Understanding the options available for struggling companies is important for all company directors in businesses facing financial challenges. The choice between receivership, voluntary administration, a company compromise or liquidation depends on the specific circumstances and the desired outcome for the company's stakeholders. Legal and professional advice is recommended to navigate these processes effectively.
What are the options? Please refer to our other articles for more detailed explanation of each option.
1. Receivership:
• Definition: Receivership is initiated when a secured creditor appoints a receiver to manage the secured assets of a company. It's important to note that a company can simultaneously be in receivership and undergo liquidation or voluntary administration.
• Process: The appointed receiver takes control of and deals with the assets that serve as security for the debt owed to the secured creditor.
2. Voluntary Administration:
• Definition: Voluntary administration involves the appointment of an administrator with the aim of reviewing and restructuring the business to prevent it from going into liquidation.
• Objective: The primary goal of voluntary administration is to explore options that could lead to the business's survival and financial recovery.
3. Liquidation:
• Court Liquidation: Creditors have the option to apply to the High Court to appoint a liquidator. This process is initiated when the company is unable to meet its financial obligations, and usually following the expiry of a statutory demand. The process involves the service of a winding up application and a formal court hearing putting the company into liquidation.
• Voluntary Liquidation: Alternatively, shareholders can opt for voluntary liquidation by passing a special resolution. This route is taken when the company recognizes its insolvency or decides that liquidation is the most appropriate course of action.
• Role of Liquidator: A liquidator, a licensed insolvency expert, is appointed to thoroughly investigate and manage the company's assets during the liquidation process.
4. Company Compromise (Part XIV of the Companies Act 1993):
• Overview: Part XIV of the Companies Act 1993 provides a legal framework for a company compromise, allowing businesses facing financial distress to propose arrangements with creditors for the purpose of avoiding liquidation. This option offers a formal mechanism for companies to reach agreements with creditors regarding debt restructuring, repayment plans, or other compromises.
• Procedure: The process involves presenting a proposed compromise to the creditors, outlining the terms and conditions. Creditors vote in classes and if a majority of creditors in number and 75% in value of those voting accept the terms, the compromise can proceed binding those creditors. Compromises provide the company with a structured path to address its financial challenges.
• Benefits: Opting for a company compromise can be advantageous as it allows the company to continue its operations under a revised financial arrangement while providing a more orderly resolution than liquidation. This avenue promotes the preservation of the company's value and may offer a more favourable outcome for both the business and its creditors.
Seeking professional advice is advisable to navigate these options and in makng informed decisions which are in the best interests of the company and its stakeholders.
CASE STUDY
Consider this case study, where a company is technically insolvent (assets are less than liabilities and/or the company is unable to pay debts when they fall due). In this case the company owes trade/unsecured creditors $200,000, has a secured creditor who holds a General Security Agreement (GSA) with debt owing $80,000, owes $100,000 to the Inland Revenue Department (IRD) for core GST/PAYE (preferential debt), and has a viable business but has faced setbacks, several insolvency options can be considered. Each option has distinct implications for both the company and its creditors.
1. Receivership:
• Pros: The secured creditor with the GSA could potentially appoint a receiver to manage and realize the assets held as security, ensuring they receive payment.
• Cons: Other unsecured creditors may not benefit from this process, and it may not address the IRD's preferential debt.
2. Voluntary Administration:
• Pros: Voluntary administration allows the company to engage an administrator to review its operations and propose a restructuring plan, providing an opportunity to avoid liquidation.
• Cons: The administrator's proposal must gain creditor approval, and the IRD, as a preferential creditor, may have more influence. Unsecured creditors may have limited power in this process. The process is regimented and can be costly with meetings and reporting and advertising costs.
3. Liquidation:
• Creditor Liquidation: Creditors, including trade creditors, can apply to the High Court for liquidation. Assets would be realized to pay off debts with creditors paid in accordance with the priorities set out in the Companies Act 1993 seventh schedule and Personal Property Securities Act 1999.
• Voluntary Liquidation: Shareholders may opt for voluntary liquidation. While it offers some control to the shareholders, the outcome for unsecured creditors may be uncertain, and the IRD's preferential status remains.
4. Company Compromise under Part XIV:
• Pros: Part XIV provides a structured framework for proposing a compromise to creditors, allowing the company to address its financial challenges while avoiding liquidation.
• Cons: Agreement from a majority in number representing 75% of creditors voting on the matter (by class of creditor) is required, and the IRD's preferential status may influence the negotiation process. However, if successfully implemented, it can provide a more favourable outcome for all parties.
Considering the viable business and the potential for a turnaround, a company compromise under Part XIV may be a strategic option. This could involve engaging with all creditors, including the IRD, to propose a comprehensive arrangement that addresses the company's financial constraints while allowing it to continue operations. This may involve an instalment plan with IRD and continued support from the secured creditor and payment of unsecured creditors over an agreed extended time frame as setout in the compromise (which may be a % return rather than full repayment) – providing a recovery better than an immediate liquidation.
It is crucial for the company to seek professional advice to navigate these options effectively. The engagement and cooperation of both secured and unsecured creditors, along with compliance with legal processes, are essential in determining the best course of action for all stakeholders involved.
For advice contact our team to discuss your situation.