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Issues of insolvency
(external administration)
Corporate Law: Law principles and practice
Issues of insolvency (external administration)
A company may seek external or outside administration
for various reasons. For example:
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The company may need restructuring.
The directors may fear that the company is insolvent
and they will be liable if they allow the company to
keep trading.
The creditors may force the company into external
administration.
Corporate Law: Law principles and practice
General insolvency issues
The directors of a company may enter into voluntary
administration when the company appears to have no
prospect of paying its creditors and is insolvent.
Directors will be personally liable if they allow the
company to continue trading without a reasonable belief
that the company can repay its debts and obligations
(Corporations Act 2001 (Cth) s 588G).
Corporate Law: Law principles and practice
Companies in distress
If a company cannot pay its creditors (e.g. the tax office,
suppliers and employees) it is considered to be in distress.
Creditors can force an involuntary administration by
appointing a qualified liquidator.
If an external administrator is appointed under
administration procedures, then a moratorium period
occurs and creditors must await an orderly distribution of
assets.
Corporate Law: Law principles and practice
Corporations Amendment (Insolvency) Act 2007 (Cth)
This Act was designed to:
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improve returns to creditors
introduce greater regulation of insolvency
professionals
deter improper company conduct
introduce changes to the voluntary administration
system.
Corporate Law: Law principles and practice
Signs of insolvency
ASIC suggests the following signs that a company might
be nearing insolvency:
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ongoing losses
poor cash flow
the absence of a business plan
incomplete financial records or disorganised internal
accounting procedures
lack of cash-flow forecasts and other budgets
increasing debt (liabilities are greater than assets)
problems selling stock or collecting debts
unrecoverable loans have been made to associated
parties
creditors are unpaid outside usual terms
Corporate Law: Law principles and practice
The creditors of the company
Any party who is owed money by a company is a creditor
(e.g. employees, the ATO, suppliers).
Secured creditors: creditors who, in supplying credit,
have received some official claim over the assets of the
company in a documented form, which allows those
creditors to seize assets under a contractual right.
Secured creditors are paid before unsecured creditors.
Corporate Law: Law principles and practice
How does a company come to an end?
Compulsory wind-up
A company may be wound up by court order:
• because it breached some order or law
• because it is no longer trading
• because it has not commenced business
• because it has no members
• for any reason that is just and equitable to wind up the
company (Corporations Act 2001 (Cth) s 461).
A company is normally wound up because of a compulsory
order (e.g. a creditor has not been paid).
A creditor, a contributory, a director and ASIC must have leave
from court to apply for a winding up, but must demonstrate
that the company is insolvent to receive an order (s 459P(3)).
Corporate Law: Law principles and practice
Compulsory wind-up cont …
The parties that can apply for a compulsory winding up
under pt 5.4 of the Corporations Act 2001 (Cth) include:
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the company itself
any creditor with an enforceable claim against the
company
a contributory, defined in s 9 as a member of the
company who has fully paid up shares or may be liable
to contribute in the event of the winding up
a director of the company
a liquidator
ASIC
a prescribed body, such as a regulatory body as per the
regulations.
Corporate Law: Law principles and practice
Compulsory wind-up cont …
Winding up by a court commences on the day the order
was made (Corporations Act 2001 (Cth) s 513A).
A liquidator can be appointed (s 472). The liquidator must
be officially registered and consent to the appointment.
The winding-up order binds all unsecured creditors and
contributories (s 471(1)) and suspends any court actions
or enforcement processes against the company (unless a
court decides otherwise (s 471B)).
Secured creditors can seize property over which they have
a charge or mortgage (s 471C).
Corporate Law: Law principles and practice
Compulsory wind-up cont …
A court can order a stay to a wind-up and return control to the
company before a company deregistration (Corporations Act
2001 (Cth) s 482).
A company remains a legal entity while being wound up (s
493(1)) and can still operate its business, subject to the
liquidator’s recommendations about disposal of property (s
477).
Any improper disposal of property by the company is void (s
468).
