1
PARLIAMENTARY JOINT COMMITTEE ON
CORPORATIONS AND FINANCIAL SERVICES
IMPROVING AUSTRALIA’S CORPORATE INSOLVENCY
LAWS
ISSUES PAPER
May 2003
2
PREFACE
The Parliamentary Joint Committee on Corporations and Financial Services has
commenced an inquiry into the operation of Australia‟s corporate insolvency laws.
The corporate insolvency provisions of the Corporations Act are arguably the most
important provisions of the Act and the most important set of laws governing the
corporate sector. Effective insolvency laws and processes are an indispensable part of
any well functioning economy and one of the primary means for maintaining financial
discipline and ensuring efficient resource allocation in an economy.
Insolvency laws also enhance corporate governance and corporate ethics. They
commonly allow private creditors to replace the management of troubled firms and in
this way create incentives for prudent corporate behaviour. They permit an
examination to be made of the circumstances giving rise to insolvency and the
conduct of officers of a company in its failure, perhaps revealing culpable behaviour
on the part of those responsible for the company‟s failure and transfers of assets or
property that is potentially recoverable.
The central role that insolvency systems play in the operations of capital markets and
the economy as a whole underlines the importance these laws have for Australia.
3
IMPROVING AUSTRALIA’S CORPORATE INSOLVENCY LAWS
Background to the Issues Paper
1.1 On 14 November 2002, the Parliamentary Joint Committee on Corporations
and Financial Services agreed to consider and report on the operation of Australia‟s
insolvency and voluntary administration laws, including:
(a) the appointment, removal and functions of administrators and liquidators;
(b) the duties of directors;
(c) the rights of creditors;
(d) the cost of external administrations;
(e) the treatment of employee entitlements;
(f) the reporting and consequences of suspected breaches of the Corporations Act;
(g) compliance with, and effectiveness of, deeds of company arrangement; and
(h) whether special provision should be made regarding the use of phoenix
companies.
1.2 There are two streams of general statutory insolvency proceedings in
Australia, one governed by the Corporations Act („the Act‟) for companies and the
other by the Bankruptcy Act for individuals. The focus of the Committee‟s Inquiry is
the law governing the conduct of company insolvencies which is principally set out in
Chapter 5 of the Corporations Act. In some cases, the insolvency of a company under
the Corporations Act may give rise to personal bankruptcy proceedings and
Bankruptcy Act implications, for example, for directors if negligence in their duties to
creditors is proven or because of personal commitments on guarantees given to the
company or creditors of the company or in the event of civil liability arising for
insolvent trading.
1.3 The Committee has invited interested persons and organisations to make
submissions addressing the terms of reference. The advertised closing date for the
receipt of submissions is the end of May 2003 or soon thereafter. To date the
Committee has received 28 submissions.
1.4 Since the implementation of the Harmer Report in 1992 a number of reports
and specific inquiries into the law and policy applying to corporate insolvency have
been undertaken by various bodies. A list of relevant reports and reviews is included
at the end of this Paper. The findings and recommendations of these reports have not
as yet been implemented. The work of these bodies overlaps the Inquiry‟s terms of
reference. These reports and reviews constitute a valuable source of suggestions and
recommendations for improvements to Australia‟s insolvency laws and should be
taken into account in the conduct of the Committee‟s Inquiry.
4
1.5 This Issues Paper provides background material and information on aspects of
insolvency law that have been highlighted in submissions to date and/or in media and
professional commentary on corporate insolvency law and practice. It seeks to assist
interested parties in commenting on matters of concern about the operation of
Australia‟s insolvency laws and focus discussion on issues that appear to offer good
prospects for improving the operation of Australia‟s insolvency laws. At the same
time it does not seek to limit the issues that commentators may wish to raise.
5
SUMMARY OF ISSUES
A summary of the issues on which the Committee invites comment under the various
terms of reference follows.
The appointment, removal and functions of administrators and liquidators
Is there a need to further strengthen the independence of administrators?
What additional measures may be adopted to do so?
Are there any concerns about the mode of appointment and removal of
liquidators and administrators? Can the procedures for the appointment of
administrators and liquidators be improved? Should administrators or
liquidators be able to be removed in a wider range of circumstances than is
presently provided for under the law?
Is it appropriate that companies are able to circumvent winding up proceedings
(where a winding up application is pending but not yet determined) by
appointing an administrator?
Can the operation of the law be improved where different forms of
administration are potentially open and the parties seek different forms of
external administration (e.g. voluntary administration or liquidation)?
What measures can be adopted to enhance the provision of information to
creditors at statutory meetings of creditors under the VA procedure?
Would it be appropriate to extend the timeframe for the first and second
statutory meetings of creditors under voluntary administration?
Is there a tendency for some administrators to recommend deeds of company
arrangement that have little or no chance of succeeding (ie where liquidation
would be the more appropriate course)? If so, what changes are needed to allow
more flexibility in the choice of external administration?
The duties of directors
Is there scope for improving the insolvent trading provisions of the law?
In an insolvency or a ‘pending insolvency’ context, can the law better define the
duties and responsibilities of directors?
Is there scope to improve the voidable transaction provisions of the law?
What measures can be taken to improve director compliance with the provision
of reports and information to administrators about companies’ affairs on the
commencement of external administration?
6
The rights of creditors
Is the voluntary administration procedure achieving the objectives set for it?
What features of the procedure are open to abuse or improvement?
Are the rules for voting by creditors under voluntary administration
appropriate? Is the ‘casting vote’ device appropriate?
Does the method of voting and the method of resolving deadlocks fairly reflect
creditors’ wishes? Should greater weight be given to the value rather than the
number of creditors in some circumstances?
Should the law give clearer guidance as to the manner in which a casting vote
may be exercised by an administrator?
Is the Corporations Act regime for statutory demands appropriate? Are there
better alternatives?
Is there a case for a unified legislative and administrative framework for
corporate and personal insolvency?
Should Australia adopt a debtor in possession business rescue regime along
similar lines to Chapter 11 of the US Bankruptcy Code as an alternative to, or in
place of, VA?
Should solvent group companies be required to contribute to the losses of other
group companies in liquidation? If so, in what circumstances?
Is there scope for the adoption of e-commerce technologies in corporate
insolvency to help to reduce the costs of external administrations?
The cost of external administrations
How should fees for insolvency practitioners be determined? Are there better
means for reviewing fees?
Can the means for disclosure of fees be improved?
What form should such disclosure take?
The treatment of employee entitlements
Commentators may wish to consider the design of the current – GEERS - and
alternative schemes for the payment of employee entitlements.
Should schemes for the protection of employee entitlements be financed by
government or industry? Are any of the alternatives — industry trust funds,
employer insurance, a levy on employers, funding options for liquidation
recovery actions — better?
7
What employee entitlements should be protected and by whom?
Should every entitlement which is built into an award be protected?
Should group companies be required to contribute to the loss of employee
entitlements in other group companies in liquidation?
Should employee entitlements have an absolute priority ahead of all other
creditors, including secured creditors, upon liquidation?
Should superannuation be given a higher priority in a corporate insolvency
context?
The reporting and consequences of suspected breaches of the Corporations Act
How appropriate is follow-up action on liquidators’ and administrators’ reports
of suspected breaches of the Corporations Act?
Compliance with, and effectiveness of, deeds of company arrangement
Is there scope for improving the process for negotiating the terms of deeds of
company arrangement?
Is there scope for improving the process for enforcing the terms of deeds of
company arrangement?
Whether special provision should be made regarding the use of phoenix
companies
Are the Cole Royal Commission proposals appropriate in relation to phoenix
companies? What other measures can be adopted to reduce the incidence of
fraudulent phoenix company activity?
