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INSOLVENCY: A GLOSSARY OF TERMS
This is a brief explanation of some of the terms you may come across in company insolvency proceedings. Please note that this glossary is for general guidance only. Many of the terms have a specific technical meaning in certain contexts that may not be covered here.
Asset
Any property of value owned by a person. Can include tangible and intangible assets.
Bankruptcy
An insolvency procedure that applies to a natural person, not to a company.
CALDB
The Company Auditors and Liquidators Disciplinary Board—the body that disciplines external administrators.
Charge
A form of security for a debt taken by a creditor over company assets. A mortgage is a type of charge.
Committee of creditors
A small group of creditors, or their representatives, often appointed by the creditors of a company at the first meeting in a voluntary administration. The committee’s role is to consult with the voluntary administrator and to receive and consider reports by the voluntary administrator. The committee may be called upon to approve the voluntary administrator's fees. The voluntary administrator must report to the committee when it reasonably requires.
Committee of inspection
A small group of creditors and shareholders, or their representatives, often appointed by the creditors and shareholders of a company in liquidation to assist the liquidator. The committee is often called on to approve the liquidator’s fees and sometimes to approve the compromise of debts or the entry into contracts extending beyond three months by the liquidator.
Compromise
Agree to accept a lesser sum in full payment of a debt.
Contingent asset
An asset that might arise if a certain event occurs (e.g. a current legal action being taken by a company might result in an asset if the company wins the case)
Contingent liability
A liability that might arise if a certain event occurs (e.g. a current legal action against a company might result in a liability if the company loses the case).
Contributory
A shareholder who may be liable to contribute towards a company’s debts in a liquidation if their shares are not fully paid.
Controller
A person appointed by a secured creditor to deal with assets subject to a charge. Includes a receiver, and receiver and manager.
Court liquidation
A liquidation that starts as a result of a court order, made after an application to the court, usually by a creditor of the company.
Creditor
A person who is owed money.
Creditors' trust
A separate legal arrangement set up to deal with creditor claims. Creditor claims can be transferred to a creditors' trust as part of a deed of company arrangement.
Creditors’ voluntary liquidation
A liquidation for insolvent companies, initiated by the company. Creditors may replace the liquidator appointed by the company in this type of liquidation.
Debenture
A document acknowledging that a company undertakes to repay a sum of money lent to the company by the holder of the document.
Debt
An amount owed.
Debtor
A person who owes a debt.
Declaration of indemnities
A declaration that must be provided to creditors by a voluntary administrator informing them about any indemnities given to the voluntary administrator to cover fees or other debts incurred in acting as voluntary administrator of the company. The declaration provides information to enable creditors to make an informed decision about whether they wish to replace the administrator over concerns about independence.
Declaration of relevant relationships
A declaration that must be provided by a voluntary administrator or a liquidator in a creditors’ voluntary liquidation informing creditors about certain relationships. The declaration provides information to enable creditors to make an informed decision about whether they wish to replace the administrator over concerns about independence.
Deed administrator
The external administrator appointed to oversee a deed of company arrangement.
Deed of company arrangement (D.O.C.A.)
A binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. Aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
Director
A natural person appointed as a director of a company who is then responsible for directing and managing the affairs of a company. Also includes a shadow director.
Dividend
A share of the profit of a solvent company paid to shareholders. Also used to describe a sum paid to creditors out of the assets of an insolvent company.
Eligible employee creditor
A creditor (including the Australian Taxation Office in respect of the superannuation guarantee charge) who, in a winding up of a company, would normally be paid their employment-related entitlements in priority to other unsecured debts. These creditors are given a special right to vote on a deed of company arrangement proposal that seeks to modify their priority.
Eligible unsecured creditor
A creditor who is entitled to have a say in a pooling determination made by a liquidator. The term generally covers the external unsecured creditors of the group, but excludes debts owing between companies in the pooled group. A pooling determination relates to a decision to treat the affairs of a group of companies as if it were a single external administration.
Excluded employee
An employee who has also been a director of the company, or a relative of a director, at any time in the 12 months before the appointment of an external administrator. Excluded employees are entitled to only limited priority for repayment of their outstanding entitlements.