A company must state that it is in liquidation on its
public documents and negotiable instruments (s 541).
Corporate Law: Law principles and practice
Compulsory wind-up cont …
There is a (rebuttable) presumption of insolvency under
an application for compulsory winding up (Corporations
Act 2001 (Cth) s 459C(1)):
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when seeking an order under oppression (s 234)
where a named party under s 459P can apply for a
wind-up under s 459A (a creditor, a contributory, a
director, a liquidator, a shareholder and ASIC)
under the grounds stated in s 461 and s 462(2) by
various parties (ASIC, creditors and liquidators)
as a result of an investigation by ASIC (s 464).
Corporate Law: Law principles and practice
Compulsory wind-up cont …
Under s 459C(2) of the Corporations Act 2001 (Cth), a
court must presume that the company is insolvent if
during or after the three months ending on the day when
the application was made:
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the company fails to meet a statutory demand (s 459F);
or
an order or decree (etc) from the court is returned
wholly or partially unsatisfied; or
a receiver is appointed; or
an order has been made to appoint a receiver; or
a person enters into possession or assumes control of
property.
Corporate Law: Law principles and practice
Voluntary wind-up
The members may undertake the wind-up because they want a
return of capital, or the company cannot continue to trade
profitably.
Members can commence the wind-up without a court order,
but with a special resolution (Corporations Act 2001 (Cth) s
491).
There must be a meeting of creditors within 24 hours (s 497).
A statement of the company’s affairs must be made and lodged
with ASIC (s 497(5)).
The directors must declare that the company is solvent and can
pay its debts in the next 12 months before proceeding (s
494(1)) or they will be personally liable.
Corporate Law: Law principles and practice
Voluntary wind-up cont …
Under s 601AA of the Corporations Act 2001 (Cth), an
application to deregister can be lodged with ASIC by the
company, director, member or liquidator if:
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all members agree
the company is not carrying on business
the company’s assets are worth less than $1000
the company has no outstanding liabilities
there is no other party to any legal proceedings.
Corporate Law: Law principles and practice
Voluntary wind up cont …
If a liquidator is appointed in a voluntary winding up and
forms an opinion that the company is unable to pay its
debs within 12 months, then the winding up proceeds as a
creditor’s winding up (Corporations Act 2001 (Cth) s
496(1)).
If a company fails to meet a creditor’s statutory demand,
the creditors can determine that the company is insolvent
and wind it up.
The directors of a company may declare the company is
unable to meet its debts (on reasonable grounds) and
should be wound up.
Corporate Law: Law principles and practice
Voluntary wind-up cont …
The directors must call a meeting of members and put a
special resolution that the company should be wound up,
and then appoint a liquidator.
A meeting of creditors must be convened and sufficient
information given so they can determine what to do.
The creditors can accept the liquidator appointed, or
appoint their own (Corporations Act 2001 (Cth) s 499).
Corporate Law: Law principles and practice
Insolvency
A company is deemed to be insolvent when it is unable to
pay its debts as they fall due (Corporations Act 2001 (Cth) s
95A).
The deeming of insolvency on a company is usually
triggered when a company cannot meet a demand made by a
creditor requiring a payment that the company cannot make.
This is determined by cash flow.
Bell Group Ltd (in liq) v Westpac Banking Corporation (No
9) (2008) 70 ACSR 1
Insolvency must be judged both by current debts and
prospective claims.
Corporate Law: Law principles and practice
Insolvency cont …
A company may be determined to have been insolvent in
the past if, under s 588E of the Corporations Act 2001
(Cth):
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the company has been found, or could be presumed to
be, insolvent at some point in time in the previous 12
months to the winding up in a ‘relation back’
the company has not kept appropriate financial records
as per s 286(1), unless the company can show that its
records were deliberately destroyed, removed or
concealed by another party (s 588E(6))
the company was found to be insolvent under separate
recovery proceedings, it will be presumed to be
insolvent under current proceedings.
Corporate Law: Law principles and practice
Insolvency cont …
Directors must make a solvency declaration in the annual
financial reports.