8
The appointment, removal and functions of
administrators and liquidators
1.6 Issues that may be discussed under this heading include the appointment of
administrators by directors under voluntary administration (VA), the appointment of
an administrator where parties seek to place the company into another form of
administration, limitations on the ability of creditors to remove administrators or
liquidators, the provision of information to creditors, extending the timeframe for the
voluntary administration procedure and the role of liquidators in relation to assetless
administrations.
The appointment of administrators and liquidators
Background
1.7 Administrators and liquidators play a central role in external administrations.
The independence of administrators and liquidators is an indispensable feature of
voluntary administration and winding up procedures. Administrators and liquidators
must not be, or perceived as being, puppets of the directors or any of the parties
affected by the financial difficulties of the company in question.
1.8 An administrator may be appointed, and an administration commenced, by the
board of directors of a company, by a liquidator or provisional liquidator or by a
secured creditor holding a substantial charge over company property. Appointment
of an administrator does not necessitate an application to a court.
1.9 The Corporations Act seeks to assure the independence of administrators and
liquidators. It makes provision for the registration and qualifications of insolvency
practitioners, details the legal responsibilities of administrators and liquidators and
sets out criteria for independence (secs 448C and 532). It prohibits the issue of
inducements to members or creditors to obtain appointments (sec 595). Administrators
are subject to fiduciary duties. They are also „officers‟ of the company and, as such,
subject to the general duties of „officers‟ under the Corporations Act.
1.10 There are two forms of liquidator registration granted by ASIC, registration as
an „official liquidator‟ and registration as a „registered liquidator‟.
Appointment of administrators by directors
1.11 Concerns have been expressed in submissions and the professional literature
about aspects of the process of appointing administrators under voluntary
administration.1
1 Submission 6, p 5; submission 14 and see Discussion Paper Independence of Company
Administrators, IPAA Working Party on Administration, March 2001 at
http://www.ipaa.com.au/pdfs/independance_company.pdf
9
1.12 The most usual way in which an administrator will be appointed is by
directors. The majority of directors choose to appoint administrators of their own
choice. On one view this method of appointment calls into question the independence
of administrators. One submission commented that the increasing popularity of the
voluntary administration process (which may be conducted by registered liquidators)
and the resultant decline in the number of court liquidations (which may only be
carried out by official court appointed liquidators) has brought about an „ambulance
chasing mentality‟ on the part of insolvency practitioners.2
1.13 The Australian Taxation Office expressed concern that public confidence in
the VA process may be being undermined by a perceived absence of impartiality and
advocated consideration of a roster system for the appointment of administrators on a
random basis.3 One submission advocated the incorporation of a code of ethics for
insolvency practitioners in the Corporations Regulations similar to that adopted in the
Canadian Bankruptcy and Insolvency Rules.4 Another advocated sending a statement
of independence to creditors prior to the first meeting of creditors.5
1.14 On the other hand, a number of submissions argued that, while there were
perceptions of a lack of independence on the part of director-appointed administrators,
the problem was more apparent than real.6 The statutory framework of duties and
responsibilities for administrators provides strong incentives for administrators to play
a constructive role in the procedure that delivers benefits to creditors. There may be
some touting for business by insolvency practitioners but this is not a matter of
concern as on appointment administrators have limited obligations to directors and
specific, on-going obligations to focus on the concerns of creditors.
1.15 These submissions suggested that notwithstanding the method of appointment
of administrators the policy objectives of the VA process—speed, informality, low
cost—were being met. One noted the concerns that have been expressed but
concluded that no change at all to the legislation was necessary.7 It raised the question
that if directors are not permitted to appoint administrators who will appoint them.
The VA procedure is predicated on the assumption that directors will play a role in the
appointment of administrators. One submission noted a range of obligations and
measures that arise for administrators on appointment including on-going scrutiny of
their actions by creditors, ASIC and the Court.8
2 Submission 6, p 4.
3 Submission 14, p 3.
4 Submission 6, p 8.
5 Submission 15, p 3.
6 Submissions 6, 12 and 14 and see also Colin Anderson, The Australian Corporate Rescue
Regime: Bold Experiment or Sensible Policy?, (2001) 10 International Insolvency Review 81
and Commencement of the Part 5.3A Procedure, (2001) 9 Insolvency Law Journal 4.
7 Submission 12, p 2.
8 Submission 12, p 2.
10
1.16 Suggestions for promoting the independence of administrators include:
requiring administrators to table a statement of interest at the first meeting of
creditors;
incorporating a code of ethics into the Corporations Regulations similar to that in
Canadian legislation;
permitting other persons—general creditors and, possibly, members—to appoint
administrators;
giving greater recognition to the role, and the rules, of self regulatory
organizations.
1.17 The Committee invites comment on the need to further strengthen the
independence of administrators and measures that may be adopted to do so.
Appointment of liquidators
1.18 Liquidators are ordinarily appointed by a court. Fewer concerns were raised
in submissions about the appointment of liquidators. Some submissions argued that
when creditors vote to place a company into liquidation under the VA procedure (at
the meeting to decide the company‟s future or on termination of a deed of company
arrangement) they should have a right to appoint another person as liquidator in place
of the administrator.9 Currently, under the law the administrator is taken to be the
liquidator.
1.19 When a liquidator or provisional liquidator appoints an administrator he/she
may only become administrator if a court gives leave. One submission proposed that
the need for court approval be dispensed with.10
1.20 The Committee invites comment on any concerns about the mode of
appointment and removal of liquidators and whether the procedures for the
appointment of administrators and liquidators be improved.
Conflicting administrations
1.21 Some submissions considered that the operation of the law could be clarified
where parties differ as to the form of administration and seek to place a company into
different forms of administration.11 A company cannot be wound up voluntarily
during administration. If an application to wind up a company is pending a board of
directors can wait until the last moment before the winding up application is heard and
9 Submission 6, p 9; submission 19, pp 1-2; submission 21, p 3.
10 Submission 12, p 6.
11 Submission 6, p 9.
11
then appoint an administrator. One suggestion is that the appointment of an
administrator be prohibited when there is an outstanding winding up application.12
1.22 The Committee invites comment on whether it is appropriate for
companies be able to circumvent winding up proceedings in these circumstances
by appointing their own administrator.
1.23 It has been noted that the law is arguably unclear as to whether a board of
directors may appoint an administrator when the company is in provisional
liquidation.13 It is suggested that such appointment be prohibited.
1.24 The Committee invites comment on whether the operation of the law may
be improved where different forms of administration are potentially open and
the parties seek different forms of administration (e.g. voluntary administration
or liquidation).
Removal of administrators and liquidators
1.25 Once appointed an administrator may only be removed at the first meeting of
creditors or thereafter only by the court on application by a creditor or ASIC. Section
449B permits a court, on application either by ASIC or a creditor, to remove or
replace the administrator. The provision does not set out criteria on the basis of which
a court may order removal but the principles that have been applied are based on those
that apply in relation to the removal of a liquidator.
1.26 The Committee invites comment on whether administrators or
liquidators should be able to be removed in a wider range of circumstances than
is presently provided for under the law.
Functions of administrators and liquidators
1.27 Under the Corporations Act wide powers are given to an administrator to
control a company‟s business during the period of the administration. Important
functions are also conferred.
1.28 One of the significant functions of an administrator is to investigate the
company‟s affairs and form an opinion about which of three future courses would be
in the best interests of creditors (execute a deed of company arrangement, end the
administration or wind up the company) and to report to creditors his/her assessment
of the company‟s financial circumstances and his/her opinion as to the most
appropriate course to adopt and the reasons for that opinion. If the recommended
course is to execute a deed of company arrangement the administrator must provide
details of the proposed deed: sec 439A(4).