External administrator
A general term for an external person formally appointed to a company or its property. Includes provisional liquidator, liquidator, voluntary administrator, deed administrator, controller, receiver, and receiver and manager. Other than a liquidator for a members’ voluntary liquidation and a controller who is not a receiver or receiver and manager, an external administrator is required to be registered by ASIC. An external administrator is sometimes also referred to as an insolvency practitioner.
Fixed charge
A charge taken by a lender over particular assets of a company. The company may not dispose of these assets without the consent of the lender.
Floating charge
A charge taken by a lender over general assets of a company. The company is usually able to use and dispose of these assets (e.g. stock, debtors) in the ordinary course of business without the secured dispose of these assets (e.g. stock, debtors) in the ordinary course of business without the secured creditor’s consent. A floating charge converts to a fixed charge over those assets if certain events listed in the charge document occur. These usually include the appointment of a liquidator or other external administrator.
GEERS
The General Employee Entitlements and Redundancy Scheme—a basic payment scheme to assist employees who have lost their jobs as a result of their employer’s liquidation or bankruptcy, and are owed certain employee entitlements.
Indemnity
An agreement between the external administrator and a third party to cover the fees and other debts incurred by the external administrator.
Insolvent
Unable to pay all debts when they fall due for payment.
Intangible asset
An asset with no identifiable physical form (e.g. a contractual right, copyrights, patents and goodwill).
IPA
The Insolvency Practitioners Association—the leading professional organisation in Australia for external administrators/insolvency practitioners.
Liability
A legal obligation to pay a person.
Liquidation
The orderly winding up of a company’s affairs. It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders. The three types of liquidation are: court, creditors’ voluntary and members’ voluntary.
Liquidator
A natural person appointed to administer the liquidation of a company.
Member (of a company
A shareholder.
Members’ voluntary liquidation
A liquidation for solvent companies, initiated by the company.
Officer (of a company)
A director, secretary or external administrator (in most cases) of the company.
Person
A natural person or a company.
Poll (of creditors)
A voting procedure where both the number of creditors voting a particular way and the value of their debts is considered in deciding if a resolution is approved or not.
Pooling
The practice of treating the affairs of a group of companies as if it were a single external administration.
Prescribed provisions
Provisions that the Corporations Act 2001 takes to be included in a deed of company arrangement, unless the deed specifically excludes them.
Priorities
The order set down by the Corporations Act 2001 for the payment of unsecured creditors of an insolvent company by an external administrator.
Priority creditor
An unsecured creditor entitled to be paid ahead of other creditors (e.g. employees)
Proof of debt
A prescribed form to be completed by creditors at the liquidator’s request, setting out details of their claim against the company, including how the debt arose and the amount claimed.
Provisional liquidator
A liquidator appointed by the court to preserve a company’s assets until a winding-up application is decided.
Proxy
A person appointed by another person to represent them at a meeting. A proxy is usually entitled to attend and vote on behalf of the person who appointed them. In an external administration, the appointer is usually a creditor or shareholder.
Proxy form
A prescribed form that must be completed by creditors or shareholders to appoint a proxy for a creditors’ or shareholders’ meeting. Public examination
EXTERNAL EXAMINATION
A liquidator, voluntary administrator, deed administrator, ASIC or a person authorised by ASIC to do so can apply to the court to question an externally administered company’s directors or any other person who may be able to give information about the affairs of the company.
Realise
Convert assets into cash, often by selling them.
Receiver
An external administrator appointed by a secured creditor to realise enough of the assets subject to the charge to repay the secured debt. Less commonly, a receiver may also be appointed by a court to protect the company’s assets or to carry out specific tasks.
Receiver and manager
A receiver who has, under the terms of their appointment, the power to manage the company’s affairs.
Receivership
An insolvency procedure where a receiver, or receiver and manager, is appointed over some or all of the company’s assets.
Report as to affairs (R.A.T.A.)
A prescribed form required to be completed by the directors and secretary of a company in liquidation or receivership, giving details of the company’s assets and liabilities, and the identities of the creditors and debtors.
Secured creditor
A creditor who has a security (e.g. charge or mortgage) over some or all of a company’s property.
Shadow director
A natural person not on the public register as a director of a company but who directs and manages the company’s affairs and is taken by the Corporations Act 2001 to be a director.
Tangible asset
An asset with a physical form (e.g. stock or real estate).