Failure to make a declaration indicates a presumption of
insolvency (Corporations Act 2001 (Cth) s 459C).
Corporate Law: Law principles and practice
The statutory demand
If a creditor claims that a company is insolvent they
must serve a statutory demand on the company
(Corporations Act 2001 (Cth) s 459E), specifying the
amount of the debts, which must be a minimum of
$2000.
The demand must be in writing in a prescribed form,
signed and attached to an affidavit with the requirement
that payment be made within 21 days (s 459E).
Corporate Law: Law principles and practice
The statutory demand cont …
The creditor making the demand must prove certain
conditions before proceeding to court:
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that the creditor has the right on receipt of payment to
validly discharge the debt
that the debt must be absolutely due and presently
payable so that the creditor legally (without doubt) is
entitled to claim immediate payment
that the debt must have existed when the statutory
demand was served on the company (Corporations Act
2001 (Cth) s 459G).
Corporate Law: Law principles and practice
The statutory demand cont …
A court must consider if there is a genuine dispute or if
there is an issue of an offsetting claim (Corporations Act
2001 (Cth) s 459H).
A court may set aside the statutory demand on various
grounds (s 459G–N) (e.g. if there is a defect in the
demand, if it would result in injustice, or if the demand
likely to be dismissed).
Corporate Law: Law principles and practice
The winding-up process in court
Under s 459Q of the Corporations Act 2001 (Cth), if an
application for a company to be wound up in insolvency
relies on a failure by the company to comply with a
statutory demand, the application:
(a) must set out particulars of service of the demand on
the company and of the failure to comply with the
demand; and
(b) must have attached to it:
(i) a copy of the demand; and
(ii) if the demand has been varied by an order
under subsection 459H(4)—a copy of the order;
and
Corporate Law: Law principles and practice
The winding-up process in court cont …
(c) unless the debt, or each of the debts, to which the
demand relates relates is a judgment debt—must be
accompanied by an affidavit that:
(i) verifies that the debt, or the total of the amounts
of the debts, is due and payable by the company;
and
(ii) complies with the rules.
Corporate Law: Law principles and practice
The winding-up process in court cont …
A defect or irregularity in an application will not lead to
its dismissal, unless it would result in a substantial
injustice that cannot be remedied.
Any such application must be served within 14 days of the
winding-up order. A court can use its discretion not to
make a winding-up order (Corporations Act 2001 (Cth) ss
459A, 467).
A court can make any type of order it sees fit (s 467(1)).
Corporate Law: Law principles and practice
The winding-up process in court cont …
A court should make a determination as to whether the
winding up should take place within six months of an
application (Corporations Act 2001 (Cth) s 459R).
Normally, any application after that time will be dismissed
(s 459R(3)).
If a company fails to comply with the statutory demand, it
can only object to the application on the grounds that the
company is solvent (s 459S(2)).
Corporate Law: Law principles and practice
External administration
External administration refers to the situation whereby a
suitably qualified outsider takes control of a company in
order to assess (and possibly resolve) its financial
difficulties.
A company may go into administration on a voluntary
basis because the directors believe the company is
insolvent, the members resolve to do this or creditors
force the administration.
Corporate Law: Law principles and practice
External administration cont …
A company may be wound up or enter a deed of
arrangement with the creditors to keep the company
going (e.g. through a compromise or arrangement with the
creditors, or by reorganising the company in some way).
The person organising any deed (such as a receiver,
voluntary administrator or liquidator) as an external
administrator needs to be registered, qualified and
experienced (Corporations Act 2001 (Cth) s 1282).
Corporate Law: Law principles and practice
The process of voluntary administration
If the directors of a company believe a company is
insolvent, or have reasonable grounds to believe that it is
likely to become insolvent (s 436A(1)), they must call a
meeting and appoint an administrator, or they are in
danger of breaching their directors’ duties by allowing a
company to trade while insolvent (Corporations Act 2001
(Cth) s 588G).
An administrator may be appointed by a liquidator or
provisional liquidator (s 436B), or a chargee (s 436C).