12 Submission 6, p 9.
13 Legal Committee of CASAC, Final Report on Corporate Voluntary Administration, p 131.
12
Information available to creditors
1.29 The law provides little guidance on the content of the reports to be provided to
creditors for the meeting that will determine the company‟s future or the details of the
proposed deed of company arrangement. There are concerns that the content and
quality of reports to creditors and information to creditors about the courses of action
open to them is uneven or inadequate. Adequate details of the contents of proposed
deeds are not being provided in every case. Submissions reflected these concerns and
proposed a range of responses to them.14 Two commented that extending the statutory
time frame for the conduct of the second meeting of creditors to determine the
company‟s future would enable more meaningful information to be provided to
creditors.15
1.30 Suggestions for ensuring that reports to creditors are sufficient include:
prescribing a checklist of matters to be addressed in the sec 439A(4) report and
details of the statement setting out the terms of the proposed deed;
incorporating in the law an additional principles-based requirement that
administrators include in their reports any other information that may
reasonably be expected to be material to the creditors‟ decision;
encouraging representative associations and ASIC to liaise in the development
of best practice guidelines for sec 439A(4) reports sent to creditors and/or the
provision of a booklet highlighting issues that creditors need to consider and
outlining strategies for creditors.
1.31 The Committee invites comment on measures to enhance the provision of
information to creditors.
Timing of meetings
1.32 On appointment an administrator assumes control of virtually all aspects of
the company‟s activities during the course of the administration. The administrator
has many tasks to perform and the time period within which these tasks must be
carried out is constrained. The administrator must hold a first meeting of creditors
within 5 business days after the administration begins and a second meeting to
determine the company‟s future within 28 days (in the usual case) or 35 days (where
Christmas or Easter intervenes) of his/her appointment.
14 Submission 19, p 2, submission 23, p 5. See also discussion of this issue in Australian
Securities Commission Research Paper 98/01 "A Study of Voluntary Administrations in NSW"
1998, p 29; and Report of the Legal Committee of the Companies and Securities Advisory
Committee on Corporate Voluntary Administration (1998), paras. 2.45-2-63.
15 Submission 19, p 2, submission 23, p 5.
13
1.33 A number of submissions were critical of the restricted timeframe for the
conduct of creditors‟ meeting.16 A longer period for holding the first meeting would
give creditors more time to consider whom to appoint as an administrator, and would
also give the administrator more time to gather information to provide to creditors. A
longer period of time for holding the second meeting may give an administrator more
time to conduct a proper examination of the company‟s financial circumstances and
consider the best options for the company‟s future.
1.34 However, a fundamental objective of the voluntary administration provisions
is speed. Extending the time for the two critical meetings may lengthen the procedure.
The moratorium that is initiated by the voluntary administration procedure represents
an abridgement of the proprietary rights of creditors and freedom of contract. An
extension of the timing of the procedure would further curtail such rights. Another
practical consideration in extending the period for holding the first meeting is that the
longer an administrator has spent on an appointment the less likely creditors might be
to replace him/her since that person would have become familiar with the company‟s
affairs, and a new appointee would need to go through the process again. Extending
the procedure‟s timeframe may reduce its efficiency and make it more expensive.
1.35 Suggestions regarding the timing of meetings in the voluntary administration
procedure include:
extending the time for holding the first meeting to 8 business days and allowing
5 business days‟ notice to creditors;
removing the requirement for the first meeting but replacing it with a right of
creditors, or the administrator, to call a meeting at any time for the purpose of
appointing a committee of creditors or replacing the administrator;
extending the time for holding the second meeting to 25 business days.
1.36 The Committee invites comment on the appropriateness of extending the
timeframe for the first and second statutory meetings of creditors under
voluntary administration.
Other aspects of the role of administrators/liquidators
1.37 Other aspects of the role of administrators/liquidators that have been criticized
or alleged include:
Some administrators are recommending deeds of company arrangement that
have little or no chance of succeeding.17 A liquidation is inevitable.
16 Submission 19, p 2, submission 20, submission 23, p 5. See also discussion of this issue in the
Report of the Legal Committee of the Companies and Securities Advisory Committee on
Corporate Voluntary Administration (1998), paras. 2.10-2.16 and 2.65-2-76.
17 Submission 12, pp 3-4, submission 15, p 1, submission 21 pp 1-2; submission 23, pp 7-8.
14
Recommendations are made after an inadequate assessment of the history and
viability of the company‟s business. Creditors who extend credit to the company
during the DCA face a risk of losses. The delay makes it difficult to pursue
recovery actions. A deed administration followed by a liquidation may be more
expensive and leave less for creditors than a straight liquidation.
Administrators, liquidators and receivers are required to report, and provide
assistance, to ASIC if they discover offences or improper actions have been
committed by an officer in relation to a company or its property. In many cases
these reports are not being provided.
The Corporations Act requires directors to give administrators a statement about
the company‟s affairs within seven days of the administration commencing.
Administrators are not insisting on the statement in every case.
The law requires a company to give notice of the appointment of an
administrator or deed administrator on all company documents. This provision
is commonly ignored.
1.38 The Committee invites comment on the performance of these and other
functions of administrators and liquidators.
Assetless administrations
1.39 A number of submissions proposed the establishment of an assetless
companies fund to fund the investigation of companies that have no assets.18
1.40 The remuneration and expenses of liquidators are ordinarily funded from the
assets of the company in liquidation. A difficulty is created when the company has
insufficient debts to cover these expenses. Creditors may indemnify a liquidator for
expenses incurred but are unlikely to do so where the prospect of recovery is slight.
Liquidators have no incentive to conduct such administrations. The Corporations Act
provides that a liquidator is not under an obligation to incur any expense unless there
is sufficient available property.
1.41 There are sound reasons for undertaking the administration of assetless
companies. In anticipation of the formal commencement of insolvency proceedings it
is possible that unscrupulous directors may attempt to hide assets from their creditors,
favour certain creditors over others, incur artificial liabilities, make gifts to relatives or
friends or transfer the business and assets to another company set up for that purpose.
Such transactions would be unfair to the general body of unsecured creditors. If the
company leaves insufficient assets to pay for an administration and no liquidator is
able to carry out an administration the likelihood is that these transactions will not be
investigated or payments recovered for the benefit of creditors. These circumstances
potentially leave an avenue for abuse.
1.42 Suggestions for dealing with assetless administrations include:
18 Submission 6, p 11; submission 12, p 8; submission 23, p 16.
15
creating a centralized fund to which a wide class of persons could contribute;
payment from consolidated revenue;
a levy on annual returns;
a levy on companies on incorporation;
making directors liable to reimburse the fund for the cost of initial investigations
of their companies;
giving ASIC responsibility for reviewing assetless administrations and/or
commissioning insolvency practitioners to conduct investigations.
1.43 The Committee invites comment on measures for dealing with assetless
companies and the role that liquidators can play in relation to assetless
administrations.
The duties of directors
1.44 The Corporations Act imposes a high standard of care on directors to act in
the best interests of the company particularly in relation to insolvent trading. There are
widespread perceptions that the corporate form is being abused by directors. The
insolvent trading and voidable transaction provisions of the law are key elements of
the architecture of the law for the protection of creditors and shareholders and the
deterrence of corporate abuse. They are a focal point for a consideration of the duties
of directors.
