Corporate Insolvency

Unfortunately, corporate insolvency or financial stress is fairly common in the business world, but being aware of the process and your rights and obligations can help ease the process.

When a business fails, the company either:

• goes into receivership
• enters a compromise with its creditors
• is put into liquidation.

Receivership

In line with receivership law, companies may offer security against their assets such as plant and equipment in order to obtain finance or improve cash flow. If there is a default, the creditor or debenture holders (usually banks) can appoint a receiver to collect and sell the asset in which they have a security interest. Receivers are often appointed by a Court and their powers and duties are outlined in the Receiverships Act 1993.

Receivership can sometimes allow the restructuring and re-evaluation of a company, and does not always mean the end of the business. However, as secured assets are often important to the operation of the company, their sale could mean that it is impossible for the company to continue trading. If this occurs, company liquidation often follows.

Compromises with creditors

Effectively, a compromise is an agreement between a company and its creditors. Most compromises have two features:

• creditors will be paid their debt in part or full over an agreed period
• during the compromise term, debts are frozen and a creditor cannot take any action against the company.

A compromise can be an effective alternative to receivership or liquidation, and may give the company an opportunity to recover.

It is recommended that an independent compromise manager be appointed to manage the proposal. Also, it is crucial that all documentation is professionally prepared, comprehensive, and complies with the Companies Act.

If a compromise does not have a successful conclusion, a company may be put into liquidation by its creditors.

Liquidation

There are two types of liquidations: voluntary (by shareholders’ resolution) or compulsory (by court order).

A company is placed in liquidation once a liquidator is named. This usually occurs through one of three methods:

• a special resolution of the shareholdersa decision of the board of directors following an event specified in the constitution to cause
• liquidation
• a Court order following an application by a creditor of the company.

The receivership, creditors’ compromises and liquidation of companies are governed by a complex set of statutory rules. We have only touched on some of the basic principles here and recommend you seek good legal advice at all stages.