Insolvency
For full details see the Corporations Act
Payment of review fee is taken to be a representation by the directors that the company is solvent
Below are a few of the main terms used with insolvency.
Bankruptcy: An insolvency procedure that applies to a natural person, not to a company.
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.
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.
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 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.
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 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.
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.
Public 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: 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 liquidator can seek to recover an unfair preference provided it occurred within 6 months prior to the 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.