LAW

atgkd153

CompanyLawlectureTopic8.2slides.pdf

Home >Law homework help >LAW

LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 8.2 EXTERNAL ADMINISTRATION

Liquidation (winding up)

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

Types of external administration

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

Types of liquidation: Source: Fisher, Wiseman & Anderson 2001, p. 435

Common characteristics Liquidator: •  takes control of company •  Keep creditors and members informed • Attempt to satisfy all company’s liabilities and

distribute any remaining assets in accordance with statutory priorities and CC

• May engage in litigation on behalf of Co • Under supervisory power of court Final result – ordinarily deregistration

An Overview of Liquidation

Two types of Liquidation 1. Voluntary winding up (initiated by a resolution of

members/shareholders) • Members voluntary winding up • Creditors voluntary winding up 2. Court-ordered or compulsory winding up (requiring

an order of a court) • Creditors in insolvency • On other grounds Note also ASIC may order the winding up of a company section 489EA

Voluntary liquidation

There are two types of voluntary liquidation: • members’ voluntary liquidation • creditors’ voluntary liquidation

Members’ voluntary liquidation

There are 2 fundamental requirements for a members’ voluntary liquidation: 1.  Members pass a special resolution section 491 2.  Directors must make a declaration of solvency

under section 494 Members voluntary liquidation cannot be used if there is an application before court to wind up company (unless get leave of court section 490)

Creditors’ voluntary liquidation There are several ways that creditors’ voluntary liquidation may commence:

• Directors make declaration of solvency and liquidator appointed but liquidator finds company insolvent and decides to proceed as a creditors’ voluntary liquidation section 496

• Directors do not make declaration of solvency but arrange members’ resolution to wind up section 497

• As an outcome of a voluntary administration or a deed of company arrangement

Creditors’ voluntary liquidation

• Directors recognise they are unable to complete a declaration of solvency

•  Board decides to put motion to members that company be wound up

•  The liquidator sends summary of company’s affairs to creditors section 497(1)

Insolvency Practice Rules (Corporations) 2016 •  Section 75-10 •  Section 75-15 •  Section 75-20

Compulsory (Court ordered) liquidation

Commenced by court order under Part 5.4 •  Insolvency section 459A •  Some other ground, section 461 eg ‘just and

equitable’

Insolvency – key elements: • Ability to prove company is insolvent •  Standing to apply to court

What is insolvency?

• Section 95A definition • Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632 [43]-[47](Sundberg J)

‘Standing’ Does applicant have standing to bring the application to wind up in insolvency? Section 459P • the company • creditor, including secured creditor • a contributory section 9 definition • a director • a liquidator or (provisional liquidator) • ASIC • a prescribed agency under Reg 5.4.01

•  Is the company insolvent? •  Section 459C situations where court will presume

insolvency unless contrary shown • Mostly = failure to comply with a statutory demand

section 459C(2)(a) •  If a statutory demand is not complied with the

company must prove its solvency at the hearing of the winding up application: section 459S

•  Enables a quick means of establishing insolvency

Has the applicant established the grounds for winding up order to be made?

Statutory Demand Requirements of a statutory demand section 459E: • Creditor owed a statutory minimum ($2,000) (see section

9) may serve demand on company • Demand must be in writing on the prescribed form (form

509H) and signed by or on behalf of the creditor • Must require the company to pay the debt within 21

days Grounds for challenge/application to set aside; Section 459H dispute as to existence or extent of debt Section 459J: •  (a) a defect in the demand and substantial injustice

unless the demand is set aside section 459J(1)(a) or •  (b) some other reason why the demand should be set

aside section 459J(1)(b) ‘Offsetting amount’ owed by creditor > reduces debt to below $2000 threshold section 459H

Effects of Winding Up Directors Powers suspended section 471A •  Prepare and submit a statement of affairs (within

14days) section 475 •  Provide books, assist liquidator section 530A • May be examined section 596A Members • May be liable for unpaid amount on shares section 515 •  Right to control company’s affairs (eg through general

meetings/appointment of directors) removed Creditors •  Stay on creditors enforcing claims section 468(4) •  Stay on legal proceedings against company (unless

leave) section 471B •  Secured creditors retain right to their security section

471C

Effects of compulsory winding up on employees

• Compulsory winding up operates as notice of dismissal to all employees (employees on fixed term / entitled to period of notice can claim damages)

•  Liquidator may waive notice •  Employees may be required to provide information

section 475 •  Employees may be entitled to make a claim through

Cth Gov employee assistance scheme ‘Fair Entitlements Guarantee’ (FEG)

•  Employee entitlements (eg. wages, superannuation, leave) note section 556

Provisional Liquidation Section 472 • Where an application is made for winding up but

hearing not yet taken place…may seek an order from court for provisional liquidator to be appointed.

