VIEWS: 12 PAGES: 11 POSTED ON: 10/10/2011
Topic 10: Pre-Liquidation Arrangements Question 1. Explain the differences between the alternative types of schemes of arrangement. Reading pages: 570 – 573 The schemes for arrangement provisions in Pt 5.1, ss 410-415 of the Corporations Act enable the rights and liabilities of members and creditors of a company to be reorganized by a scheme of compromise or arrangement which complies with s 411. A scheme, once approved, binds the company, its members and creditors: s 411(4). An arrangement under s 411 requires an element of bargain. It must reasonably be supposed by sensible business people to be for the benefit of members or creditors: sited in Re Senodyne International Ltd (1995) 13 ACLC 221. For Creditors: The forms of schemes of arrangement generally take one of two forms: 1. Compromise scheme or arrangements; or A scheme of compromise arrangement is a plan, which by law binds a company’s creditors or members or both to some form of re-arrangement of their rights and obligations. Under this scheme or arrangements creditors agree to either: Receive a lesser sum to fully satisfy the debts owed by the company. For example, the creditors may accept to be paid 50 cents for each $1 owed; or Take shares in the company as a means of satisfying the debts. In either case, once the lesser payment has been made or shares allotted, the company is released from its contractual obligations and able to resume normal business operations. 2. Moratorium scheme or arrangement Under these arrangements the company is to satisfy the debts of the creditors in full. However, repayment of the debts is deferred for a specified period of time. This type of arrangements is viewed as long – term arrangement. In this scheme, a scheme administrator or manager is appointed by the creditors, and assumes the business affairs of the company and takes over the functions of its directors, until the debts are satisfied. An advisory committee comprised of representatives of creditors and members generally supervises the scheme administrator. These arrangements vary according to how creditors agree to have their debts satisfied. For Members: This involves reorganization of rights and liabilities of members only. Section 9 defines arrangement to include a reorganization of share capital of a body corporate by the consolidation of different classes of shares or by the division of shares into different classes. Therefore, the scheme may alter the rights of particular classes of shareholders. For example, preference shares may be converted into ordinary shares if it is not otherwise possible to do this. Case: (1) Re Crusader Ltd (1995) 13 ACLC 1008, states the conversion preference shares into ordinary shares. Transfer of assets of one company to another company and controlled by the shareholders’ reconstruction. Case: (2) Re Advance Bank Australia Ltd (1997) 15 ACLC 62 defines merger between two or more companies. Several companies may agree to merge by transferring their assets to a new company, which in turn cancels the existing shares and issues shares in the new company to the members of the merging companies. A merger may also be achieved by the cancellation of the shares of one company and the issue of shares in the other company to those shareholders whose shares were cancelled. These are referred to as amalgamation schemes. In this scheme the court approval is necessary. Topic 10: Pre-Liquidation Arrangements Statutory requirements to implement a scheme of arrangement: The Corporations Act 2001(Cth) lays down a procedure to be followed to enable a scheme of arrangement to be entered into, sec 411 and 412 being the main provisions. Some of the main points under these sections are: To initiate the process, meeting must held with each class of member or creditor to be affected by the scheme. However, such meetings can only be arranged via a court order. The company itself cannot call a meeting for the purpose of proposing a scheme of arrangement. There is however a restriction on the ability of the court to grant an order for the convening and holding of meeting. Section 411(2)(a) prevents the court from making an order for the convening and holding of meetings unless notice has been given to ASIC at least 14 days prior to the application for the order being heard. A draft explanatory statement must accompany the notice. The order will then only be granted if the court is satisfied ASIC has had a reasonable opportunity to: (a) examine the proposed scheme and draft explanatory statement, and (b) make submissions to the court regarding the proposed scheme: s 411(2)(b). The proposed scheme must be presented to each meeting between the company and its creditors; or a class of creditors for approval of majority of at least 75% of voting either in person; or by proxy at the meeting: s 411(4)(a). If the proposed scheme is accepted and passed at the required meetings, it must then be submitted to the court. The scheme will only then become binding on the company, its creditors or members if the approved by the court order: s 411(4)(b). The process involved in the implementation of a scheme of arrangement clearly indicates that it is subject to significant court intervention, in terms of approval and alteration where deemed necessary. Effect of the scheme of arrangement: A scheme of arrangement is a contractual document and therefore binding in nature. Section 411(4) identifies the circumstances under which a scheme of arrangement becomes binding: If agreed to by at least a 75% majority at a meeting between the company and its members or creditors, including any class of member or creditor, convened by court