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CORPS LAW > EXTERNAL ADMINISTRATION > Flashcards

EXTERNAL ADMINISTRATION Flashcards

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1
Q

INSOLVENT

A

when a company is unable to pay its debts as and when they become due and payable (s 95A).

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2
Q

CREDITOR

A

someone to whom the company owes money.

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3
Q

SECURED CREDITOR

A

creditor whose debt is protected by a security interest (eg bank has a fixed charge over a company’s land, plant and equipment; and a floating charge over the company’s cash, stock and book debts).

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4
Q

UNSECURED CREDITOR

A

creditor whose debt is not protected by a security interest (eg a firm that has supplied stationary to the company, on the basis that the company has 30 days to pay).

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5
Q

SECURITY

A

a charge or other legally recognised interest in a company’s property that gives some kind of protection to a person who loan money (or provides goods or services on credit) to a company.

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6
Q

CHARGE

A

a mortgage or an agreement to give or execute a charge or mortgage, whether on demand or otherwise.

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7
Q

FIXED CHARGE

A

one that is intended by the parties to attach to a specific item of property (such a land/piece of equipment) in such a way that the company cannot dispose of the property without the consent of the lender.

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8
Q

FLOATING CHARGE

A

is intended by the parties to cover a class of property but not to attach to specific items within the class until some future event occurs.

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9
Q

WHAT IS EXTERNAL ADMINISTRATION

A
  • When a company becomes insolvent, it should go into external administration of some sort
    › Ch 5 of the Corporations Act External Administration
  • ‘External Administration’ means administration of companies by a person/people appointed to take over control from the directors
  • In Australia, the three types of external administration are:
  • Where insolvency is the reason for the company entering external administration, the three types of external administration serve different purposes
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10
Q

THREE TYPES OF EXTERNAL ADMINISTRATION

A

› Receivership;
› Voluntary administration (VA);
 Deed of company arrangement (enter into this after company enters into VA).
› Liquidation (or winding-up)
- Note also: scheme of arrangement can be used to implement a restructure to avoid insolvency but is not a formal insolvency regime.

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11
Q

S 95A

A

SOLVENCY AND INSOLVENCY
(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable
(2) A person who is not solvent is insolvent.

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12
Q

CASH FLOW V BALANCE SHEET TEST

A

› ASIC v Plymin, Elliot & Harrison (No 1) [2003] VSC 123 at 370, Mandie J quoting Professor Keay “The insolvency factor in avoidance of antecedent transactions in corporate liquidations” (1995) 21 Monash University Law Review 305 at 307:
 “The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors”
 Mere consequence under cash flow test that assets exceed liabilities.
 Use the cash flow test over the balance sheet test (Austin & Ramsay).

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13
Q

INSOLVENCY V TEMPORARY LACK OF LIQUIDITY

A

ASIC v Plymin, Elliot & Harrison (No 1) [2003] VSC 123 at 374:
› “In Sandell v Porter [1966] HCA 28 the High Court - - - observed that it was important not to confuse insolvency with a temporary lack of liquidity and said (per Barwick CJ): ‘Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s moneys are not limited to cash resources immediately available. They extend to moneys which he can procure by realising by sale or mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of debts and to the circumstances, including the nature of the business, of the debtor’”.

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14
Q

NATURE OF DUE AND PAYABLE

A

Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at [54] per Palmer J:
› “The commercial reality that creditors will normally allow some latitude in time for payment does not, in itself, warrant a conclusion that the debts are not payable at the time contractually stipulated and have become debts payable only on demand.”