Insolvent trading
1.45 A company director will be liable for insolvent trading where he or she was a
director of a company at the time it incurred a debt, the company was insolvent at that
time (or became insolvent because of the transaction), there were at the time
reasonable grounds for suspecting that the company was (or would become) insolvent
and the person was (or reasonably should have been) aware that there were reasonable
grounds for suspecting insolvency. A holding company will be liable for the debts
incurred by its insolvent subsidiaries where there are reasonable grounds for
suspecting that the subsidiary company is or will become insolvent at the time of
incurring the debt and the holding company, or one or more of its directors, were or
should reasonably have been aware of those grounds.
1.46 Defences to liability for insolvent trading are available to directors under the
law, for example where there were reasonable grounds to expect solvency, where the
director has relied on a competent person or where the director took reasonable steps
to prevent the company from incurring the debt.
1.47 A submission noted that establishing when a company became insolvent is
one of the most difficult tasks that confronts an insolvency practitioner. 19 The HIH
Royal Commission did not make an adverse finding that any person might have
19 Submission 6, p 10.
16
committed an offence under section 588G of the Corporations Act. Justice Owen‟s
report noted the difficulty „which any prosecution would face in establishing beyond
reasonable doubt the insolvency of a general insurer with long-tail liabilities‟ and the
further complication of the HIH group‟s organization.20
1.48 It also noted the difficulty in establishing the ingredients of the offence in the
circumstances including the identification of the corporate entity of the group that
incurred the debt, the directors of the entity, whether the entity was insolvent and the
state of knowledge of the directors.21 Importantly, Justice Owen did not appear to be
critical of the structure and content of the insolvent trading provision or the underlying
policy intent. Rather he considered it was a question of a lack of evidence available to
him and the peculiarities of the insurance industry and the circumstances of the HIH
group. In a recently decided case, John Elliott, a non-executive director of a listed
company, Water Wheel Ltd, and Bernie Plymin, managing director, have been found
guilty of allowing Water Wheel to trade while insolvent.22
Voidable transactions
1.49 Insolvency law has long adopted a policy of setting aside transactions in
which an insolvent company disposes of property or makes payments to particular
creditors within a relevant period of time prior to the commencement of formal
insolvency. The voidable transaction provisions of the law aim to prevent the
depletion of the assets of the company through certain transactions entered into within
a specified period prior to the winding up.
1.50 Some submissions commented on features of the voidable transaction
provisions. One proposed that „insolvency‟ should not be a prerequisite for a finding
that a transaction is an „uncommercial transaction‟.23
1.51 The Committee invites comment on:
whether there is scope for improving the insolvent trading and voidable
transaction provisions of the law.
whether, in an insolvency or a ‘pending insolvency’ context, the law can
better define the duties and responsibilities of directors.
General duties of directors
1.52 The general fiduciary and statutory duties of directors are generally expressed
to be owed to the corporation as a whole. In practice this means among other things
that the directors must give primary consideration to the interests of existing members
of the corporation as they are the proprietors who have risked their capital in the
expectation of a return. In considering the scope of directors‟ fiduciary and statutory
20 HIH Royal Commission Report, Vol 3, p 44.
21 HIH Royal Commission Report, Vol 3, p 61-2.
22 Australian Financial Review, 6 May 2003
23 Submission 6, p 10.
17
duties the courts require directors to have regard to the interests of the company‟s
creditors especially where it is nearing insolvency.
1.53 The question arises whether the general fiduciary and statutory duties of
directors as expressed in the law give sufficient recognition to the protection of
creditors. Fraud and mismanagement may arise in circumstances of financial stress
and in anticipation of insolvency.
1.54 The Committee is interested in exploring the scope and extent of
directors’ liability upon insolvency under existing legislation and whether any
changes to the law are necessary.
Directors’ reports
1.55 Directors are obliged to co-operate with the administrator by delivering any
books of the company in their control to the administrator and telling the administrator
of any other books of which they are aware. They are also required to prepare a report
on the company‟s business, property, affairs and financial circumstances and attend on
the administrator and give such information to the administrator as he or she
reasonably requires.
1.56 According to a 1998 Australian Securities Commission Research Paper, in a
large number of cases, directors are not providing reports on the affairs of companies
(sec 438B and 475) or books and records relating to the company‟s affairs.24 This
hinders the process of recovering assets and assessing offences. One submission
proposed that directors should be required to bring all the companies‟ records up to
date on the appointment of an external administrator.25
1.57 The Committee invites comment on measures to improve compliance
with these requirements.
The rights of creditors
1.58 The primary object of VA is to maximise the chance of the company
emerging from administration with as much as possible of its business continuing in
existence. Where the survival of the company or its business is not possible, the
secondary object is to provide for a fair and efficient winding up and in particular one
that results in a better return for the company‟s creditors and members than would
result from an immediate winding up of the company. The legislation is flexible in
that section 435A merely states the objects of the part and not the criteria against
which an administration must be assessed. A major purpose of the voluntary
administration procedure is to provide the company with the benefit of a moratorium.
During administration, court proceedings are automatically stayed without the written
24 Australian Securities Commission Research Paper 98/01 "A Study of Voluntary Administrations
in NSW" 1998, p 33.
25 Submission 12, p 7.
18
consent of the administrator or the court. The execution process if started cannot
continue. Any other attempt to enforce a judgement is barred.
1.59 Overall appraisals of the VA procedure emerging from submissions are
generally positive. One submission commented that after ten years the procedure has
been accepted by the corporate sector as „a way of corporate life‟ and has „served
industry and commerce reasonably well‟.26
1.60 Four submissions suggested that the VA procedure was open to misuse in that
it was being used as a means for placing a company into liquidation rather than as a
means of enabling a company to continue in existence. Companies that had no
realistic prospects of being saved were being put into administration. They suggest
that the creditors‟ voluntary liquidation procedure should be simplified to enable
directors to place a company into liquidation informally and speedily in the same
manner that they can place a company into administration.27
1.61 The Committee welcomes overall evaluations of the voluntary
administration procedure and invites comment on features of the procedure that
are open to abuse or may be improved.
Voting at meetings.
1.62 The method of voting on matters requiring a decision or resolution of
creditors under the voluntary administration procedure has been the subject of some
criticism.
1.63 Under the voluntary administration procedure a vote on a resolution is
determined on the voices, unless a poll is demanded. A poll can be demanded by the
Chair, any 2 creditors or anyone present or voting by proxy with at least 10% of the
voting rights. If a poll is taken, the resolution is determined by simple majority by
number and value of debts owed. If there is a deadlock, which may commonly happen
where the majority by number vote one way but the majority by value vote another,
then the Chair gets a casting vote. The exercise of a casting vote by the Chair can be
reviewed by the Court on the application of a dissatisfied creditor.
1.64 Concerns expressed in submissions about the method of voting include:
The exercise of a casting vote in relation to removal of the administrator at the
first meeting of creditors, approval of a deed of company arrangement and
approval of the administrator‟s remuneration may involve a conflict of interest
on the part of the administrator.28
Voting may be controlled by the voting of related parties and the use of proxies.
Canvassing for special proxies may be undertaken to ensure that resolutions are
determined by the use of the casting vote.
26 Submission 23, p 3;
27 Submission 12, pp 3-4, submission 15, p 1, submission 21 pp 1-2; submission 23, pp 7-8.
28 Submission 6, p 8.
19
The effect of voting by related parties and canvassing for special proxies
effectively means it is impossible for other creditors to remove an administrator
or defeat a resolution to approve a deed of company arrangement.
1.65 One submission advocated that the casting vote be eliminated.29
1.66 The Committee invites comment on the appropriateness of the rules for
voting by creditors and the ‘casting vote’ device under voluntary administration
and
whether the method of voting and the method of resolving
deadlocks fairly reflect creditors’ wishes;
whether greater weight be given to the value rather than the
number of creditors in some circumstances;
whether the law give clearer guidance as to the manner in which a
casting vote may be exercised by an administrator. (This issue also
has relevance for the costs of external administration and the
appointment of administrators.)
