Options available to directors of insolvent companies
2 mins reading time
Alternatives to formal insolvency appointments exist. Safe Harbour, is it disruptive to the insolvency profession?
Before Safe Harbour, directors would be personally liable for debt incurred if teh company was trading whilst insolvent unless they put the company into Administration or even Liquidation.
Liquidation and Voluntary Administration are both formal insolvency appointments for companies.
Administration allows a brief time to find an alternative to Liquidation. The Administrator as opposed to the direct controls the company in the interim and the creditors determine the outcome. If a turnaround is possible it will be documented in a Deed of Company Arrangement – but if not, the company will almost always end up in Liquidation.
In Liquidation: trading ceases, company assets are sold, and any remaining proceeds, after the Liquidators fees, are distributed to creditors according to the Corporations Act.
Bankruptcy is a similar process, but it only applies to individuals, who don’t trade through a company but are sole traders or in a partnership.
Separately, lenders might insist that a company hire an Investigating Accountant to assess the situation on the bank’s behalf and make a recommendation as to what the bank should do. They often recommend a formal appointment, such as a recewership, VA.
Safe Harbour allows directors to turnaround their insolvent or financially stressed companies, without incurring personal liabilities for any debts incurred whilst doing so.
Additional benefits of Safe Harbour formal insolvency appointments include:
- Directors remain in control, not the Administrator or the Liquidator.
- Fees can be taken in options, so as not to affect cash flow.
- If a listed company makes a formal appointment or appoints an Investigating Accountant, the appointment must be announced, whereas under Safe Harbour no announcement is required.
- When a formal appointment is made, all communications from the company must state so, whereas under Safe Harbour there is no such requirement. This can affect trade terms.
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Options available to directors of insolvent companies
Alternatives to formal insolvency appointments exist. Safe Harbour, is it disruptive to the insolvency profession?
Before Safe Harbour, directors would be personally liable for debt incurred if teh company was trading whilst insolvent unless they put the company into Administration or even Liquidation.
Liquidation and Voluntary Administration are both formal insolvency appointments for companies.
Administration allows a brief time to find an alternative to Liquidation. The Administrator as opposed to the direct controls the company in the interim and the creditors determine the outcome. If a turnaround is possible it will be documented in a Deed of Company Arrangement – but if not, the company will almost always end up in Liquidation.
In Liquidation: trading ceases, company assets are sold, and any remaining proceeds, after the Liquidators fees, are distributed to creditors according to the Corporations Act.
Bankruptcy is a similar process, but it only applies to individuals, who don’t trade through a company but are sole traders or in a partnership.
Separately, lenders might insist that a company hire an Investigating Accountant to assess the situation on the bank’s behalf and make a recommendation as to what the bank should do. They often recommend a formal appointment, such as a recewership, VA.
Safe Harbour allows directors to turnaround their insolvent or financially stressed companies, without incurring personal liabilities for any debts incurred whilst doing so.
Additional benefits of Safe Harbour formal insolvency appointments include:
- Directors remain in control, not the Administrator or the Liquidator.
- Fees can be taken in options, so as not to affect cash flow.
- If a listed company makes a formal appointment or appoints an Investigating Accountant, the appointment must be announced, whereas under Safe Harbour no announcement is required.
- When a formal appointment is made, all communications from the company must state so, whereas under Safe Harbour there is no such requirement. This can affect trade terms.