order; and If the scheme is approved by court order subsequent to the meetings being held. Further, because of its contractual nature, the scheme will operate to override any existing provision of a company’s constitution and/or replaceable rules. This means that a scheme of arrangement will override s 140(1). Recall this section deems a company’s constitution and/or replaceable rules to be a contract binding on the company, its members and certain officers. Question 2. (i) Is there a difference at law, between the role of a receiver and that of a manager? Explain. Role of receiver: (a) Common law position A receiver is a person who is appointed to collect and receive the debts and other property belonging to another person. A receiver can be appointed whenever an impartial person is required to collect and receive debts and other assets. The appointment of a receiver is often a device used by creditors of a company for the recovery of debts. At common law there is a clear distinction drawn between the role of a receiver and that of a manager, and because of the distinction, both a receiver and manager would be required to be appointed. The distinction between the roles was explained in Re Manchester & Milford Railway Co (1880) 14 Ch D 645, according to this case: Topic 10: Pre-Liquidation Arrangements (1) a receiver is a person who takes control of property or assets and deals with such property or assets as a means of satisfying debts. The control of the property or assets may extend to collecting income and selling the property or assets as a mean; of satisfying the debt. However, a receiver is not responsible for the carrying on of business or trade on behalf of another party; (2) a manager, on the other hand is a person who undertakes the responsibility for the carrying on of business or trade in the hands of a receiver. The ole of the manager is to undertake operations on behalf of the business in the hands of a receiver. (b) Statute law position or; (ii) How has the Corporations Act 2001(Cth) overcome the difficulties associated with the distinction between such roles? The Corporation Act 2001 (Cth) does not precisely define the term “Receiver”. It does through a number of sections deem the role of receiver to also incorporate that of manager. The main sections are: (i) Section 90 which deems a receiver to be a manager if the receiver manages the affairs of the company or has been given the power to do so by the terms of the appointment; (ii) Section 420(2)(h) which grants to a receiver the power to carry on any business of the corporation. A receiver is empowered to perform the role of a manager without the need for one to be formally appointed; and (iii) Section 82A(1)(d), which defines as officer of a corporation to include a receiver and manager appointed under an instrument of appointment. The section recognizes a receiver as assuming the role of manager. Question 4. How may a receiver be appointed and what are the differences between the methods of appointment? A person may be appointed as a receiver of a company in a number of ways. Generally, only a registered liquidator, being a natural person, may be appointed a receiver: s 418(1)(d). Section 418(1) lists persons disqualified from being receivers. A receiver may be appointed either: (a) by the court; or (b) by way of private appointment. (a) Appointed by the court: The principal ground upon which a court will appoint a receiver is when the company’s assets or securities are under threat. The court’s concern is whether a company is meeting outstanding debts in relation to assets or securities, such as the repayment of loans. As noted previously, the appointment of a receiver is a tool often used by creditors as a means of recovering a debts. The court is given the power to appoint receivers through various statutes: a) S 1323(1)(h) of the Corporations Act 2001 (Cth). S 1323(I)(h) enables ASIC or an aggrieved person to apply to the court for an order that a receiver be appointed. An aggrieved person is a person who is owed money by another in the form of: - a debt; or - by way of damages or compensation or otherwise; or - to account for securities, future contracts or other persons. The court has a power to appoint a receiver where: - an investigation is being carried out in relation to an act or omission that does or may constitute a contravention of the law; or - a prosecution or civil proceeding has commenced for a contravention of the law. According to s 1323(1)(h) a receiver may be appointed by the court not only in relation to the assets of the company but also in relation to the assets of natural persons associated with company. For example, company directors. However, an appointment under s 1323(1)(h) will result in a receiver having restricted powers. The powers are limited to a receiver preventing the company Topic 10: Pre-Liquidation Arrangements from dealing with its assets. The powers do not entitle the receiver to sell the company’s assets or carry out investigations to determine whether the company or its officers have contravened the law: ASC v Aust-Home Investment Ltd (1993) 11 ACLC 438. b) S 233(1)(h) of the Corporations Act 2001 (Cth). This section enables the court to appoint a receiver where there is evidence of either the affairs of the company or acts or omissions, or proposed acts or omissions, are being conducted in an oppressive or unfair manner. c) S 62 of the State Supreme Court Act 1958 (Victoria). The Supreme Court of Victoria may appoint a receiver on a discretionary basis where it is just and convenient to do so. The section will enable the Court to appoint a receiver on any ground considered just and convenient, as it