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Common terms in liquidation and insolvency – definitions

Superannuation Guarantee Charge (SGC)

Superannuation Guarantee Charge is the liability that arises with the ATO once the company has failed to meet its’ Superannuation Guarantee obligation to its’ employees either in full or in part. Superannuation Guarantee Charge is comprised of the amount of the shortfall in Superannuation Guarantee payments plus 10% per annum interest plus a $20 per employee per period processing charge.

Superannuation Guarantee (SG)

Superannuation Guarantee is the official term for compulsory superannuation contributions made by employers on behalf of their employees. An employer must contribute the equivalent of 9 per cent of an employee’s salary.

Pay As You Go (PAYG) Withholding

The ATO defines PAYG Withholding as: …” the system whereby payers withhold amounts from payments to payees and send the withheld amounts to us” In layman’s terms it is the tax an employer takes out of an employees pay and pays to the ATO.

Winding up order

A court order for the winding up of a company. This is the first step in a court liquidation. Usually made after an application to court by a creditor.

Voluntary liquidation

A method of liquidating a company whereby directors and shareholders resolve to appoint a liquidator to wind up and finalise the affairs of a company.  Voluntary liquidations can be either a Creditors Voluntary Liquidation (for insolvent companies) or a Members Voluntary Liquidation (for solvent companies).

Voluntary Administrator

An external administrator appointed to carry out the voluntary administration of a company.

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.

Unsecured creditor

A creditor who does not hold a security over a company’s property.

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.

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.

Tangible asset

An asset with a physical form (e.g. stock or real estate).

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.

Secured creditor

A creditor who has a security (e.g. charge or mortgage) over some or all of a company’s property.

Restructuring

A process for the resuscitation of a financially distressed company. It is based on the assumption of a potentially viable business.

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, including the identities of the creditors and debtors.

Receivership

An insolvency procedure where a receiver, or receiver and manager, is appointed over some or all of the company’s assets.

Receiver and manager

A receiver who has, under the terms of their appointment, the power to manage the company’s affairs.

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.

Realise

Convert assets into cash, often by selling them.

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.

Proxy form

A prescribed form that must be completed by creditors or shareholders to appoint a proxy for a creditors’ or shareholders’ meeting.

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.

Provisional liquidator

A liquidator appointed by the court to preserve a company’s assets until a winding-up application is decided.

Provisional liquidation

The process whereby a Court appoints a liquidator to preserve a company’s assets until a winding-up application is decided.

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.

Priority Creditor

An unsecured creditor entitled to be paid ahead of other creditors (e.g. employees).

Priorities

The order set down by the Corporations Act 2001 for the payment of unsecured creditors of an insolvent company by an external administrator.

Prescribed provisions

Provisions that the Corporations Act 2001 takes to be included in a deed of company arrangement, unless the deed specifically excludes them.

Pooling

The practice of treating the affairs of a group of companies as if it were a single external administration.

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.

Person

A natural person or a company.

Official 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.  Sometimes referred to as a Court Liquidation.

Officer (of a company)

A director, secretary or external administrator (in most cases) of the company.

Members voluntary liquidation

A liquidation for solvent companies, initiated by the company.

Member (of a company)

A shareholder.

Liquidator

A natural person appointed to administer the liquidation of a company.

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 types of liquidation are: court liquidation, provisional liquidation, creditors’ voluntary liquidation and members’ voluntary liquidation.

Liability

A legal obligation to pay a person.

Insolvency Practitioners Association (IPA)

The Insolvency Practitioners Association is the leading professional organisation in Australia for external administrators and insolvency practitioners.

Intangible asset

An asset with no identifiable physical form (e.g. a contractual right, copyrights, patents and goodwill).

Insolvency

A financial situation whereby an individual or company is unable to pay all their debts when they fall due for payment.  It is a very complicated area of the law.  We have developed a quick test to check for insolvency at Is my company insolvent?

Insolvent

The legal definition is that a person or company is insolvent if they are unable to pay all their debts when they fall due for payment.  It is a very complicated area of the law.  We have developed a quick test to check for insolvency at Is my company insolvent?

Indemnity

An agreement between the external administrator and a third party to cover the fees and other debts incurred by the 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.

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.

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.

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.

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.

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.

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.

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.

Director

A person appointed as a director of a company is then responsible for directing and managing the affairs of a company. The definition of Director can also include a shadow director.

Deregistration

The process whereby ASIC strikes a company off the register of companies.  Deregistration occurs either on application of the company, if all debts are paid, or by the liquidator, after the liquidation process is complete.

Deed of Company Arrangement (DOCA)

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.

Deed administrator

The external administrator appointed to oversee a deed of company arrangement.

Declaration of indemnities relevant relationships and interests (DIRRI)

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.

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.

Debt restructuring

A process for the resuscitation of a financially distressed company that focuses primarily on reorganising the company’s debt burden rather than operational matters.

Debtor

A person who owes a debt.

Debt

An amount owed.

Debenture

A document acknowledging that a company undertakes to repay a sum of money lent to the company by the holder of the document.

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.

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.

Creditor

A person or company who is owed money

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. Sometimes referred to as an Official Liquidation.

Controller

A person appointed by a secured creditor to deal with assets subject to a charge. Includes a receiver, and a receiver and manager.

Contributory

A shareholder who may be liable to contribute towards a company’s debts in liquidation if their shares are not fully paid.

Contingent liability

A liability that might arise if a certain event occurs, for example, a current legal action against a company might result in a liability if the company loses the case.

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).

Compromise

Agree to accept a lesser sum in full payment of a debt.

Company liquidation

The process whereby a liquidator is appointed to wind up the affairs of a company

Company bankruptcy

A misnomer. Sometimes used to explain a situation whereby a company can not pay its debts as they fall due. The term “bankruptcy” actually refers to an individual person who has a Trustee appointed to manage their financial affairs. Companies in this situation have a “liquidator” appointed

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 3 months by the liquidator.

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 voluntary administrator must report to the committee when it reasonably requires.

CALDB

The Company Auditors and Liquidators Disciplinary Board which is the body that supervises and disciplines external administrators

Bankruptcy

An insolvency procedure that applies to a natural person, not to a company.

Asset

Any property of value owned by a company which can include tangible and intangible assets.

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