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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 8.1

EXTERNAL ADMINISTRATION © John ORR.

This material is subject to copyright. Not to be reproduced without written permission from the author

Topic 8 External administration AIM: At the end of this topic you

should understand:

•  Insolvency meaning of and significance •  Role of receivership powers and duties of receivers •  Schemes of arrangement • Voluntary administration role and procedures and

Deeds of Company Arrangements (DoCA) • Winding up/liquidation

EXTERNAL ADMINISTRATION

•  Schemes of Arrangement •  Receivership • Voluntary Administration (VA)

•  (Deeds of company arrangement (DOCA))

•  Liquidation (winding up) next lecture

Definition of Insolvency

Balance Sheet Test Insolvency exists if value of total liabilities exceeds total assets Cash Flow or Commercial Test Insolvency exists if debtor is unable to pay debts as and when they fall due

Legislative Definition Section 95A Corporations Act Section 5(2) & (3) Bankruptcy Act ‘A person is “solvent” if, and only if, the person is able to pay all of the person’s debts, as and when they become due and payable;

A person who is not solvent is insolvent.’

External administration Company ordinarily managed by board of directors and senior executive officers May appoint external person to manage company and finances to either: •  Rescue company •  Provide fair/orderly process for dealing with its

property during insolvency

Shareholder primacy >>> benefit of creditors

Why is external administration important? Harmer Report (ALRC General Insolvency Inquiry) 1988 • Both debtors and creditors to participate with least possible delay and expense

•  Impartial, efficient and expeditious • Recover property to be applied toward payment of debts and liabilities of insolvent Co

• Pari passu – equal sharing between creditors should remain

• Support commercial and economic processes of community

• Harmony with general law

Investigation and public reporting

Types of external administration

•  Receivership •  Scheme of arrangement • Voluntary administration • Winding up/liquidation

External administration Administrative responsibility may only be assumed by an outsider in a limited number of circumstances: Alternatives to Insolvency: •  Schemes of arrangement under Part 5.1 •  Receivership under Part 5.2* •  Administrator is appointed under Part 5.3A •  (Voluntary Administration and Deed of Company Arrangement) Insolvency Corporation is wound up by a Court either: •  in insolvency under Part 5.4 or •  on grounds other than insolvency under Part 5.4A or •  voluntarily wound up under Part 5.5

• *Note cl 5.15 Schedule 2 (Corp Act) re the meaning of External Administration does not include receivership

1. SCHEMES OF ARRANGEMENT – Part 5.1

•  Schemes require two applications to the court

• Applications to the court involves delay and is expensive

•  The procedure for implementing a scheme under section 411 involves three parties:

company; members; and creditors.

•  If the court accepts the application it will order meetings to be held:

• members meetings – these must be separate if there are different classes of members;

• creditors meetings – these must be separate if there are different classes of creditors.

2. RECEIVERSHIP - Part 5.2

Receivership is of two types: •  Privately appointed receivers • Court appointed receivers

Court Appointments Traditionally exercised by equity courts To preserve the status quo whilst some other issue was litigated or resolved. Court Rules preserve courts’ equitable jurisdiction to appoint a receiver if: •  just and convenient section 37 Supreme Court Act 1986

(Vic); section 67 Supreme Court Act 1970 (NSW); section . 69 Supreme Court Act 1961(NT)

• appropriate section 63 Court Procedures Act 2004 (ACT) •  necessary or desirable Corporations Act •  Sections 233(1)(h) (oppression) &1323(1)(h) (general

powers of the court)

Private Appointment • Made under an instrument, eg debenture trust deed

•  Terms dictate the time & the circumstances of appointment

•  Right to appoint triggered by certain predetermined occurrences outlined in the document, eg, company:

• Company defaults in paying any due instalments; • Company ceases to carry on business; • company operates at a loss; or • Application made to wind up the company; •  Security at risk by failure to maintain or insure it;

Lipton and Herzberg, Understanding Company Law cited in Lofthouse and ASIC [2004] AATA 327 [25]

Definitions CONTROLLER section 9 as follows: Controller, in relation to property of a corporation, means: a) a receiver, or receiver and manager, of that property: or b) anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge.