determines. (b) Appointed by private (secured creditors): The private appointment of a receiver occurs by way of a contractual arrangement being entered into with a company and terms of the contract allowing for an appointment in the event of a default (breach) under the contract. The private appointment of a receiver does not occur through any court intervention. Private appointment of a reviver usually occurs as a result of a loan agreement or debenture trust deed having been entered into with the company. As the lender or debenture holder is given security over company property, the instruments granting the security generally also grant the power to appoint a receiver in the event of default under the instrument. The instrument allowing for the appointment of a receiver is referred to as the instrument of appointment. Generally, it is quite common for a trust deed to permit a receiver to be appointed if: - the company ceases to carry on its business or is operating at a loss; - any person files an application to wind up the company; - the company reduces its capital; or - the security is put at risk by a failure to maintain or insure it. Question 5. What are the powers of: (i) a court appointed receiver? (ii) a privately appointed receiver? (i) A person appointed a receiver by the court would be granted and determined by the court responsible for the appointment. A court appointed receiver and manager is regarded as an officer of the court. This is also the case with a liquidator appointed by order of the court. Court appointed receiver managers are under more stringent duties than receivers appointed out of court. Debentures usually provide for the appointment of a receiver or receiver and manager to avoid the legal costs associated with applications to the court for the appointment. (ii) In the case of a privately appointed receiver the instrument of appointment will determine the extent of a receiver’s powers. The appointment of a privately appointed receiver does not affect the legal personality of the company nor does it displace the board of directors. The appointment of a receiver and manager or other controller does, however, affect the ability of the directors to exercise their powers of management. The Corporations Act 2001 (Cth) also confers specific powers on receivers, in addition to the powers granted by way of court order or instrument of private appointment. Section 420(1) empowers a receiver to do all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed; while section 420(2) lists specific powers of a receiver. Such as: To enter into possession and take control of property of the corporation; To lease, let or hire or dispose of property of the corporation; To borrow money on security of property of the corporation; To convert property of the corporation into money; To carry on any business of the corporations; To execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the corporation; and Topic 10: Pre-Liquidation Arrangements To make an application for the winding up of the corporation in the name of the corporation. The Corporations Act 2001(Cth) also incorporates other provisions aimed at enabling a receiver to get on with the job. Sections 429 and 430 enable a receiver to access information and request reports from officers and other persons associated with the company. Question 7. (i) What statutory duties are imposed on receivers? Statutory duties are subject to both the Court appointed and privately appointed receivers. These duties are: (i) S 421 sets out the duties of a receiver in relation to bank accounts and accounting records; (ii) S 422(1) imposes the duty on receivers to report certain matters to ASIC. They are: Where the company’s present or past officers have committed an offence against the company; Where there is evidence of a misapplication of funds, negligence, breach of duty or breach of trust by a person who has been involved in the formation, promotion, administration, management or winding up of the corporations. (iii) S 427(1)(a) requires the receiver to give notice of the appointment to ASIC within 7 days of the appointment, and S 427(4)(a) requires the receiver to give notice to ASIC within 7 days of the termination of the appointment as receiver; (iv) S 429(2)(a) requires the receiver to give notice of the appointment to the corporation as soon as practicable after the appointment; Subsection 2(b) requires the corporation to submit to the receiver within 14 days of the receipt of the notice, a report of the affairs of the corporation as at the date of the appointment; Subsection 2(c) then requires the receiver to lodge a copy of the report together with any comments to ASIC within one month of the receipt of the report; and (v) The section 232(2), (4), (5) and (6) apply to receivers. Recall these duties apply to officers of a company (and not merely directors), which includes a receiver. (ii) Explain the common law duties of receivers and on whom such duties are imposed. The importance legally of the office of receiver is apparent at law, by the imposition of duties on receivers. A privately appointed receiver is subject to both common law and statutory duties. The common law duties require privately appointed receivers to act honestly and in a no-reckless manner. This means, that amongst other things, receivers must act bona fide; must be fair and impartial; must not act to the detriment of the company as a whole; must not act for personal gain or in a grossly negligent manner. Question 8. What effect does the state of receivership have upon? (i) the company? The appointment of a receiver will carry with it certain ramifications for the company; The company