Statutory Demands
1.67 The Corporations Act permits a person who is owed money by a company to
serve that company with a formalised written „statutory demand‟ for payment. The
statutory demand procedure is one way of establishing that a company is insolvent and
should be wound up. The significance of a statutory demand is that if a company fails
to comply with a validly served statutory demand there is a presumption that it cannot
pay its debts as and when they fall due. However, this presumption can be rebutted by
a debtor company.
1.68 Few submissions raised the issue of the law relating to statutory demands.
However, Professor Andrew Keay has raised a range of concerns about the statutory
demand procedure including that the law is technical and gives rise to substantial
litigation, it does not discourage or prevent insolvent companies from continuing to
trade, it is inflexible and harsh in its consequences and it may be used unfairly against
solvent companies.30 Given that the law relating to statutory demands is such a central
aspect of insolvency law and generates many complaints it may be appropriate to
review the underlying policy of the law and the merits of alternatives mechanisms.
1.69 The Committee invites comment on the appropriateness of the
Corporations Act regime for statutory demands.
29 Submission 6, p 8;
30 Prof Andrew Keay, „Finding a Way through the Maze that is the Law of Statutory Demands‟,
(1998) 16 Companies and Securities Law Journal 122-138
20
Merger of corporate and personal insolvency law
1.70 One submission advocated the merger of corporate and personal insolvency
law.31
1.71 The question of the merger of corporate and personal insolvency law has been
considered by various bodies over the years. The Harmer Report (1988) recognized
that there were advantages in having unified legislation but did not recommend a
merger. The former Trade Practices Commission in its 1992 Study of the Professions
recommended that consideration be given to this issue. The 1997 Review of the
Regulation of Corporate Insolvency Practitioners recommended that the Government
examine the benefits of a merged regulatory framework for personal and corporate
insolvency. However, its conclusions were qualified. The Cork Committee (1982) in
the UK recommended a unified insolvency code be enacted in the United Kingdom.
1.72 Proponents of a merger have argued that the separation of corporate and
personal insolvency law is a result of historical evolution of the law rather than a
development based on logic or policy, legal or drafting reasons and a merger of the
two systems would produce public benefits including cost savings, a single system for
the registration of practitioners and greater consistency in the law and the formulation
of policies. They point to successful merged systems in other countries, notably the
United Kingdom and the United States.32 However, no State government since
Federation has been persuaded to undertake a merger of corporate and personal
insolvency law.
1.73 A „merger‟ may, of course, take different forms. A „minimalist‟ merger may,
for example, focus on particular aspects of corporate and personal insolvency law
such as a single system for registration and regulation of insolvency practitioners. A
„maximalist‟ merger of the kind envisaged by the Cork Committee in the United
Kingdom would represent a major undertaking and the benefits of such an undertaking
would need to be demonstrated. The task of drafting unified legislation would be a
significant and resource intensive exercise.
1.74 Administrative arrangements for insolvency reflect the different historical
evolution of personal and corporate insolvency systems and Commonwealth/State
arrangements for corporate law. The Australian Securities and Investment
Commission and the Insolvency and Trustee Service Australia have separate
responsibilities for the regulation and administration of the corporate and personal
insolvency regimes.
1.75 The Committee invites comment on the merits of a unified legislative and
administrative framework for corporate and personal insolvency.
31 Submission 6, p 3.
32 Submission 6, p 3. See also Keay, Andrew, “The Unity of Inoslvency Legislation: Time for a
Re-Think”, (1999) 7 Insolvency Law Journal 4 arguing the case for a merger.
21
A new form of administration
1.76 There have been calls from some quarters for Australia to adopt a debtor in
possession business rescue model along similar lines to Chapter 11 of the US
Bankruptcy Code. Comparative analysis of Australian and comparable countries‟
business rescue schemes provides a useful perspective in evaluating the merits of
Australia‟s voluntary administration scheme. Two submissions advocated the
adoption of a debtor in possession insolvency regime for Australia.33
1.77 Australia‟s voluntary administration procedure has some similarities with
Chapter 11 in the United States. Both schemes aim to rehabilitate businesses in trouble
or, when that is not possible, to assist in an orderly transition to liquidation. However,
in their detailed features and underlying rationale the procedures differ markedly.
1.78 The voluntary administration procedure essentially enables a company to
activate a moratorium period under the control of an insolvency practitioner for a
relatively short period of time in order to enable the parties to take stock of the
company‟s situation at a time of insolvency or anticipated insolvency with a view to
determining the most appropriate course of action open to it. It aims to provide an
expeditious and relatively inexpensive procedure in which a company may obtain a
breathing space so that it can attempt a compromise or arrangement with its creditors
(a deed of company arrangement) aimed at saving the company or the business or
maximising the return to creditors. A further policy behind the procedure is to reduce
the delay, expense and legalism of court involvement as much as possible. It is not, of
course, intended to exclude court involvement. The courts retain a general
supervisory role, and a number of provisions permit or require court involvement.
1.79 One submission commented that a major shortcoming of the VA procedure is
that it relies on some form of financial engineering or sale of assets within a period of
about a month to revive a company. This is impossible to achieve in so short a
timeframe. In most cases VAs which are successful involve creditors agreeing to
forgive a substantial portion of their debts. A new form of administration having
some of the characteristics of the US chapter 11 model is needed. The submission
proposed an administration with a moratorium of six months and the replacement of
the management with new directors. It also argued that a greater appreciation of
„business turnaround and reconstruction services‟ is needed.34
1.80 Chapter 11 of the US Bankruptcy Code is used primarily by commercial
enterprises seeking to continue operating a business and to repay creditors through a
court approved reorganisation plan. The procedure is considered by some
commentators to be more „debtor friendly‟ than the voluntary administration
procedure. It is a slower process and more expensive, with much greater involvement
by the court. Many voluntary administrations may run their full course with no or
minimal court involvement.
33 Submission 6, p 3; submission 17, p 2.
34 Submission 17, p 2-3.
22
1.81 Ordinarily, the debtor remains in possession under Chapter 11. Under
voluntary administration, an independent administrator is appointed to report on the
affairs of the company to the creditors, and control of the company and supervision of
the process passes from the directors to the administrator.
1.82 Under Chapter 11, the debtor has the first opportunity to propose a
reorganisation plan. However, this can take up to three months, and only after that are
other parties given the opportunity to propose their own plan. Often it may take
months for a plan to be finalised. Under voluntary administration, administrators must
normally report to creditors within one month on a proposal for the future of the
company. The longer time periods involved in a Chapter 11 proceeding necessitate
complex rules concerning the rights of secured creditors, which are not required under
voluntary administration.
1.83 The Committee invites comment on the desirability of Australia adopting
a debtor in possession business rescue regime along similar lines to Chapter 11 of
the US Bankruptcy Code as an alternative to VA.
1.84 The Companies and Markets Advisory Committee is currently conducting an
in-depth examination of this issue.35
Corporate groups
1.85 The prevalence of corporate groups raises the question whether corporate
insolvency law adequately accommodates this form of business organization.
Corporate insolvency law in a particular respect gives recognition to the importance of
corporate groups in making holding companies liable in some circumstances for the
debts of insolvent subsidiaries. However, apart from this exception, there is limited
recognition of corporate groups in a corporate insolvency context.
1.86 Contribution orders are a feature of New Zealand law. Under a contribution
order, a court can require a group company not subject to a winding up order to
contribute specific funds to cover all or some of the debts of another group company
in liquidation. Contribution orders have the potential therefore to enhance returns to
creditors.