•  This will protect assets of the company during the interim period.

• Application by creditor or company itself to gain temporary protection from claims of creditors

Liquidator - Appointment

•  Takes control of liquidation process and control of the company section 477

• Consent in writing before appointment section 532(9) •  Registered with ASIC section 532(1) • Qualifications for a registered liquidator section 1282 • Court appointed - must be ‘Official Liquidator’ section

532(8) • Official Liquidator must be registered with ASIC section

1283

Liquidator – Powers & Duties Powers: •  List in section 477 list is wide •  Specifically applies to court ordered but also will apply

to voluntary liquidation by virtue of section 506 •  Subject to review by court section 477(6) or section

1321 and voluntary liquidation section 511 Duties: As officer, liquidator owes duties to the company

including: • Duty of loyalty and good faith; • Duty of skill care and diligence; • Duty to exercise discretion; • Duty to act jointly where appropriate. See sections 180-184

The liquidator; case authorities For reference purposes only: Role of the liquidator: • Australian Securities & Investments Commission v

Edge [2007] VSC 170 (Dodds-Streeton J) Liquidator’s powers and duties: • Hall v Poolman [2009] NSWCA 64 (31 March 2009)

(Spigelman CJ, Hodgson JA, Austin J) •  Lofthouse and Australian Securities and Investments

Commission [2004] AATA 327 (Deputy President S A Forgie)

Assets to be distributed

1.  Secured creditors 2.  Preferential creditors 3.  Unsecured creditors

Assets – available for distribution by liquidator Companies in liquidation: • all property due to the company at commencement of

winding up • assets that become the company’s property after

commencement of winding up Insolvent company expanded to include: • Unfair preferences section 588FA • Uncommercial transactions section 588FB • Unfair Loans to the company section 588FD •  Related entity transactions section 588FH • Circulating security interests created within 6 months of

relation back day section 588FJ Insolvent trading by directors section 588G and by holding company section 588V

Voidable transactions could be challenged by the liquidator:

*ending on relation-back day = day order for winding up is made; s 9 or if VA preceded the winding up the day the VA began; s 513C

Relation Back Day Voidable transactions may only be attacked by liquidator within time limits determined in accordance with section 588FE

The important date for the purposes of establishing the time limits is relation back day (see section 91)

winding up by court - date of court order section 513A(e) unless another another administration in place at the time see section 513A

• voluntary winding - date of special resolution to wind up section 513B(e) unless there was another administration in place at the time section 513B

Defences – voidable transactions Section 588FG protection Persons who are a party to the transaction who acquired their rights from the insolvent party in good faith and at the time of becoming a party had no reasonable grounds to suspect insolvency of the company nor would a reasonable person in their circumstances have such grounds; and provided valuable consideration or changed their position

Assets Available – claims on directors

• Directors’ duty to prevent insolvent trading section 588G (defences under section 588H)

• Similar duty applies to a holding company section 588V (defences under section 588X)

• Breach may be pursued by ASIC. • Liquidator may claim for insolvent trading from the director personally to enlarge the funds that are available (whether or not ASIC pursues the directors)

Provable debts & distribution • All types of debts are provable (or claimable) section

553 • Debts proved in accordance with Regulations 5.6.37 to

5.6.66 •  Present or future; certain or contingent; either liquidated

or sounding only in damages (ie unliquidated) • Must arise before relevant date (see section 91)

generally the day winding up is deemed to have commenced under section 513A or section 513B

Distribution of the funds •  Basic rule - equality of all claims section 555 • Note as to other priority order section 556 •  There are no limits on wages etc priority except for

‘excluded employees’ (ie directors and their relatives)

Source: Townley & Pratt 1995 p.86

Section 556

Deregistration

•  Final step to take after liquidation finalised • Deregistration under sections 601AA to 601AL • Voluntary liquidation - liquidator presents final accounts

and reports to meeting of creditors and members • Within seven days - lodge return and report to ASIC • ASIC then deregisters company 3 months after lodgement • Court ordered liquidator applies to court for release and

deregistration of company section 480 • Court may then order release and deregistration • Deregistration will then occur under section 601AC

Effect of deregistration = Company ceases to exist – section 601AD

KEY POINTS

•  Insolvency (meaning of and significance) • Distinguish the types of liquidations (Voluntary v

compulsory) • Winding up in insolvency (including statutory

demand process) • Assets available and the role of the liquidator -

voidable transactions

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 7 – Takeovers Tutorial Attempt Activities 8.1.2 & 8.3.4