will remain a separate legal entity for the duration of the receivership. Although the company remains a separate legal entity, its legal capacity is diminished. The loss of legal capacity is reflected in section 420(2)(h) as a receiver is empowered to carry on the business of the company including the power to contract on its behalf. Notice of the company’s diminished legal capacity must also be made public. According to s 428(1) a statement advising that a receiver has been appointed must appear after the company name on every public document and negotiable instrument. The company will loose control over assets subject to the receivership. According to the terms of the appointment the assets may be transferred to the receiver. (ii) the directors? The receiver, does not however, assume the role of the board of directors. The board is not dissolved by the appointment of a receiver. Directors may lose their ability to manage the company, but they retain their right to initiate legal proceedings on its behalf. Directors Topic 10: Pre-Liquidation Arrangements remain subject to their common law and statutory duties, throughout the company’s state of receivership. Question 9. Is any person entitled to be appointed as an administrator? Explain. No, section 9 of the Corporations Law defines administrator to mean an administrator of either a company under voluntary administration or a deed of company arrangement. A person eligible to be appointed as administrator are as following; S 448B requires the person appointed to be a registered liquidator. Consent in writing must be given by the person to be appointed as administrator for the appointment to be effective: s 448A; S 448C identifies persons disqualified from being appointed as administrator, they include; - a debtor or creditor of a company or a related company, owing or being owed in excess of $5,000: s 448C(1)(a) and (b); - an officer or auditor of the company: s 448C(1)(c) and (e); - an officer of a body corporate that is a mortgagee of property of the company: s 448(1)(d); - a partner or employee of an auditor of the company: s 448C(1)(f); - a partner, employer or employee of an officer of the company: s 448C(1)(g); and - a partner or employee of an employee of an officer of the company: s 448C(1)(h). Question 10. (a) How may an administrator be appointed? Explain. An administrator can be appointed; By resolution of directors in belief corporation is insolvent or likely to become insolvent: s 436A(1). This occurs through the board of directors passing a resolution to be the effect that in their opinion the company is insolvent or likely to become insolvent at some future time. The board also resolves that an administrator should be appointed. The directors are given the opportunity to appoint an administrator even before the company becomes insolvent. The right to appoint an administrator is lost once, and if, the winding up of a company has commenced: s 436A(2). Liquidator or provisional liquidator if corporation is insolvent or likely to become so: s 436B(1). If a liquidator or provisional liquidator of a company exists, they may appoint an administrator in writing, if he/she thinks that the company is insolvent or is likely to become insolvent at some future time. The liquidator or provisional liquidator may, with the leave of the court, appoint himself or herself as administrator: s 436B(2). Chargee entitled to enforce charge over all or a large part of corporation’s property: s 436C(1). More precisely, the section refers to a person who is entitled to enforce a charge on the whole, or substantially the whole of a company’s property. A charge is a form of mortgage over the assets of the company. If there is a default under a charge, the chargee may appoint an administrator. However, the chargee must hold a charge over whole or substantially the whole of the company’s property to be entitled to appoint an administrator. (See study guidebook page: 137). Topic 10: Pre-Liquidation Arrangements (b) What legal obligations are imposed on an administrator in a voluntary administration? The administrator has general powers under s 437A to take control of the company’s business, property and affairs, carry on, terminate or dispose of the company’s business or property and perform any function and exercise any power that the company and its officers could previously perform or exercise. In so acting, the administrator is taken to be acting as agent of the company: s 437B. No person other than the administrator may act as an officer of the company without the administrator’s consent” s 437C(1). The Osborne Computer Corp Ltd v Airroad Distribution Pty Ltd (1995) 13 ACLC 1129, the Supreme Court of New South Wales held that s 437A did not allow an administrator to destroy a third party’s rights in property created before the administration. In particular, s 437A did not give the administrator the power to take control of computer components in the possession of a computer assembler where those components were subject to a pledge created prior to the commencement of administration. The administrator is also given further additional powers under s 442A. The administrator may remove a director from office, appoint a person as a director, and do anything in the company’s name and on its behalf such as executing a document or bringing proceedings and whatever else is necessary for the purposes of the administration. The administrator may dispose of the business and property of the company without convening a general meeting of members: Brash Holdings Ltd v Shafir (1994) 12 ACLC 619. The administrator also has the power to terminate employment of company employees: Australian