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15
Q

INDICATORS OF INSOLVENCY

A
  • ASIC’s Regulatory Guide 217 Duty to prevent insolvent trading: Guide for Directors and Table 2 of the Appendix:
    › The company is experiencing cash flow problems;
    › The company has a history of continuing trading losses
    › The company is experiencing difficulties selling its stock
    › Creditors are not being paid on agreed trading terms (creditors then requiring cash only delivery terms or special payments on existing debts before supplying further goods/services)
    › The company is not paying its taxes
    › Cheques are being returned dishonored
    › The company can no longer obtain appropriate or further finance
    › The company cannot produce accurate financial information on a timely basis
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16
Q

AIMS OF INSOLVENCY LAW

A
  • Insolvency law plays an important role in corporate regulation; it is inevitable that some companies will fail leaving unpaid debts
  • The consequences of insolvency can affect many parties; employees, creditors, tax authorities, directors, suppliers, customers, the community
  • Insolvency law may:
    › Provide a fair and orderly process for dealing with the financial affairs of insolvent companies
    › Provide mechanisms that enable both debtor and creditor to undertake administration tasks with least possible delay and expense
    › Insolvency administration should be impartial and efficient as possible
    › Insolvency law should provide a convenient means of collecting or recovering property that should be applied toward payment of debts and liabilities.
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17
Q

RECIEVERSHIP

A
  • Available to secured creditors – a secured creditor may appoint a receiver to realise its security
  • Primary objective is to sell secured assets for benefit of secured creditor
  • Powers of receiver set out under s 420
  • Receiver has duty of care under s 420A to sell property for the ‘best price that is reasonably obtainable’
  • Receiver has control of secured property rather than liquidator or administrator
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18
Q

PART 5.2

A
  • Receivership involves appointing a ‘receiver’ or controller of property of a company
    › Usually appointed by a secured creditor (usually a bank or financial insitiution
  • The purpose of a receivership is to use an external administrator to take possession of a corporation’s property and realise it to satisfy or repay the corporation’s debt owed to the secured creditor
  • The definition of ‘property’ is broad: s 9 Corporations Act
  • The person appointed as receiver must be a registered liquidator, ensuring that the receiver is independent and experienced in managing insolvent companies
  • There are two ways to appoint a receiver:
    › Appointment by secured creditors (usually a bank) (private appointment by contract)
    › Appointment by the court
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19
Q

S 420

A

provides for both a general power and numerous specific powers available to receivers:
› (1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, 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.

20
Q

S 420(2)

A

provides additional powers, such as, the power to enter into possession and take control of the property of the company; to lease or dispose of it; to borrow money security of it; to insure it; and to convert it into money

21
Q

S 420A

A

requires that a receiver sell the property for the best price reasonably obtainable or its market value

22
Q

DUTIES OF RECIEVERS

A
  • Duties are owned to the appointing secured creditor, but receivers also owe duties to the debtor company to exercise powers in good faith and for proper purpose and a duty of care not to sacrifice the company’s interests recklessly
23
Q

LIABILITY OF RECIEVERS

A
  • s 419: the receiver is liable for debts incurred in the course of the receivership for services rendered, goods purchased or property hired, leased, used or occupied under s 419
  • The receiver, as an agent, would expect to be reimbursed by the company for these debts
  • A receiver is considered an officer of the company and will be subject to officers’ duties as found in ss 180-184
24
Q

PART 5.3A

A
  • The voluntary administration scheme is governed by Part 5.3A of the Corporations Act
  • The aim of voluntary administration provisions are to maximise the chances of the company or its businesses remaining in existence and, if this is not possible, to achieve a better return to creditors than would result from an immediate winding up: s 435A
25
Q

2 PHASES OF VA

A

› i.) Begins with the appointment of a voluntary administrator
 1st meeting w/in 8 days of the appointment.
 Members have opportunity to get new VAdministrator, if they vote on that (i.e. think conflict of interest or that their friendly with director).
› ii.) The second phase commences at the conclusion of a (second) creditors’ meeting that decides the company’s future
 2nd meeting – happens within 5 days after end of convening period (20 days after appointment).
 Creditors will decide what action. Liqiudation, wind up, DOCA.
› Quick process generally = 25 business days.