Directors can appoint an administrator without the
approval of shareholders, creditors or needing to attend
court to receive permission (s 436A(1)).
Corporate Law: Law principles and practice
The process of voluntary administration cont …
The appointment of an administrator means that an external
party assesses the company.
The object of external administration is to, if possible,
maximise the chances of continuing the business
(Corporations Act 2001 (Cth) s 435A).
Voluntary administration allows for negotiation and
assessment with a minimum of formal hearings in court and
creditors’ meetings.
Administration commences with the appointment of a
registered administrator, who must consent to their
appointment and not be linked to the company (s 436A–C).
Corporate Law: Law principles and practice
The moratorium period
Once voluntary administration is entered into, any legal
action by creditors is stayed under a moratorium of up to a
month until approval is given by the administrator or a
court (Corporations Act 2001 (Cth) s 440D).
The secured creditors cannot press any claim until they
receive permission from the court or the administrator (ss
440A–J).
Corporate Law: Law principles and practice
Administrators’ advice to the creditors
The purpose of the administrator is to determine what is in
the best interests of the creditors (and all parties involved)
and to advise as to how best to achieve this (Corporations
Act 2001 (Cth) s 435A).
The administrator must investigate the affairs of the
company.
The administrator then recommends whether the company
should continue trading, enter a deed or arrangement or if
liquidation should take place (s 438A(b)).
Corporate Law: Law principles and practice
The first meeting of creditors
Once the administrator is appointed, they must lodge
certain notices with ASIC (e.g. a statement of the
company’s affairs to be put to the first creditors’ meeting
(Corporations Act 2001 (Cth) s 497(5)).
All company documentation must state that the company
is under administration.
The administrator calls a meeting of creditors to
determine the company’s future (there are strict time
limits in which they must do this).
The creditors of the company have the right to appoint a
committee of creditors (s 436E).
Corporate Law: Law principles and practice
The first meeting of creditors cont …
The administrator takes control of the company and
manages its property (Corporations Act 2001 (Cth) ss
437A and 437B).
The administrator has wide powers to do such things as
remove directors, sell property and whatever is necessary
to run the company business.
Directors must report on the company’s business to the
administrator.
The powers of directors are suspended during the period
of administration.
Corporate Law: Law principles and practice
The second meeting of creditors
The administrator must, before the second meeting of
creditors, investigate the affairs of the company
(Corporations Act 2001 (Cth) s 438A(a)) and form an
opinion on what should be done with the company (s
438A(b)).
The administrator then advises the creditors at a meeting,
having given appropriate notice of the meeting to the
creditors (s 439A(4)(a)).
Corporate Law: Law principles and practice
The second meeting of creditors cont …
At the second meeting of creditors, the creditors can
discuss what the administrator has proposed and then vote
on one of the options under s 439C of the Corporations
Act 2001 (Cth):
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that the company execute a deed of arrangement
that the administration should end
that the company be wound up.
Corporate Law: Law principles and practice
The second meeting of creditors cont …
A deed of arrangement may be entered into. This provides
a fixed period for the company to trade out its difficulties.
The administrator must inform ASIC of any offences
committed by officers within the company (Corporations
Act 2001 (Cth) s 438).
Administration ends with the winding up of the company.
Corporate Law: Law principles and practice
Liabilities of an administrator
The administrator:
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is personally liable for debts incurred in the course of the
administration for services rendered, goods bought or
property leased (Corporations Act 2001 (Cth) ss
443A(1), 443B); and
is entitled to an indemnity out of the company’s property
for these debts and their remuneration (ss 443D,
449E(1))
has a professional responsibility to use their judgement
and may liable for negligence if they do not undertake
their responsibilities appropriately
has a right to be paid for their work
has a responsibility to ensure taxation is paid on behalf
of the company and its employees.
Corporate Law: Law principles and practice
The role of the court
The court has a supervisory role in voluntary
administration.