Uncommercial transaction
A transaction that was unreasonable for a company to have entered into. It may be able to be set aside by the company’s liquidator provided it occurred within 2 years prior to the winding up, and when the company was insolvent or if the company became insolvent by entering into the transaction.
Unfair preference
A payment made or other benefit given to a creditor by an insolvent company which causes that creditor to be in a more favourable position than other unsecured creditors in a liquidation. The company’s liquidation, and when the company was insolvent or if the company became insolvent by making the payment or giving the benefit.
Unsecured creditor
A creditor who does not hold a security over a company’s property.
Voluntary administration
An insolvency procedure where the directors of a financially troubled company or a secured creditor with a charge over most of the company’s assets appoint an external administrator called a ‘voluntary administrator’. The role of the voluntary administrator is to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.
Voluntary administrator
An external administrator appointed to carry out the voluntary administration of a company.
Winding-up order
A court order for the winding up of a company. The first step in a court liquidation. Usually made after an application by a creditor.
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The good news is these problems can often be overcome by having the company viewed and then restructured after assessing what in the first instance has caused the problems. By having a restructure or an assessment done of your company when it is in the early stages of duress may save 10’s of thousands of dollars and large periods of emotional duress.
Although we believe it is bad practice to borrow more money to get out of debt, there are as in all cases some exceptions to the rule. Often by borrowing an amount of money now, a proposal can be put forward to creditors, whereby they will accept a lump sum rather than a time repayment period, but the lump sum being substantially less than the total amount of debt owed to them. Alternately, sometimes particularly when there is work in progress or the debtor is comfortable it will come in, a short term fix is of immense advantage.
Government's Phoenix crusade continues into 2012 Over the course of 2010 and 2011 we reported on a number of legislative changes increasing the Australian Taxation Office's (ATO) powers to requiretaxpayers to provide security, the clamping down on unpaid taxes, changes to the director penalty notice regime and the increased focus on phoenix avoidance schemes.
As part of its 2011 budget the Federal Government announced measures to counter and deter what it deemed 'fraudulent phoenix activities' and that crusade is set to continue with the Federal Government
recently implementing the Corporations Amendment (Phoenixing and Other Measures) Act 2012, which was assented to on 26 May 2012 (CAPAM Act).
The ATO estimates that approximately 6,000 companies in Australia have gone through a phoenix process.
Phoenix activity is generally, activity where a company:
•fails and is unable to pay its debts;
•acts in a manner which intentionally denies unsecured creditors equal access to the available assets in order to pay debts; and
•within 12 months of closing, another business commences which may use some or all of the assets of the former business, and is controlled by parties related to either the management or directors of the previous company.
Below is a brief summary of the basis of the CAPAM Act and how it may impact you. In summary, the CAPAM Act amends the Corporations Act
2001 (Cth) (Corporations Act) to:
•Provide ASIC with an administrative power to order the winding up of a company to facilitate payment of employee entitlements where a company has been abandoned. Under the CAPAM Act, ASIC will be able to take into account policy considerations, including the ability for employees to access GEERS, or possible phoenixing behaviour by the directors of the company in order to seek a winding up order.
•Amend the advertisement requirements for insolvency practitioners. The Corporations Act previously required petitioning creditors and liquidators to publish notices of certain events in the print media or the ASIC Gazette, often at a significant cost. The amendments now allow for publication of notices by other means, namely through publication on a single corporate insolvency notices website to be maintained by ASIC. Schedule 1 of the Corporations (Fees) Regulations 2001 sets out the current prescribed fees of $64 for notices previously published in the Gazette, and $400 for other notices. From 1 July 2013, those fees will significantly reduce to$145. This is substantially cheaper than previous costs to advertise in larger publications such as the Australian or the Courier Mail.
•Impose a notification requirement on insolvency practitioners in relation to paid parental leave payments. The CAPAM Act now imposes an obligation on external administrators to advise theSecretary of the Department of Families, Housing, Community Services and Indigenous Affairs (FAHCSIA) where a company to which they are appointed is a paid parental leave employer. As
the department responsible for administering the Paid Parental Leave Scheme, the changes allow FAHCSIA to determine whether to continue paying paid parental leave payments to the company or to make the payments directly to the employer.
What does this mean for you? The CAPAM Act imposes significant amendments to companies and company directors.