In today’s current economic climate it is important for everyone doing business to know the difference between a company in receivership, a company in administration and a company in liquidation.

A Company in Receivership

A company will go into receivership when a independent receiver is appointed by a secured creditor or, in rare circumstances, by the court, to take control of some or all of the company’s assets.

Commonly, receivers are appointed by secured creditors pursuant to the terms of a charge (e.g. a mortgage, fixed and floating charge over the company’s assets, etc).

The role of a receiver is to collect and sell enough of the charged assets to repay the debt owed to the secured creditor.

The difference between receivership and other forms of external administration is that the appointment of a receiver does not affect the legal existence of the company.  The directors of the relevant company still remain in office but their powers are limited depending upon the powers granted to the receiver and the extent of the assets over which the receiver is appointed.

A Company in Administration

A company will be placed in administration when the directors of the company form the opinion that the company is insolvent, or is likely to become insolvent.  An administrator, who is a person external to the company, is appointed to manage the company in the interim.  An administrator must be a registered liquidator. 

A voluntary administrator can be appointed in various ways:

1.            By the directors of the company;

2.            By a liquidator or provisional liquidator;

3.            By a secured creditor.

During the voluntary administration, an administrator will:

1.            Take control of the company’s assets;

2.            Investigate the company’s affairs;

3.            Report any offences to ASIC;

4.            Assist the directors to produce a Deed of Company Arrangement;

5.            Report to creditors on the best course of action which will provide the most lucritvate outcome for the creditors;

6.            Call the requisite meetings of creditors in order to decide whether or not the company should be wound up and placed in liquidation or continue to trade.

During an administration creditors have 3 options moving forward:

1.            Accept a proposal for a Deed of Company Arrangement;

2.            End the voluntary administration and pass control of the company back to the company directors;

3.            Liquidate the company.

A Company in Liquidation

Liquidation involves the process of winding up a company’s financial affairs in order to dismantle the company’s structure, undertake appropriate investigations and fairly distribute the company’s assets to its creditors.

Liquidation of a company will occur when:

1.            The company was unable to pay all of its debts when they became due (namely the company was insolvent)

2.            The company members wanted to end the company’s existence.

A company can be wound up by either a resolution of its members at an appropriate meeting or by the court, usually on the application of one or more creditors of the company.

Once a company is placed into liquidation, a liquidator is appointed.  The role of a liquidator is to:

1.            Find and protect the assets of the company;

2.            Realise the assets of the company;

3.            Investigate the financial affairs of the company;

4.            Make appropriate reports ASIC and creditors;

5.            Distribute funds to creditors;

6.            Distribute funds to shareholders, only if a surplus of funds exists after all creditors have been satisfied; and

7.            Ultimately deregister the company.

If your company is experiencing financial difficulty, one of the three above options may be appropriate for your company.  Ferguson Cannon Lawyers can provide you specialist advice on how best to move forward.

Alternatively, if you are owed money by a company that is or is likely to be placed into administration, receivership or liquidation, Ferguson Cannon Lawyers can advise you as to how to best extract the money owed to you by that company.

 The days of low vacancy rates and high rents are well and truly over. As a consequence lease incentives are increasing in regularity as landlords compete for tenants.

 It is important to ensure that any incentive is worded correctly so that it has the effect the parties intent and does not lead to a dispute. Further, there can be large differences in the way that different types of incentives are treated for tax purposes. Tenants and Landlords should discuss incentives with their accountants to make sure they are getting their money’s worth by structuring the incentive in the most tax effective way.

Incentives can take many forms. Some of the most common ones are:

1.  Rent Abatements

A rent free or rent reduced rent period is probably the most common incentive. It is important to consider what is being offered in negotiations. Usually other payments such as outgoings or promotion funds are still required during this period however if it is not clear a dispute can arise.

Rent abatements are effectively tax free. The disadvantage of rent abatements is that the tenant can be required to take the incentive over a number of months or years. A tenant often needs an injection of cash at the lease commencement to help with the costs of its fit out. It may be that the tenant is better off requesting a lump sum payment for cash flow reasons.

 2.  Lump Sum Payments

It is not uncommon for a landlord to give the tenant a cash incentive to enter into the lease. A carefully worded clause in the lease is essential to deal with issues such as what must the cash be used for, when must it be used, how will it be paid, if used for fit out who owns that fit out, when if at all is the incentive refundable, what happens if the tents breaches the lease. GST is also an important factor to be considered.

Courts have previously held that cash incentives are generally treated as income in the tenant’s hands and are liable to income tax. This may erode the benefit of the incentive. For example, if a corporate tenant is paid $100,000 as a lump sum incentive, based on the current company tax rate of 30%, the value of the incentive would be eroded to $70,000.

 3.  Free Fit Outs

Another popular form of incentive is a free fit out. Again the lease needs to deal with ownership, maintenance and replacement. The tax treatment of this type of incentive will depend on who owns the fit out.

For example, a free fit out which is owned by the landlord is generally tax free for the tenant. In many instances this is a popular type of incentive for landlords as it may enable the landlord to claim depreciation in relation to plant and equipment forming part of the fit out. The tenant will need specialist advice about the situation if the tenant has an obligation to remove the fit out at the end of the lease term.

 A free fit out which is owned by the tenant or the tenant has the right to remove may be assessable to the tenant, however it may be open to the tenant to claim a deduction for depreciation.

 The tax implications for this type of incentive usually comes down to the exact wording of the clause so these types of provisions in leases often need to be carefully crafted to ensure that they reflect the agreed position on which party is to bear any tax liability.

Conclusion

Whether you are a landlord or tenant, the next time you are negotiating a lease incentive, seek expert advice from Ferguson Cannon Lawyers about the wording of the lease. There is no sense in negotiating a good incentive only to see that good work wasted due to poor drafting. It is also vital to obtain expert taxation advice about how an incentive will affect your situation. As well as income tax issues, there may be capital gains tax and GST issues associated with lease incentives.