Australasian Memory Pty Ltd v Brien (2000) 200 CLR
270
Corporate Law: Law principles and practice
Receivership
A receiver is appointed by the secured creditors to take
control of company property in order to pay out those
secured creditors; this is a form of external administration.
The right to appoint a receiver is created by a contractual
arrangement made by the creditor as part of providing
credit or lending to the company.
A default in the loan means a creditor invokes a
contractual right to enforce their claim over company
property, or to appoint a receiver to act on their behalf.
Corporate Law: Law principles and practice
Receivership cont …
A receiver can be appointed under contract and without the
need to go to court.
A receiver who is privately appointed must act within the
bounds of the contract of appointment, though they act in the
interests of the creditor.
A receiver may become a ‘controller’ of the company so that
they control the assets of the company or, in fact, manage the
company.
A receiver may go on to become the liquidator of the
company. The receiver (or liquidator) is an officer of the
company and takes the requisite duties and liabilities attached
to this.
Corporate Law: Law principles and practice
Receivership cont …
When acting for debenture holders under a floating
charge, the receiver must first pay any insurance monies
owing (Corporations Act 2001 (Cth) ss 433(3), 562), then
auditor’s fees, and then wages and leave entitlements up
to $2000.
Corporate Law: Law principles and practice
Appointing a receiver
A court can appoint a receiver at the request of creditors
and lenders who do not have the power to privately
appoint a receiver.
A court-appointed receiver is an officer of the court (not
of the company) and is responsible to the court
(Corporations Act 2001 (Cth) s 1323). The court must
supervise the receiver (s 423).
The court-appointed receiver must consider the competing
claims of creditors and determine who has priority, the
ultimate distribution being made by the court
Corporate Law: Law principles and practice
Appointing a receiver cont …
Once a receiver is appointed:
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notice must be placed in the Government Gazette
ASIC and the ATO must be informed.
The receiver:
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can be a receiver manager and must be a registered
liquidator
must not be associated with the company as an officer
of creditor.
The directors no longer manage the company (though they
remain as a board).
Corporate Law: Law principles and practice
Receivership
Receivership does not impose a moratorium on creditors.
Secured creditors will take priority, though some
unsecured creditors (e.g. employees and superannuants
can still claim.
Receivership may end with the appointment of a
liquidator.
The liquidator, if appointed, looks after the interests of all
creditors, not just the secured creditors.
Corporate Law: Law principles and practice
The receiver’s powers and duties
The receiver has a common law duty to act in good faith
(Downsview Nominees Ltd v First City Corp Ltd (1993)
11 ACLC 3101) and to take reasonable steps to determine
appropriate value and to advertise for prospective buyers
(Pendlebury v Colonial Mutual Life Assurance Society Ltd
(1912) 13 CLR 676).
Corporate Law: Law principles and practice
The receiver’s powers and duties cont …
The receiver, once appointed, must act in good faith under
statute and their power of appointment; a receiver can
seek directions from a court if unsure of what they need to
do.
A receiver appointed by a court is an officer of the court,
while a receiver appointed by secured creditors is an
officer of the company.
Corporate Law: Law principles and practice
The receiver’s powers and duties …
The duties and liabilities of company receivers are
prescribed in s 420A of the Corporations Act 2001 (Cth),
which sets out some 23 different powers available to a
receiver.
A receiver can ask for further information from officers.
The receiver must lodge a copy of their report with ASIC.
A receiver must report any offences or negligence to ASIC
(s 422).
Corporate Law: Law principles and practice
The receiver’s powers and duties cont …
The administrative duties of a receiver include:
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opening a bank account and keeping accounting
records Corporations Act 2001 (Cth) s 421)
notifying the company of their appointment (s 429(2))
preparing a report about the company’s affairs (s
421A) within two months of their appointment
ascertaining the priority of payment of debts (s 433)
determining their own costs, expenses and fees (s 425)
providing notification of their appointment (s 429(2)).
Corporate Law: Law principles and practice
Liability of receivers
Under s 419(1) of the Corporations Act 2001 (Cth), a
receiver (acting as agent for the parties appointing them)
who takes possession or assumes control of property to
enforce a charge is not personally liable for debts incurred
in the course of the receivership (s 419(1)).