1.87 The then Companies and Securities Advisory Committee (now CAMAC) has
recommended against the introduction of a general court contribution order power
either generally or in relation to particular creditors. However, it has recommended
that the law permit liquidators to pool the unsecured assets, and liabilities of two or
more group companies in liquidation with the prior approval of all unsecured creditors
of those companies.
1.88 The Committee invites comment on whether and in what circumstances
solvent group companies should be required to contribute to the losses of other
group companies in liquidation.
35 For information on the progress of its inquiry see http://www.camac.gov.au/camac/camac.nsf
23
E-commerce and insolvency administration
1.89 A number of submissions suggested that the use of e-commerce alternatives in
insolvency administration should be considered.36 E-commerce offers the prospect of
cost savings in communicating with creditors, sending notices and reports and
advertising. One submission proposed the creation of a “Public Notices” web page for
the placing of advertisements.37
1.90 The Committee invites comment on whether technology and e-commerce
initiatives may help to reduce the costs of external administrations.
Shareholders
1.91 One submission highlighted the need to consider the impact of corporate
insolvencies on shareholders.38 It noted that a shareholder‟s most important residual
interest is almost invariably the crystallisation of a capital loss for tax purposes.39
Under sec 104-145 of the Income Tax Assessment Act 1997 a liquidator may make a
declaration that there is no likelihood that the shareholders in the company will
receive any further distribution in the winding up.
1.92 Some concerns have arisen in regard to this provision. Considerable time
may elapse before a liquidator is able to make such a declaration. The power to make
a declaration appears to be available only in the case of a liquidation. It would not
apply in the case of a voluntary administration, a provisional liquidation or a
receivership. The external administration of Pasminco took the form of a voluntary
administration which did not permit a declaration to be made even though it was
reasonably clear that shareholders would not receive a distribution.
1.93 Other aspects that impact on shareholders of insolvent companies include:
It is important for shareholders to have information about the fate of
their companies in external administration. However, in contrast to
creditors, shareholders have limited rights to information. Companies
under administration rarely hold AGMs. Progress reports on
administrations should be available to shareholders;
Legal actions against directors and auditors have the potential to benefit
shareholders as well as creditors. Where funding is required
shareholders should also be invited to participate.
1.94 The Committee invites comment on the rights of shareholders in
corporate insolvencies.
36 Submission 12, p 7; submission 23, p 10, submission 26, p 14.
37 Submission 23, p 10.
38 Submission 5, p 1.
39 Submission 5, p 2.
24
The cost of external administrations
Background to this issue
1.95 Generally the costs of external administrations are taken out of the remaining
unsecured assets of a company. They include the expenses of the administration as
well as the administrator‟s remuneration. Under the Corporations Act the costs of
administration are treated as a priority payment. The unsecured assets of the company
are utilised to pay the administrator‟s remuneration and expenses and there are cases
where they have been entirely absorbed for this purpose leaving unsecured creditors
with little or no dividend. Unsecured creditors are understandably concerned about
this possibility since, even apart from the cost of the administration of the company,
they face the prospect of losses.
1.96 Under the Corporations Act a voluntary administrator‟s remuneration may be
fixed by the company‟s creditors at the initial meeting to consider the administrator‟s
proposal for the company‟s future or at a meeting to terminate or vary the deed of
company arrangement. If no remuneration is fixed by the creditors, the remuneration
will be determined by the court on the application of the administrator. Until the
creditors or the court determine the remuneration payable to the administrator, the
administration will not be entitled to remuneration out of the company‟s assets.
Further, where the remuneration is fixed by the creditors, any creditor, member or
officer of the company may apply to the court to review the remuneration. The court
may confirm, increase or reduce the remuneration. Broadly similar arrangements
apply in the case of liquidations and receiverships.
1.97 In the case of a receivership, remuneration is ordinarily determined by the
appointing creditor. A court has power to fix or vary the amount on the application of
a liquidator, voluntary administrator or deed administrator or ASIC. In a compulsory
winding up, remuneration is determined by agreement between the liquidator and the
creditors or, in the absence of such agreement, by the court. In the case of a members‟
voluntary winding up the company sets the level of remuneration. In a creditors‟
voluntary winding up, the creditors set the level of remuneration. A provisional
liquidator‟s remuneration is determined by the Court. Liquidators may not be
compelled to incur expenditure where there is not enough property for reimbursement
but are still required to perform some obligations such as lodging reports with ASIC.
IPAA Recommendations
1.98 The IPAA formerly issued a guide to hourly rates which was accepted as a
standard for the industry. The former Trade Practices Commission considered the
Guide to be a restriction on competition. From 1 July 2000, the IPAA discontinued its
„Guide to Hourly Rates Scale and Staff Classifications‟ and recommended that
practitioners charge hourly rates in accordance with their own internal cost structures
having regard to the complexity and demands of each appointment.
1.99 The IPAA recommends that in most insolvency appointments fees should be
based on the time spent at the level appropriate to the work performed. The resolution
25
for remuneration should include a specified amount. Where remuneration is approved
prospectively an upper limit must be included in the resolution of creditors or
Committee of Inspection.
1.100 The IPAA Guidelines state that fees should reflect the quality and quantity of
work performed ensuring that the staff mix and average rate is commensurate with the
nature and complexity of work done. Alternative methods of calculation, such as
percentage of realisations, percentage of funds distributed, a lump sum or a
combination of methods could be warranted in specific cases.
1.101 The Review of the Regulation of Corporate Insolvency Practitioners
considered the question of the basis of remuneration and noted that:
The market should be allowed to determine the most cost effective fee
systems. However, the Working Party sympathises with the view that the
public interest is not necessarily best served by minimising the cost of
administrations at the expense of quality.
Rights of review
1.102 The Corporations Act itself does not prescribe remuneration levels. Rather it
encourages administrators and creditors to reach agreement on the question of
remuneration as between themselves. The Courts have a general supervisory role in
settling disputes over remuneration or setting remuneration where it is not practicable
for agreement to be reached.
1.103 Generally administrators‟ fees may be reviewed by a court or by the
professional bodies. However, this places a considerable burden on any creditor
seeking such a review particularly where not all creditors are in agreement or willing
to contribute to the cost of such a review.
Disclosure
1.104 Administrators‟ fees are commonly fixed by open ended resolution of the
creditors and ordinarily do not specify an amount or set a limit. This form of approval
arguably makes the review of fees by a court difficult and reduces practitioners‟
accountability for their charges.
1.105 The Committee invites comment on the proper approach for determining
fees for insolvency practitioners, the means for reviewing fees, the adequacy of
the disclosure of fees and the form such disclosure should take.
1.106 Chapter 10 of the 1997 Review of the Regulation of Corporate Insolvency
Practitioners may be referred to for a discussion of the respective merits of different
kinds of pricing mechanisms.
26
The treatment of employee entitlements
1.107 In discussing the question of employee entitlements submissions focused on
four main aspects:
the design of the GEERS Scheme and other possible schemes for the payment of
employee entitlements;
the proposal to pay out certain employee entitlements ahead of all other
creditors, including secured creditors, upon liquidation (the „maximum priority
proposal‟);
the features and effects of the current law governing the order for payment of
employee entitlements;
the treatment of superannuation in a corporate insolvency context.
The General Employee Entitlements Scheme
1.108 The main Government scheme for the protection of employee entitlements is
the General Employee Entitlements Scheme (GEERS) which protects the entitlements
of employees who have been terminated due to their employer‟s insolvency. Under
the scheme, where an employee has a legal entitlement derived from legislation, an
award, a statutory agreement or a written contract of employment, as at the date of
his/her former employer‟s insolvency, he/she may be eligible to receive payments in
respect of:
unpaid wages;
accrued annual leave;
accrued long service leave;
accrued pay in lieu of notice; and
up to 8 weeks redundancy entitlements (as per community standard).
