How do directors and shareholders commence an urgent corporate insolvency appointment?
With the increased debt collection activity by the ATO in recent years, we are increasingly receiving urgent calls asking how quickly we can be appointed as insolvency practitioners, to mitigate the personal liability associated with ‘non-lockdown’ Director Penalty Notices (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.
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 very quickly by way of the director/s passing a resolution that the company is insolvent or likely to become insolvent, and that a SBRP should be appointed. Our Worrells Teams can very quickly draft the necessary appointment documents for this and other insolvency options.
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 lodgements, as this may impact on the company being able to propose a restructuring plan to creditors.
Voluntary administration
Should the company not meet the eligibility criteria for an SBR, an alternative option for a Director/s is to appoint a voluntary administrator. Again, this can be done at very short notice. Like a small business restructure (SBR), 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 total company debt was in excess of $1million, thus the company was not eligible for an SBR. However, the directors held a meeting and passed the necessary resolutions. They appointed us voluntary administrators that day—mere hours before the DPN’s 21-day expiry thereby avoiding personal liability.
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 maybe done very quickly.
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.
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.
