When insolvency strikes: How to save a good business from the corporate wreckage

  • There are a number of ways directors can approach saving the business in the event of insolvency.
  • The 'official' way under the Corporations Act is a 'DOCA' which involves the company entering voluntary administration.
  • However, other options exist which can include a 'pre-pack' sale or licence arrangement.

Wrecking ball

When a company becomes insolvent, the immediate question that is often asked is whether the business can be saved. The answer to that question most often is yes, but the more important question is whether the business should be saved.

If the company has failed because its business has ceased to be (or never was) relevant to the needs of the market, then the business should not and cannot be saved.

On the other hand, if the company’s failure is for other reasons, and the business remains profitable or (with some changes) can be made profitable, then there are a number of ways directors can approach saving the business.

‘DOCA’: The official way

Part 5.3A of the Corporations Act 2001 (Corporations Act) contains the ‘official’ process for saving an insolvent company with a good business.

In the words of the Act: ‘[t]he object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence.’

The way the company is saved is through a deed of company arrangement (DOCA) which is a ‘deal’ between the company and its creditors. This deal typically involves creditors accepting a reduced payment in full and final settlement of their debts. It requires the approval of a majority of creditors in value and in number.

The process leading up to a DOCA is known as voluntary administration. It is commenced by the directors resolving that the company is insolvent, or likely to become insolvent, and appointing one or more registered insolvency practitioners who have signed a consent to act as administrators of the company. This vests management and control of the company in the administrators immediately and for the duration of the administration.

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