1.109 Payments made under GEERS are subject to an annual income cap ($75,200
for 2001-2002 and $81,500 for 2002-2003). Eligible claimants who earn more than
the scheme's cap are paid as if they earned a rate equivalent to the scheme's income
cap. Benefits paid under the scheme are recoverable by the Commonwealth.
1.110 The Commonwealth Government pays GEERS funds to the insolvent
business as an advance on the condition that in the event of liquidation, the
Commonwealth would be a priority creditor under section 560 of the Corporations
Act 2001 to the extent of the amount advanced.
1.111 If a Deed of Company Arrangement (DCA) is proposed and the creditors vote
for a deed rather than for the company to be wound up, the deed must include the
priorities of subsection 556(1) of the Act in relation to the entitlements to be paid to
employees and, in relation to any advances for payments of employee entitlements,
the deed presented to the creditors for their consideration must provide for the same
27
priority as the Commonwealth would receive under section 560 of the Act in relation
to such an advance under a winding up.
1.112 If at the end of the administration the company is restored to the directors
(other than pursuant to a DCA) and continues to trade, the loan which the
Commonwealth has advanced is to be repaid within 4 weeks of the end of the
administration.
1.113 Alternative mechanisms for protecting employee entitlements include the
establishment of industry trust funds which secure the accrued entitlements of
workers, employer insurance to cover the value of employee entitlements, a levy on
employers and funding options for liquidation recovery actions.
1.114 Other proposals have been made for the protection of employee entitlements.
They include two private members‟ bills:
the Employee Protection (Employee Entitlement Guarantee) Bill 2003
which seeks to establish an insurance scheme for the protection of
employee entitlements; and
the Corporate Responsibility and Employment Security Bill which seeks
to make a corporation liable for the debts and unpaid employee
entitlements of a related insolvent corporation.
1.115 The Committee invites comment on the design of current schemes for the
payment of employee entitlements including:
What employee entitlements should be protected and by whom?
Should every entitlement which is built into an award be protected?
Should group companies be required to contribute to the loss of
employee entitlements in other group companies in liquidation?
Maximum priority for employee entitlements
1.116 On 14 September 2001, the Prime Minister announced that the Government
proposed to increase protection for employee entitlements (other than redundancy
payments) by giving priority to unpaid employee entitlements over new debts owed to
banks and other secured creditors (a “maximum priority” for employee entitlements).
To date legislation giving effect to the Government‟s proposal has not been made
available.
1.117 In a liquidation under the current law, employee entitlements for unpaid
wages and unpaid superannuation contributions, long service leave and retrenchment
payments rank ahead of other creditors (except secured creditors with a fixed charge
over assets), including unsecured creditors and creditors whose debts are secured by a
floating charge. Employees also enjoy a superior priority over other unsecured
creditors such as suppliers, subcontractors and their employees and creditors.
1.118 Employees also enjoy a further benefit over unsecured creditors in a
liquidation. The Act allows a person who advances money to a company for the
28
purpose of that company paying wages, superannuation contributions, leave of
absence or termination of employment entitlements under an industrial agreement to
prove in the liquidation as if that person was an employee: sec 560. That is, anyone
who wishes to put a liquidator in funds to pay employee entitlements will have the
same priority position formerly enjoyed by the employees for those funds. Under the
GEERS scheme the Government may rely on this provision to effectively stand in the
place of the employees in a liquidation and enjoy the priority in any distribution which
those employees would otherwise have had in the liquidation.
1.119 In the case of a receivership the Act sets out obligations for the repayment of
certain debts in priority to those owed to debenture holders. Employee entitlements
are included in the debts given priority. The priority only applies to property subject
to a floating charge. Property subject to a fixed charge is not accorded priority.
1.120 In the case of a voluntary administration or a deed administration there are no
priority repayment provisions. Employee entitlements are not accorded priority in
such situations. However, in many DCAs the same statutory priority that would apply
in a liquidation is provided for. Employees are unlikely to support a DCA if it did not
give them a result at least equal to what they would obtain in a liquidation.
1.121 The maximum priority proposal has attracted critical comment in the
submissions addressing this issue.40 No submissions to date support the proposal.
Most submissions were very concerned about the impact of the proposal on the
availability of credit commenting that it would lead to a contraction of credit. They
pointed to the priority that employees already enjoy under the current law. The
Australian Chamber of Commerce and Industry argued that the Government stood to
benefit from the adoption of a super priority for employees as it would serve to defray
the Government‟s exposure under GEERS.41 In its view the proposal would have a
widespread economic and social impact and the costs of the proposal would be passed
on to businesses.42 Submissions generally indicated support for the retention of the
GEERS scheme.
1.122 One submission commented in depth on the priority given to employee
entitlements under the current law. It argued that treating employees as priority
creditors is difficult to justify and disadvantages ordinary unsecured creditors such as
subcontractors, trade creditors and tort claimants. It is inconsistent with longstanding
principles of insolvency law, in particular the pari passu principle that all creditors
within a class should be treated equally. Employees are unsecured creditors and
should be accorded equal treatment with other unsecured creditors and have an equal
entitlement to share in a proportionate distribution of the assets of an insolvent
debtor.43 Others submissions suggested that a maximum priority rule would lead to
40 Submission 6, p 12; submission 13; submission 19, p 4, submissions 26, 27 and 28.
41 Submission 13, p 9.
42 Submission 13, p 9.
43 Submission 4, p 7.
29
artificial commercial arrangements designed to avoid the operation of the rule44 and a
proliferation of companies employing no staff and holding no assets other than a
receivable from an operating or trading company. 45 The impact would be particularly
severe on companies with long serving work forces.46
1.123 The Australian Banking Association considered that a maximum priority for
employees would impact significantly on the lending and loan security arrangements
of many businesses and would not benefit employees.47
1.124 The Committee invites comment on the Government’s foreshadowed
proposal to pay out certain employee entitlements ahead of all other creditors,
including secured creditors, upon liquidation.
Current law governing employee entitlements
1.125 A submission proposed that the priority for limited directors‟ employee
entitlements be abandoned.48
Superannuation
1.126 Some submissions proposed that superannuation be afforded a higher priority
in an insolvency context. Under the current law superannuation is granted preferred
creditor status together with wages49 ranking behind administration expenses but
ahead of other employee entitlements such as leave, workers compensation and
retrenchment payments. Superannuation is not covered by the GEERS scheme.
1.127 The Association of Superannuation Funds of Australia (ASFA) proposed that
superannuation be included in the GEERS scheme and ranked at the top of the list of
preferred creditors.50 Supporting measures should also be adopted to ensure its prompt
payment. One submission argued that wages and superannuation should be split into
separate categories of entitlements and superannuation should not be afforded a higher
priority than wages as employees prefer to receive a distribution as wages rather than
as superannuation which cannot be assessed until retirement.51
1.128 The Committee invites comment on the treatment of superannuation in a
corporate insolvency context.
44 Submission 27: attachment, „Priority for Employee Entitlements‟.
45 Submission 6, p 12
46 Submission 28, p 1.
47 Submission 28, p 1.
48 Submission 12, p 8.
49 Under sec 556(1)(e)
50 Submission 11, p 2.
51 Submission 12, p 8.
30
The reporting and consequences of suspected breaches of
the Corporations Act 2001
1.129 Administrators, liquidators and receivers have a continuing obligation to
report to ASIC suspected breaches of the Corporations Act, misapplication of funds,
negligence, breach of duty or breach of trust by past or present company officers or
members. They must also lodge further reports specifying any matter which they
think is desirable to bring to the attention of ASIC. On the provision of such a report
they must furnish ASIC with such information and give it such access to and facilities
for inspecting and taking copies of any documents as ASIC requires.