26
Q

WHAT IS VA

A
  • Voluntary administration involves the appointment of a registered liquidator as administrator; the administrator takes control of an insolvent company usually for a short period of time
  • The administrator’s task is to investigate the affairs of the company and report on whether a compromise or arrangement can be negotiated that would be acceptable to the company and its creditors
27
Q

VA AND CREDITORS

A
  • Creditors will have the final say on what happens to the company after voluntary administration ends
  • s 439C, creditors can decide:
    › The company enters into a deed of company arrangement (DOCA);
    › The company is wound up; or
    › The administration is terminated
28
Q

BEING PLACED INTO VA

A
  • In most cases, the decision to put a company into voluntary administration is made by the company’s directors (and does not require approval of shareholders, creditors or the court)
  • Directors may appoint an administrator if they believe that the company is insolvent or is likely to become insolvent: s 436A(1)
  • The court has a supervisory role in voluntary administrations and has general power to make such orders as it thinks appropriate: s 447A
  • Voluntary administration vs Reconstruction process for small companies
    › The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) inserted new restricting processes into the Corporations Act and allows eligible companies, with the assistance of a restricting practitioner, to retain control
29
Q

HALLMARKS OF VA

A

› Interim, creditor driven, short (25 business days)
› Administrator assesses company
› Moratorium on proceedings against company, see s 440D
 Moratorium or stay places on company during VA.
 Not civil proceedings can be brought against the company (unless written consent, or leave of court).
› Restrictions on exercising third party property rights, see s 440B
› Stay on ipso facto clauses, see 415D, 434J, 451E and 415FA
› No distribution to creditors

30
Q

HOW A COMPANY ENTERS VA

A

› Generally commenced by resolution of board of directors
› Administrator must consent to act, s 448A
› Administrator must be registered liquidator and not connected to company, ss 448B and 448C

31
Q

USUAL COURSE OF VA

A

› First creditor’s meeting, s 436E(2), creditors determine whether
 to appoint committee of inspection
 administrator should be replaced, Insolvency Practice Schedule, s 80-5
› Administrator investigates company’s affairs and prepares report, s 438A
› Second creditor’s meeting
 Generally convened 3-4 weeks after commencement administration, s 439A
 creditors determine, s 439C, whether:
* administration should end
* company should execute DOCA
* company should be wound up

32
Q

END OF VA

A

› If DOCA approved, see 444A
 administrator prepares & company executes within 15 days of end of 2nd creditors meeting, see 444B
 Administration ends when company & deed administrator sign deed
› Creditors resolve company  liquidation, see 446A
 Administrator becomes voluntary liquidator

33
Q

DOCA

A
  • Creditors’ claims can be compromised
  • Binds all unsecured creditors, see s 444D
  • Generally does not bind secured creditors unless they vote for it
  • Only available if someone (creditor, member, purchaser) proposes DOCA
  • Can discriminate between creditors provides not unfairly prejudicial
  • Requires majority in number and value, administrator has casting vote
34
Q

PURPOSE OF LIQUIDATION AND FUNCTION OF LIQUIDATOR

A
  • Liquidation is the process by which the company is prepared for and ultimately de-registered.
  • Once the company is de-registered it ceases to exist.
  • Role of liquidator
    › Investigate company’s affairs
    › Realise assets
    › Determine who the creditors are and what they are owed
    › Distribute the proceeds among creditors (and members if there is any surplus)
  • Liquidator’s role is not to enable company to survive
  • Liquidators powers, s 477
35
Q

PART 5.4

A
  • Liquidation is a form of external administration that ultimately results in the company being deregistered and ceasing to exist as a legal entity
  • The purpose of liquidation is to collect and realise the company’s assets and, out of the proceeds of this realization, pay the creditors in a fixed order of priority and adjust the rights of members
  • The company’s business can be terminated, or if any part of the business is salvageable, it will be sold; the non-operational company can then be deregistered
36
Q

