There are three common corporate insolvency procedures.
A company can go into voluntary administration, liquidation and receivership.
Where do shareholders rank in an insolvency?
Shareholders rank behind debt holders and other parties to whom the company owes money in the event of an insolvency.
According to the Australian Securities and Investments Commission (ASIC), this means shareholders are “unlikely to receive any dividend in an insolvent liquidation”.
This is the reason why being a shareholder carries a higher risk than holding debt securities such as bonds, because in the event of the company being wound up you are the very last in line to be paid.
What is voluntary administration?
Usually voluntary administration comes about when directors of a company decide that it is insolvent or likely to become insolvent and appoint an external, independent person to take full control of the business.
The external administrator’s job is to investigate the company’s affairs, to report to creditors and to form a recommendation on whether the company should form a deed of company arrangement, which is a binding agreement between a company and its creditors to try and sort out a restructure to allow all or part of the business to go on.
The other options available and which the administrator must give an opinion on are:
- To end the voluntary administration if it is found that in fact the company is not insolvent, in which case the company gets handed back to directors; or
- To wind up the company and appoint a liquidator.
What is a liquidation?
In the case of a liquidation, the liquidator will sell the company assets and operations and distribute the proceeds to creditors.
First the receivers, administrators and liquidators take their fees, then secured creditors get paid – these are creditors to whom the company provided some collateral in exchange for money. An example is a mortgage where the property itself is held as collateral over the loan.
Employee entitlements such as outstanding wages and superannuation are considered priority claims which are paid before unsecured creditors and, depending on the kind of asset being sold, some secured creditors.
Any money left over then goes to unsecured creditors. An example of an unsecured creditor might be a supplier which had issued an invoice for services but was yet to be paid.
Shareholders sit below all of these.
What is a receiver?
A receiver is appointed by a secured creditor. Their role is to collect and sell enough company assets to repay the debt owed to the secured creditor which has appointed them.
Where can shareholders get information?
None of the above parties has any obligation to shareholders. The administrator is not required to report to shareholders on the progress or outcome of the administration and shareholders don’t get to vote on the future of the company.
Shareholders who are seeking information, however, can go onto the administrator’s website and typically look at the creditor’s reports there.
When can you write off your shareholding as a capital loss?
A capital loss is the loss that’s incurred when an investment decreases in value. While it cannot be claimed against your income, you can use a capital loss to reduce a capital gain in the same financial year.
If your capital losses exceed your capital gains, you can carry the loss forward and deduct it against capital gains in future years.
As a shareholder of an insolvent company, ASIC says you can realise a capital loss if:
- A liquidator or administrator makes a written declaration that they have reasonable grounds to believe there is no likelihood of shareholders receiving any distribution in the course of the company being wound up; or
- No declaration is made, then the deregistration of a company at the end of the liquidation also allows shareholders to realise a capital loss.