Corporate Law: Law principles and practice
Termination
If the company is terminated and the creditors paid out,
the receiver’s role is finished.
A court can end the receivership if there is misconduct or
if a liquidator applies to have them removed.
Corporate Law: Law principles and practice
Receiver managers
A receiver has the role of taking possession of the
company’s assets so that they can be sold off and creditors
paid out. A receiver merely receives the rents or income
and pays the outgoings, but does not manage the
company.
A receiver manager is specifically appointed with powers
of management under a private deed or contract. If a
receiver manager is appointed by a court, they are an
officer of the company and report back to the court, rather
than creditors (Corporations Act 2001 (Cth) s 90).
Corporate Law: Law principles and practice
Liquidators
A liquidator may be appointed to locate and take
possession of company assets, and to protect them for the
creditors.
Under s 477(1)(a) of the Corporations Act 2001 (Cth), a
liquidator may carry on the business for the beneficial
disposal or winding up of the business.
A liquidator may come to an arrangement with the
creditors, but generally they liquidate the assets and pay
out competing claims of creditors according to law (s
477).
Corporate Law: Law principles and practice
Qualifications of a liquidator
A liquidator must have certain qualifications to be
appointed. A court-appointed liquidator must be registered
as an official liquidator with ASIC in addition to simply
registering as a liquidator.
The liquidator must be a natural person, with the
appropriate accounting qualifications necessary to register
as a liquidator with ASIC (Corporations Act 2001 (Cth) s
1282(3)), and not be associated as an officer or creditor of
the company.
Corporate Law: Law principles and practice
Disqualifying a liquidator
Certain persons will be disqualified from being appointed
a liquidator, particularly those persons who are not
independent of the company.
Section 532(2) of the Corporations Act 2001 (Cth) lists
persons who cannot be appointed, including any person
owing the company more than $5000 or a creditor who is
owed more than $5000.
Other disqualified persons include insolvent persons,
officers and auditors of the company (since they lack
independence) and officers who have been prohibited
from managing a company (ss 206B, 206E).
Corporate Law: Law principles and practice
Duties of a liquidator
A liquidator is an officer and a fiduciary within the
company in carrying out their role of gathering assets,
indentifying liabilities and fulfilling statutory duties,
which are in addition to those of an officer (Corporations
Act 2001 (Cth) ss 179–184).
A liquidator must gather in the assets, maintaining assets
in a saleable form, selling off the assets and then paying
out the creditors (s 478(1)).
A liquidator uses their own discretion in administering
and distributing company property (s 479).
Corporate Law: Law principles and practice
Duties of a liquidator cont …
A liquidator has:
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extensive general powers (Corporations Act 2001
(Cth) s 477)
11 particular powers (listed in s 477(2))
certain delegated powers of the court (e.g. to hold
meetings, to determine the wishes of creditors, to
exercise power over the property, books and monies (s
530A–C)
powers to access company books and obtain
information from officers and employees (ss 477(3),
483(1), 530A).
Corporate Law: Law principles and practice
Duties of a liquidator cont …
The liquidator must assess the company and prepare
various reports on it (Corporations Act 2001 (Cth) s 476),
and within two months of receiving a statement of the
affairs from the directors and secretary (s 475), prepare a
preliminary report as to the company’s position.
The liquidator must call a meeting of creditors, if
requested, to form a committee of creditors (s 548) and
then call a final meeting when the company’s affairs are
fully wound up (s 509).
Corporate Law: Law principles and practice
Duties of a liquidator cont …
For a deregistered company, the liquidator must report to
ASIC:
• any offence (e.g. negligence, taking of company
money, breach of directors’ duties) within six months
of its occurrence
• when the company is unable to pay its unsecured
creditors more than 50 cents in the dollar
(Corporations Act 2001 (Cth)s 533)
The liquidator must lodge with ASIC every six months
accounts in a prescribed form (Form 524), with a
statement in writing that sets out receipts and payments,
an aggregate amount, and statement of what has been
done by the liquidator and amounts received from
property disposed of (s 539(1)).