Liquor, Hospitality & Miscellaneous Worker’s Union v Terranora Lakes Country Club Ltd (1996) 14 ACLC 1200. Liability and indemnity: The administrator is personally liable for debts incurred in the course of the administration for services rendered, goods bought or property leased or used: s 443A(1). This is despite any contrary agreement, although the administrator retains rights against the company or anyone else: s 443A(2). This liability on the part of the administrator is necessary to encourage third parties to do business with the company so as to enable it to trade out of difficulties. In Molit (No 55) Pty Ltd v Law Soon Australia Pty Ltd (1996) 14 ACLC 1371, the Federal Court held that an administrator was not liable for damages caused by his removal of fixtures and fittings from leased premises. A liability for damages was not a debt for purposes of s 443A(1). The administrator is also personally liable for the payment of rent on property leased before he/she was appointed: s 443B. This liability only arises seven days after appointment, during which time the administrator can make a preliminary assessment of the financial position of the company and decide whether the continuation of the lease is the appropriate course. If the administrator decides not to continue the lease, no personal liability for rental payments is incurred. The administrator is not liable for rental payments after a receiver of the property is appointed or the chargee or an agent takes steps to assume control of the property under the charge: s 443B(7). The court may also excuse the administrator from liability: s 443B(8). (c) What legal procedures must be followed in the case of a voluntary administration of a company? The legal procedures must be followed by a voluntary administrator are; Notify appointment; Organize a meeting of creditors; Investigate the financial position of the company: s 438A(a); To form an opinion as to the course of action in the creditors’ best interests; - what to recommend to the creditors; - s 438A(b) whether the company and its creditors should enter into a deed of company arrangement; end the administration; or wind up the company. Topic 10: Pre-Liquidation Arrangements (d) What may be the outcome of the second creditors’ meeting for the company? A second meeting must follow the first meeting of creditors. The second meeting will determine the fate of the company. Section 439A(1) requires the administrator to convene a creditors meeting within the time period prescribed by subsection. Section 439A(5)(b) prescribes the time period as within 21 days after the commencement of the administrator. The time period is extended to 28 days where the administration commences in December or less than 28 days before Good Friday: s 439A(S)(a). The court may extend the convening period pursuant to section 439A(6). The meeting must then be held within 5 business days after the end of the convening period: s 439A(2). The meeting must be convened by the administrator pursuant to section 439A(3). That is, notice of the meeting n writing must be given to as many of the company’s creditors as reasonably practicable. Further, a copy of the notice must be placed in a national newspaper, or a daily newspaper that circulates in each jurisdiction in which a company carries on business or has a registered office. Section 439A(4)(a) provides that the notice of the meeting must be accompanied by a report by the administrator regarding the company’s business, property, affairs and financial circumstances. Further, section 439A(4)(b) requires the report to be accompanied by a statement setting out the administrators’ option, with reasons, regarding the following: Whether it would be in the creditors’ interests for the company to execute a deed of company arrangement; or Whether it would be in the creditors’ interests for the administration to end; or Whether it would be in the creditors’ interests for the company to be would up. At the second meeting the creditors may pass a resolution resolving according to section 439C: That the company execute a deed of company arrangement; or That the administration should end; or That the company be wound up. (This would be a consideration where the creditors are of the opinion that the company cannot be salvaged by a voluntary administration.) (e) What occurs where a company fails to execute a deed of company arrangement? The deed of company arrangement: Section 444B(2) requires the company to execute the deed of arrangement within 21 days after the meeting of creditors (at which it was resolved to enter into a deed of company arrangement) or such further period as the court allows, where an application is made within the 21 day period. Section 444B(5) requires the administrator to also execute the deed as soon as practicable after the company executes it. The deed is deemed to have become a deed of company arrangement once executed by both the company and deed administrator: s 44B(6). If the deed of company arrangement is not executed by the company within the prescribed 21 days period, a transition will occur from a voluntary administration to a creditors’ voluntary winding up. The administrator, in such circumstances, is deemed to be appointed as liquidator of the company: s 446A(1)(b) and (4). Further, the company is taken to have passed a resolution resolving that the company be wound up if they fail to execute the deed of company arrangement within 21 days of the creditors’ meeting. The company is deemed to have passed the resolution without the need for a declaration of solvency being provided as required by section 494(1): s 446A(2). Once the deed of company arrangement is executed the