1.130 The Committee invites comment on the extent of compliance with the
requirement to lodge reports and the extent and appropriateness of follow-up
action on receipt of reports.
Compliance with, and effectiveness of, deeds of company
arrangement
Background
1.131 On taking control of a company‟s affairs, the primary task for an
administrator is to investigate the financial position of the company with a view to
making a recommendation to creditors about what should be done. One of the options
open to creditors is to execute a deed of company arrangement (DCA). If a DCA is
recommended the administrator must provide a statement setting out details of the
deed. One submission indicated a need for better funding to enable ASIC to take
action against rogue directors.52
1.132 If the creditors vote in favour of a DCA proposed by an administrator, all
creditors are bound by it. The DCA details the adjustment of the rights and
obligations of creditors in relation to the company.
Contents of deed of company arrangement
1.133 The person who is to be the administrator of the deed must prepare an
instrument setting out its terms. The DCA must include some essential matters (such
as the property to be available to pay creditors‟ claims, the duration of any
moratorium period for which the deed provides, the extent to which the company is to
be released from its debts, conditions for the deed to operate, the circumstances for
termination of the deed, order of payment of creditors‟ claims). In addition the deed is
taken to include prescribed provisions set out in schedule 8A of the Regulations unless
the deed otherwise provides.
52 Submission 12, p 8.
31
1.134 The Act attempts to ensure the integrity of DCAs. A Court may terminate a
deed where it is satisfied that material information was omitted from the
administrator‟s report, where there has been a material contravention of the deed, or
where the deed is oppressive or unfairly prejudicial to one or more creditors, or
contrary to the interests of the creditors as a whole.
1.135 Concerns have been expressed about a number of aspects of DCAs:
There are shortcomings in the manner in which some DCAs are prepared:
the intentions of creditors expressed at the meeting to decide the
company‟s future are not being reflected in the actual terms of the DCA;
matters are being included which were not discussed or approved by
creditors;
open ended discretions are being included in the deed which were not
discussed or approved by creditors;
the prescribed provisions were being amended in ways that may not be
in the interests of creditors and employees, for example, in relation to
the priorities specified in sec 556 which had the effect of denying the
priority normally accorded to claims by employees; the requirements
relating to meetings in the event of default; the requirement to have a
committee of inspection; the requirement to lodge accounts of receipts
and payments with ASIC.
The terms of DCAs are not being enforced (appropriate action following default
is not being taken, moneys payable under the deed are not being received and
follow-up action is lacking, monitoring and reporting to, and by the
administrator is inadequate).
DCAs are being varied without giving creditors details of the variation.
1.136 It has been held that a DCA may discriminate against certain creditors or
classes of creditors if compliance with the deed has the effect that every creditor
would nevertheless receive more that they would in a winding up. 53 The Australian
Taxation Office proposes that the law should require that distributions to creditors
pursuant to DCAs must not depart from the principle expressed in section 555, all
debts in a winding up should rank equally and, if there is insufficient property to meet
them in full, they must be paid proportionately.54
1.137 A 1998 Australian Securities Commission Research Paper found that the
major defaults in compliance with the terms of DCAs occurred in failing to enforce
the terms of deeds rigorously.55 It noted non-compliance in relation to the receipt of
moneys payable pursuant to the DCA on a timely basis and non-compliance in
53 Re Solfire Pty Ltd (in liq) 15 ACLC 1487
54 Submission 14, p 5.
55 Australian Securities Commission Research Paper 98/01 "A Study of Voluntary Administrations
in NSW" 1998, p 37.
32
relation to monitoring and reporting requirements to and by the administrator and
procedures to be followed in the event of default.
1.138 The Committee invites comment on suggestions for improving the
process for negotiating and enforcing the terms of deeds of company
arrangement.
Whether special provision should be made regarding the
use of phoenix companies
1.139 The Corporations Act adopts some measures to control the spread of phoenix
companies. It allows a Court, on application by ASIC, to prohibit a person from
managing a corporation for up to 10 years if the person has been involved, within the
last 7 years, in repeated insolvencies or corporate failures. Such failures include a
court-ordered winding up, a voluntary liquidation or a deed of company arrangement
in which creditors are not fully paid, the appointment of a receiver, entering into a
compromise or arrangement with creditors or a liquidation that has involved offences
against Commonwealth law or the misapplication of property of the company or
returns no more than 50 cents in the dollar to unsecured creditors.
1.140 Additionally, ASIC has the power to disqualify, for a period of up to 5 years,
persons who have, in a 7 year period, managed corporations which have become
insolvent and the liquidation has involved offences against Commonwealth law or the
misapplication of property of the company or resulted in returns to unsecured creditors
of no more than 50 cents in the dollar. It may do so on its own initiative.
1.141 In relation to the building and construction industry, the Cole Royal
Commission has proposed a range of additional measures to deter the incidence of
fraudulent phoenix companies including:
guidelines to clarify the separate responsibilities of government agencies
in combating fraudulent phoenix company activity;
legislation to permit the sharing of information relating to such activity;
checks to identify companies that are left without a director following
the bankruptcy of a serving director;
an increase in the maximum penalties for offences associated with
fraudulent phoenix company activity;
extending ASIC‟s power of disqualification to permit disqualification
where a person on one occasion was an officer of a corporation which
has been wound up and been the subject of a liquidator‟s report;
measures developed by ASIC to check company officers against the
Insolvency Trustee Service Australia‟s National Personal Insolvency
Index ensuring that they are not disqualified from acting as directors.
33
1.142 Submissions were supportive of strengthening measures against phoenix
companies and proposed a range of measures to do so.56 One submission stated that
though the use of phoenix companies in the building and construction industries has
been widely reported, their use is common in most industries. 57 It also noted that in
most phoenix company cases an empty corporate shell is left and there are no assets to
fund the pursuit of the company‟s former assets and business. In this regard the
problem is related to the question of the administration of assetless companies.
1.143 The Committee invites comment on the appropriateness of the Cole
Royal Commission proposals in relation to phoenix companies and on what other
measures may be adopted to reduce the incidence of fraudulent phoenix
company activity.
56 Submission 6, p 12; submission 12, p 8;
57 Submission 6, p 12.
34
Attachment
The 1997 Report of the Working Party for the regulation of corporate insolvency
practitioners, Review of the Regulation of Corporate Insolvency Practitioners. Copies
of the review may be obtained from the Treasury website, www.treasury.gov.au under
Publications.
The 1998 Australian Securities Commission Research Paper 98/01 "A Study of
Voluntary Administrations in NSW".
The 1998 Report of the Legal Committee of the Companies and Securities Advisory
Committee on Corporate Voluntary Administration. Copies of the Report may be
obtained from the Corporations and Markets Advisory Committee website at
http://www.camac.gov.au under Final Reports.
The May 2000 Report of the Companies and Securities Advisory Committee on
Corporate Groups (approximately half of the Advisory Committee‟s
recommendations related to insolvency law). Copies of the Report may be obtained
from the Corporations and Markets Advisory Committee website at
http://www.camac.gov.au under Final Reports.
Three reports of the Parliament of Victoria “Curbing the Phoenix company”, 1994 and
1995
CLERP 8, “Cross Border Insolvency Promoting International Cooperation and
Coordination”, 2003.
Final Report of the Royal Commission into the Building and Construction Industry,
(The Cole Royal Commission), February 2003. The Report made a number of
recommendations in relation to phoenix companies (see Recommendations 104-109
and Chapter 12).
Report of HIH Royal Commission, April 2003