Who may be appointed as receiver?

Section 418 Must be a registered liquidator and not connected to the corporation by being: • An officer, auditor or mortgagee of the corporation • An officer of a related body corporate or mortgagee

of the corporation • An officer or promoter of the corporation or a

related body corporate within the previous 12 months

Appointment • No prescribed method • Depends on the documents •  If demand is issued then must allow reasonable time to comply

• No loss of right to appoint even if delay • May rely on defaults even if at the time appointor is unaware of them.

• Right to challenge appointment not only for directors but also now for creditors section 418A

• Also receiver can use section 418A to confirm her or his appointment.

Receiver’s role, powers, duties and liability Role protection of company assets

Power flows from two sources • agreement between the parties to the appointing

instrument (eg debenture) •  Section 420 – very extensive see section 420(2)

Duties • General law duties (contract, tort and equity) •  Statutory duties – is officer of company and subject to

duties as in sections 180-184

Liabilities • Agent •  Section 419 new contracts

Power of sale

Section 420(A)(1) • When selling assets of the company the receiver

must take all reasonable steps to ensure that sell for - Not less than market value or - If no market value the best price reasonably

obtainable. • Not entirely clear what is meant by market value or

“best price”: Jeogla v ANZ • Must advertise the item in the market where it fits -

emphasis on need to get best price

Effect of Receivership

Directors • Depends on type of appointment/terms of security

instrument •  Remain in office and powers continue to the extent that

there are assets not covered by the charge • May challenge validity of appointment, acts of receiver •  Reporting obligations to receiver section 429 • Duties (common law/statutory) continue

Effect of Receivership

Company •  Business and commercial reputation •  Section 428 notification in all public documents •  Triggers further external administration • Company property never vests in receiver - merely

has control over it •  Receiver may bring action on behalf of the

company to recover property section 420(2)(k)

Effect of Receivership

Creditors • Does not terminate existing contracts • No moratorium on enforcement of claims •  Ipso facto clauses now unenforceable •  Employees

Distribution of company’s assets Section 433 - applies only to assets secured by a circulating security interest Payment is made in the following order: 1.  Insurance recovered under a 3rd party insurance

contract for the benefit of a 3rd party section 562

2.  Reasonable audit fees if s329(6) order made (ie the ASIC orders that the auditor not resign but continue)

3.  Amounts of wages, leave of absence and retrenchment payments rank equally( for wages see section 9 definition); see section 556. Must be due before appointment.

3. VOLUNTARY ADMINISTRATION Part 5.3A Independent appointment to: •  investigate company •  make a recommendation to creditors, company should: •  continue under Deed of company Arrangement -

DOCA) •  or liquidated (wound up)

Part 5.3A objectives section 435A: •  Maximise chances of company continuing; and if this is not possible, •  To get a better return for creditors and members than would result from an immediate winding up Note also the role of Schedule 2 – Insolvency Practice Schedule

Appointment of administrator 1.  Directors; section 436A Normally board resolves to appoint an administrator. Must resolve that company is insolvent or is likely to become insolvent at some future time; and that an administrator be appointed. 2. Liquidator or Provisional Liquidator ; section 436B Another option under section 496(1)(b) 3. Substantial charge-holder; section 436C Secured creditor with charge over whole( or substantially whole) of company’s assets

Effect of Appointment

•  Powers of officers suspended; section 437C

• Administrator takes control of the company’s business: section 437A

• Moratorium: stay on all claims on company – owners or lessors and chargees are all generally prevented from recovering their property; sections 440A-F

•  The period of administration is short and the dramatic restrictions are justified. It is a time for investigation and assessment.