administrator must: - publish a notice in a national newspaper; or - in a daily newspaper in each jurisdiction where it has a registered office or carries on business; and - lodge a copy of the notice with ASIC: s 450B. Topic 10: Pre-Liquidation Arrangements Question 11. Hard Times Pty Ltd is involved in the breeding of fresh water trout. Three years ago the company borrowed $5 million from various creditors to enable the company to establish a substantial trout-breeding program. Unfortunately, 12 months ago the breeding farm contracted bacteria, which eliminated all trout, causing significant losses to the company. The company has taken almost 12 months to contain the bacteria and believes it will have a successful harvest in the next 8-10 months. The creditors not being as confident as the directors, now come to you seeking advice as to legal avenues available to them to recover their existing debts but without the need to wind up the company. Advise them. There are several pre-liquidation arrangements the creditors could use to recover their debts without the need of windup the company. For example: 1) Schemes of arrangement (a) Compromise scheme or arrangement A scheme of compromise arrangement is a plan, which by law binds a company’s creditors or members or both to some form of re-arrangement of their rights and obligations. Under this scheme or arrangements creditors agree to either: Receive a lesser sum to fully satisfy the debts owed by the company. For example, the creditors may accept to be paid 50 cents for each $1 owed; or Take shares in the company as a means of satisfying the debts. In either case, once the lesser payment has been made or shares allotted, the company is released from its contractual obligations and able to resume normal business operations. (b) Moratorium scheme or arrangement Under these arrangements the company is to satisfy the debts of the creditors in full. However, repayment of the debts is deferred for a specified period of time. This type of arrangements is viewed as long – term arrangement. In this scheme, a scheme administrator or manager is appointed by the creditors, and assumes the business affairs of the company and takes over the functions of its directors, until the debts are satisfied. An advisory committee comprised of representatives of creditors and members generally supervises the scheme administrator. These arrangements vary according to how creditors agree to have their debts satisfied. 2) A receiver can be appointed Role of receiver: Common law position A receiver is a person who is appointed to collect and receive the debts and other property belonging to another person. A receiver can be appointed whenever an impartial person is required to collect and receive debts and other assets. The appointment of a receiver is often a device used by creditors of a company for the recovery of debts. At common law there is a clear distinction drawn between the role of a receiver and that of a manager, and because of the distinction, both a receiver and manager would be required to be appointed. The distinction between the roles was explained in Re Manchester & Milford Railway Co (1880) 14 Ch D 645, according to this case: (3) a receiver is a person who takes control of property or assets and deals with such property or assets as a means of satisfying debts. The control of the property or assets may extend to collecting income and selling the property or assets as a mean; of satisfying the debt. However, a receiver is not responsible for the carrying on of business or trade on behalf of another party; (4) a manager, on the other hand is a person who undertakes the responsibility for the carrying on of business or trade in the hands of a receiver. The ole of the manager is to undertake operations on behalf of the business in the hands of a receiver. Topic 10: Pre-Liquidation Arrangements Statute law position; The Corporation Act 2001 (Cth) does not precisely define the term “Receiver”. It does through a number of sections deem the role of receiver to also incorporate that of manager. The main sections are: (i) Section 90 which deems a receiver to be a manager if the receiver manages the affairs of the company or has been given the power to do so by the terms of the appointment; (ii) Section 420(2)(h) which grants to a receiver the power to carry on any business of the corporation. A receiver is empowered to perform the role of a manager without the need for one to be formally appointed; and (iii) Section 82A(1)(d), which defines as officer of a corporation to include a receiver and manager appointed under an instrument of appointment. The section recognizes a receiver as assuming the role of manager. 3) A voluntary administrator Voluntary administration would be a highly unlikely pre liquidation arrangement as the director feel there will be a successful harvest. If the creditors are a chargee they have the right to appoint an administrator: s 436C(1). The second meeting would thus determine the fate of the company. The two options open to the creditors would be as the company executes a deed of company arrangement; (a) the company executes a deed of company arrangement to be administered in such a way that maximizes the chances of the company, or as mach as possible of its business, continuing in existence. (b) that the administrator should end or eventually lead to a deed of company arrangement being entered into between the company and its creditors. Ultimately for the creditors to appoint a receiver would be the most preferable pre-liquidation arrangement. Question 12. (a) What are the differences between receivership, voluntary administration and winding up in