Corporate Law: Law principles and practice
Duties of a liquidator cont …
The liquidator produces Form 524, which sets out:
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the particulars of ‘dividends’ to secured and unsecured
creditors for the six-month period
payments made to preferred creditors
particulars of the rate per share on the return of assets
in specie and/or cash to contributories
an assessment of the current progress of the winding
up.
Corporate Law: Law principles and practice
Duties of a liquidator cont …
The liquidator will give notice to every creditor and
contributory that the account has been made up when they
next forward any report or notice of meeting, or notice of
call or dividend (Corporations Act 2001 (Cth) s 539(5)).
ASIC is given powers to have the Form 524 information
audited by a registered company auditor (s 539(2)).
The liquidator must give the auditor such books and
information as they require (s 539(3)) and the liquidator is
entitled to copy of that report given to ASIC (s 539(4)(a)).
Corporate Law: Law principles and practice
Alternatives to winding up
The deed of company arrangement
The administrator of a company may recommend to the
creditors that instead of winding up the company that it
enter a compromise or arrangement with its creditors
(Corporations Act 2001 (Cth) ss 411–12), reconstruction,
or merger with one or more companies (ss 413–14).
The administrator is essentially putting a proposal that the
company can keep trading and work through its financial
problems.
Corporate Law: Law principles and practice
The deed of company arrangement cont …
The administrator of the company is to be the
administrator of the deed, unless the creditors appoint
someone else to be administrator of the deed
(Corporations Act 2001 (Cth) s 444A(2)).
The administrator of the company must prepare an
instrument setting out the terms of the deed (s 444A(3)).
Corporate Law: Law principles and practice
The deed of administration
The deed will set out all the conditions of the
administration (i.e. the start of administration, to what
extent the company is released from its debts, the order in
which the company will be released from its debts).
The deed will bind the company, the members, its officers,
its creditors and the administrator (Corporations Act 2001
(Cth) s 444D), although the deed does not prevent a
secured creditor from pursuing their claims, unless that
creditor voted in favour of the deed.
The deed will be binding on all creditors, which includes
all creditors to the company and not just those whose
debts were payable under the deed (s 444A(4)(i)).
Corporate Law: Law principles and practice
The scheme of company arrangement
A scheme of company arrangement (SCA) is similar, to a
certain extent, to a deed of company arrangement made
between the creditors and the company. A company may
initiate an SCA when it fears that it is facing insolvency
unless the company is somehow revamped.
A solvent company may use an SCA to facilitate a merger
or restructure of itself; this could be in place of using
takeover provisions (Corporations Act 2001 (Cth) s 625).
An SCA tends to be used less by insolvent companies
because it involves complex steps of procedure by a court
for a scheme to be approved.
Corporate Law: Law principles and practice
The scheme of company arrangement cont …
An SCA is designed as a plan to save the company, which may
include a restructure, merger or compromise with creditors.
A scheme operates through s 411 of the Corporations Act 2001
(Cth).
A party applies to a court for an order that a meeting be held
for creditors to consider the scheme.
Proper notice and information must be given.
An explanatory statement must be given to the creditors (s
412).
The scheme must be voted on and approved by 50% of
creditors who hold 75% of the debts; the vote does not have to
be unanimous.
Corporate Law: Law principles and practice
The scheme of company arrangement cont …
A court has wide powers to make orders as they see fit
(Corporations Act 2001 (Cth) s 413).
The wide powers of the court overcome difficulties if a
company constitution prevents changes, or a small
number of dissenting members or creditors prevent the
adoption of a scheme.
A court essentially supervises the process and if it is
satisfied that there is no discrimination, oppression or
illegal behaviour, it will approve the scheme.
Corporate Law: Law principles and practice
Priority of debts
A secured creditor has priority over other creditors and
does not need to prove the debt when a company is being
wound up, but can seize and sell secured assets.