2 FORMS OF WINDING UP

A

› Voluntary winding-up: If the company is solvent, then winding-up will be a members’ voluntary winding-up; if the company is insolvent, then a voluntary winding-up can only proceed as a creditors’ voluntary winding-up
› Compulsory winding-up: Commenced and conducted under the control of the court (Federal court and State and Territories Supreme Courts)

37
Q

ROLE OF LIQUIDATOR

A
  • A liquidator is required to investigate the affairs of the company, the causes of the failure and the past conduct of its business because they have to then prepare a preliminary report on the company under s 476
  • The investigation will assist to locate the assets of the company, collate the liabilities and identify and prosecute any breaches of duty by delinquent officers of the company
  • A liquidator, as a fiduciary, is expected to take all reasonable steps to preserve the property of the company until the assets are realized in the course of winding-up
  • During the course of winding-up, a liquidator has a statutory duty to report to ASIC as soon as practicable, and within six months, where it appears that an offence has been committed or there has been a misappropriation of company money or property or negligence, default or other breach in relation to the company
38
Q

STEPS IN LIQUIDATION

A
  • Realisation of assets
  • Investigate wrongdoing – eg s 533
  • Proofs of debts
  • Applying proceeds of realisation, s 556
  • Note different treatment of secured creditors
39
Q

EFFECTS OF WINDING UP

A
  • Prior to liquidation, all creditors are free to pursue their own claims to enforce payment of their debts; this right is lost once liquidation commences
  • A creditor’s pre-liquidation right to enforce its debts through legal action is replaced by an orderly, collective process controlled by the company’s liquidator
  • Creditors are paid first, then shareholders
40
Q

EFFECTS OF WINDING UP ON THE COMPANY

A

 The company continues to exist as a legal entity
 Liquidator takes complete control of the company; directors lose their powers to manage company; shareholders lose their right to transfer shares and cannot pass resolutions

41
Q

EFFECTS OF WINDING UP ON CREDITORS

A

 Secured creditors are largely unaffected; unsecured creditors must lodge a proof of debt and are entitled to a distribution only after secured creditors have been paid in full
 Unsecured creditors generally participate in distribution on the basis of receiving equal proportions of their debts

42
Q

INTER-RELATIONSHIP OF INSOLVENCY REGIMES

A
  • Consecutive / concurrent regimes
    › Australian Menswear has assets worth $1.5 million. It obtained finance from Banking Australia in the amount of $1.2 million. As security, the company granted a charge over its assets to Banking Australia.
    › With Australian consumers increasingly moving online and accompanied by Australian Menswear failure to move its stores online, the company hits tough times. It stops making repayments on the $1.2 million loan and Banking Australia subsequently appoints a receiver, whose primary job is to realise assets to the value of $1..2 million.
    › Shortly after a receiver is appointed, a liquidator is also appointed, the liquidator’s primary job is to realise the remaining assets of the company i.e. $300,000 for the benefit of the unsecured creditors.
43
Q

MOVING FROM ONE INSOLVENCY REGIME TO ANOTHER

A
  1. From administration to deed of company arrangement
  2. From administration to voluntary liquidation
  3. From liquidation or administration to receivership
  4. From receivership to liquidation
44
Q

OBJECTS OF ASIC

A

1 Objects
(2) In performing its functions and exercising its powers, ASIC must strive to:
a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and
b) promote the confident and informed participation of investors and consumers in the financial system; and
c) .
d) administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and
e) receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and
f) ensure that information is available as soon as practicable for access by the public; and
g) take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.

45
Q

AREAS ASIC COVERS

A
  1. Financial services
    › Financial product advice
    › Financial products…
  2. Consumer credit
    › National consumer credit code.
    › Banks, credit unions, debt management services etc.
  3. Markets
    › ASX.
    › Essentially facility which offers to acquire or dispose of financial products.
    › insider trading – market based offence.
  4. Corporations, auditors, liquidators
  5. Registry

CORPS LAW (8 decks)

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