insolvency? Receivership: An alternative form of pre-liquidation arrangement available to the company is the appointment of a receiver. A state of receivership comes about following the appointment of a receiver. An agreement as such is not entered into (for example, between the company and its members and creditors), as a means of bringing about the receivership. A receiver is appointed to take charge of company assets as a means of recovering outstanding debts. A receiver may be appointed in relation to specific assets or the assets generally of a company. The terms of the appointment of the receiver will determine the nature and extent of company assets to be controlled. At any given point in time there may be more than one receiver appointed to take charge of different assets to recover individual debts. Voluntary administration: Voluntary administration can only be considered as a pre-liquidation arrangement where a company is insolvent. Section 435A reflects the proposed aim of voluntary administration being: to provide for the business, property and affairs of an insolvent company to be administered in a way that; maximizes the chances of the company, or as much as possible of its business, continuing in existence; or if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company. Therefore, the provisions are aimed at salvaging, as far as possible, the business and the entity itself, of an insolvent company, and failing this, at providing a smoother transition to a liquidation of the company than would result from any other pre-liquidation arrangement. Topic 10: Pre-Liquidation Arrangements Winding up: A winding up in insolvency is procedure for a creditor who usually brings to wind up the company. Step 1, Who can initiate a winding up in insolvency? Who has standing? Winding up in insolvency is initiated by the application of a creditor or 1 or more of the persons listed in s 459P(1). Leave of court is required for the certain applicants. (b) Why would the directors of an insolvent company chose to place their company into voluntary administration? The administration of a company begins when an administrator is appointed: s 435C(1). Sections 436A, 436B and 436C specify who has the power to appoint an administrator. The insolvent trading provisions provide an incentive for directors of a company in financial difficulties to appoint an administrator as soon as there are reasonable grounds for suspecting that it is insolvent. Director who fail to prevent the company incurring debts when there are reasonable grounds for suspecting that it is insolvent contravene s 588G. If the company is subsequently wound up, its liquidator can bring an action against contravening directors claiming compensation: s 588M. Under s 588H(5) a director avoids liability if the director proves that he or she took all reasonable steps to prevent the company from incurring the debt. In determining whether this defence is proved, s 588H(6) directs the court to have regard to any action the director took with a view to appointing an administrator, when that action was taken and the results of that action. The income tax assessment Act also provides an incentive for directors to appoint an administrator. Under s 222AOC of that Act directors may be personally liable for their company’s unremitted employee group tax liability. Directors avoid personal liability if, among other things, they arrange for their company to go into voluntary administration: ss 222AOJ and 222API. (c) Homer Pty Ltd borrowed $500,000 from the Springfield Bank on security of a registered fixed charge over some of its plant and equipment. Homer Pty Ltd failed to pay the last two interest installments. The other day the bank was notified that the directors of Homer Pty Ltd had appointed an administrator pursuant to section 436A of the Corporations Act. Advise whether or not the Springfield Bank is legally entitled to immediately seize the plant and equipment secured by the fixed charge. Would your answer be different if the Springfield Bank’s charge covered all the assets of Homer Pty Ltd? The compulsory winding up in insolvency to emphasizes the distinction between the winding up of solvent and insolvent companies. Section 459A enables the court to order that an insolvent company be wound up in insolvency on the application of a creditor or any one or more of the persons listed in s 459P(1). The Corporations Act also allows a court to order that a company be wound up in insolvency in other circumstances. Section 459B provides for a winding up in insolvency in the case of applications under three provisions of the Corporations Act. Under that section, the court may order a winding up in insolvency if it is satisfied that the company is insolvent where: A member has made an application for a remedy under s 233, the oppression remedy; A person listed in s 459P has applied under s 462 for the winding up of a company on grounds other than insolvency; or ASIC has applied for a winding up under s 464 after having investigated a company’s affairs and has concluded that the company is insolvent. When the company fails to pay the amount owing or apply to the court to have it set aside under s 459G as section 459(1) demand is defective (as per s 9) and substantial injustice would be caused if the demand not set aside, or s 459H the debt itself is disputed. Failure to comply with statutory demand such as, section 459F where period for compliance has passed and debt not paid by company. General rules: 21 day period as per s 459F(2)(b); or 7 days after final decision of the court in an application by the company: s 459(2)(a)(ii).
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