Some unsecured creditors, such as employees, will be
paid in preference to other creditors (Corporations Act
2001 (Cth) s 433(3)(a)).
If a creditor is not a secured creditor, they must prove
their debt against the company in the event of a winding
up (s 553).
The order for repayment (of a dividend) is set out in ss
556–64.
Corporate Law: Law principles and practice
Priority of debts cont …
Essentially, the liquidator will pay in the following order:
•
•
•
•
•
insurance monies owing (Corporations Act 2001 (Cth)
ss 433(3), 562)
administration expenses (liquidators, administrators
and auditors)—in order to preserve, realise or get in
the property of the company
wages and leave entitlements up to $2000—
employees’ entitlements are protected under pt 5.8A
in a compulsory winding up, the legal costs of the
applicant in obtaining the winding up order (s
556(1)(b))
unsecured creditors.
Corporate Law: Law principles and practice
Priority of debts cont …
Employees are protected under s 596AA(1) of the
Corporations Act 2001 (Cth), under which it is an offence
to enter an agreement or transaction with the intention of
reducing or defeating recovery of those entitlements (see
also s 596AB(1)).
Entitlements are broadly defined under s 596AA(2) and
include wages, superannuation, compensation and leave
payments. A liquidator can bring a compensation claim
under s 566 since employees have a preferential debt.
Corporate Law: Law principles and practice
Pooling orders
A liquidator can make a determination (a ‘pooling
determination’) that a group of companies is a ‘pooled
group’.
The group becomes jointly and severally liable for each
company’s debts and have their claims against each other
extinguished (Corporations Act 2001 (Cth) ss 571(2)–
(11)).
Corporate Law: Law principles and practice
Voidable transactions
An external administrator has a duty to investigate
transactions that were made prior to their appointment
(antecedent transactions), which appear to have given
some creditors preferential treatment to the disadvantage
of other creditors (Corporations Act 2001 (Cth) pt 5.7B
div 2).
This process is referred to as ‘relation back’ or tracking of
transactions prior to the appointment of the administrator.
Corporate Law: Law principles and practice
Voidable transactions cont …
Improper transactions include:
•
•
•
undue preferences—the insolvent debtor has given
money or property to one creditor in preference to
other creditors who should have been paid first
(Corporations Act 2001 (Cth) s 588FA); these are void
against the liquidator if they were made six months
before the bankruptcy occurred (s 565)
payment of invalid floating charges
uncommercial transactions—that is, selling property
for less than what it is worth (s 588FB)
Corporate Law: Law principles and practice
Improper transactions cont …
•
•
•
insolvent transactions—this is an unfair preference
given by the company or an uncommercial transaction
of the company while the company is insolvent
(Corporations Act 2001 (Cth) s 588FC)
unfair loans—the interest and charges are extortionate
according to the amount, terms and conditions of the
loan (s 588FD)
unreasonable director-related transactions—a payment
or transfer of property or benefit to a director or
associate is unreasonable when the circumstances are
considered (s 588FDA).
Corporate Law: Law principles and practice
Voidable transactions cont …
A court can make various orders in relation to voidable
transactions (Corporations Act 2001 (Cth) s 588FF) in
order to return the company to its original position if not
for the voidable transaction.
Court orders to void a transaction can apply to
transactions made six months before the date of the
winding up commenced. This is called a ‘relation back for
an unfair preference’ (s 588FE(2)).
If an insolvent transaction is also an uncommercial
transaction, the transaction can be voided up to two years
in a relation back ( s 588FE(3)).
Corporate Law: Law principles and practice
Voidable transactions cont …
There are some defences under s 588FG of the
Corporations Act 2001 (Cth) whereby a court will not
make an order under s 588FF that materially prejudices a
right or interest of a person other than a party to the
transaction if it is proved that:
•
•
the person received no benefit because of the
transaction
the person received the benefit in good faith (s 588FG),
and at the time when the person received the benefit,
the person had no reasonable grounds for suspecting
that the company was insolvent or would become
insolvent, and, as a reasonable person in these
circumstances, would have had no such grounds for so
suspecting.