructuring within the preceding seven years.

Various other matters must be taken into account in considering whether the appointment of a SBRP is appropriate, including the extent of unpaid employee entitlements and status of the company’s taxation lodgments, as this may impact on the company being able to propose a restructuring plan to creditors.

As can be seen above, while it may be possible to place a company into some form of external administration at short notice, early intervention clearly enables more time to obtain advice and consider all available options (including informal options) with the aim of getting better outcomes for all stakeholders involved.

Related articles: 

How small business restructuring is helping SME businesses 

Director penalty notices have arrived! 

Using the personal insolvency solutions to resolve director liability for company tax debt 

Director penalty notice regime affected by major change