Impact on creditors Secured • Can continue enforcement proceedings section 441B •  Security interest over whole (substantially whole) of

company’s property – permitted to enforce rights for up to 13 business days section 441A

•  Section 440B security interests unenforceable without approval from court or administrator

Unsecured •  Statutory moratorium section 440D • May be broken with permission from court or

administrator - unlikely

Creditors’ Meetings •  First meeting must be held within 8 business days of

appointment: section 436E • Notices must be sent out at least 5 business days before

the meeting. •  Purpose is to

• determine if a committee of inspection (creditors) should be appointed and if so who to appoint to it; and

•  to replace the administrator should creditors wish

Second meeting - will decide the future of the company; sections 439A – 439C • Must be held within 5 business days before or 5 business

days after the end of the “convening period” - defined as •  if in December or less than 25 business days before Good

Friday then 25 business days from appointment or • otherwise 20 business days from appointment.

• Court may extend convening period: section 439A (6) but only if in the best interests of creditors; section 439A(7)

• Meeting once convened may be adjourned for up to 45 business days; section 439B(2)

second meeting of creditors cont.

Section s439C > • enter deed of company arrangement; • end administration; or • wind up company If meeting decides to execute deed of company arrangement (DOCA) it must be done within 15 business days section 444B(2)

Deed of Company Arrangement - DOCA

•  Vote for DOCA ends Voluntary Administration section 435C

• Critical terms of proposed DOCA to creditors with notice of second meeting

•  If DOCA is decided upon the meeting - must appoint a deed administrator section 444A – often voluntary administrator – must sign consent section 448A

• Administrator must prepare the deed; section 444A(3) - Contents of DOCA prescribed under section 444A(4) -  Some default provisions section 444A(5) - And Reg 5.3A.06 and Sch 8A Corporations Regulations

Deed of Company Arrangement

• VA moratorium provisions end; • DOCA terms & any relevant statutory provisions

take effect • Deed binds administrator; company; officers;

members section 444G •  Sch 8A requires funds be applied as in section 556 -

if deed seeks to vary section 556, priority creditors likely to vote against it

• DOCA may not seek to reduce / extinguish statutory priority – at least without consent of creditor

EXTERNAL ADMINISTRATION

•  Schemes of Arrangement ✔ •  Receivership ✔ • Voluntary Administration (VA) ✔

•  (Deeds of company arrangement (DOCA)) ✔

•  Liquidation (winding up) next lecture

Topic 8 External administration AIM: At the end of this topic you

should understand:

•  Insolvency meaning of and significance •  Role of receivership powers and duties of receivers •  Schemes of arrangement • Voluntary administration role and procedures and

Deeds of Company Arrangements (DoCA) • Winding up/liquidation

Next week

Lecture Topic 8.2 Liquidation (winding up)

Collaborate Tutorial Activities 6.3.3 and 6.4.1

EXAM

Exam • Open book • 2 hours + 10 minutes • 6 questions

• 3 essay questions • 3 problem questions

• Must attempt 5 questions • No compulsory questions • No sub-questions

Essay questions •  identify and clearly state relevant issues • apply relevant legal principles to the resolution of

these issues •  integrate and evaluate relevant knowledge from

material covered in this unit; • develop and sustain a concise and convincing legal

argument through to a logical conclusion; • answer the specific question asked in a clear and

concise manner

Problem questions •  identify and clearly state relevant issues; •  state the law/s or general legal principles related to

those issues and their sources (case and/or statute); • apply the case or statute law to the facts given in

the problem; • argue whether or not any relevant precedents apply

or whether relevant precedents may be distinguished, based on the facts;

• develop and sustain a concise and convincing legal argument through to a logical conclusion;

• answer the specific question asked in a clear and concise manner

What may be examined? There are no direct questions on: •  Takeovers; • Schemes of Arrangements; • Provisions of the Personal Property Securities Act

Everything else potentially examinable

Preparing for the exam

•  Start now •  Prepare as for closed book exams • Notes/flow charts etc • Model answers •  Join the dots • Consider what you will take into the exam

• Don’t panic and remember to breathe!