Eiffel Towers Ltd, a listed company, was a builder and property developer specialising in projects in Brisbane’s central business district. It has five directors. Giscard is the managing director and Henri is the chief financial officer. They are the only

Reading

Text, Chapter 22

Objectives

On successful completion of this module, you should be able to:

· understand the meanings of the key terms listed below and appropriately use them in relevant contexts;

· describe the various means of handling the affairs of companies in financial distress, and know which is appropriate in given factual scenarios;

· describe the relative advantages and advantages of each method; and

· solve problems related to voluntary administration and liquidation of insolvent companies, including the provision of advice to a liquidator or administrator about their powers, duties, functions, appointment, obligations, liabilities and ability to recover assets for the company.

12.1 Introduction

External Administration is simply a general term to describe those situations when the company may be required to hand over its administration to external parties. This may occur in a number of different circumstances. One commonly recognises the most drastic consequence of the company being put into liquidation but there are different alternatives that should be considered prior to the liquidation stage when a company is in financial difficulties. The various possibilities include the following:

· schemes of arrangement

· voluntary administration

· receivership and

· liquidation (winding up).

This area is indeed a specialisation of itself and a thorough understanding of these areas is not possible nor perhaps appropriate at this stage. Keeping this in mind and given the introduction of the voluntary administration structure into the Corporations Act, it is felt that it is more important to focus on a brief overview of these possibilities and look a little more closely at the new Voluntary Administration scheme and the basics of liquidations.

12.2 Schemes of arrangement

Schemes of Arrangement are intended to be flexible arrangements that can be entered into within the company and with creditors to reconstruct the company or resolve financial difficulties with creditors to allow the organisation to continue.

Part 5.1 (s 410 to s 415) contains the procedural requirements. The most important provisions are s 411 and s 412. Members or directors of the company can seek a scheme by applying to the Court for a meeting of creditors (if there is a question as to its solvency). The liability of members and creditors can then be reorganised. Any scheme, then, if approved by the company and the Court becomes binding: s 411(4).

The arrangements with creditors are usually in the form of a compromise or moratorium. The compromise is where creditors may agree to accept payment of a sum less than their debt and a moratorium may provide for the deferring of the debt. Companies in financial difficulty

may then still survive.

However, schemes of arrangement can be lengthy and costly, so laws relating to voluntary administration were introduced in an attempt to achieve the same results for creditors, more quickly and cheaply than in a scheme of arrangement. Since their introduction, voluntary administrations have proven more popular than schemes of arrangement, which is why schemes of arrangement will not be examined in any detail. It is sufficient that you are aware of the structure of this alternative and the basic procedure.

12.3 Voluntary administration

Voluntary Administrations are covered by Part 5.3A of the Corporations Act. Their purpose is to provide an avenue for companies to trade out of difficulties and avoid liquidation (if possible): s 435A.

12.3.1 Administrator

A voluntary administration commences with the appointment of an administrator. The administrator may be appointed by directors, liquidator or a secured creditor. It is in directors’ interests to appoint an administrator if the company could be insolvent, as appointment of an administrator prevents any further director liability for insolvent trading under section 588G.

12.3.2 Voluntary administration process

Flowchart illustrating voluntary administration process

(Fisher, Wiseman & Anderson)[footnoteRef:1] [1: S Fisher, L Wiseman & C Anderson, Corporations Law (Butterworths, 2nd ed, 2001) 425. ]

The above diagram provides a very useful summary of the procedure involved in voluntary administrations. Note that it refers to the ASC, which was the predecessor of ASIC. You should follow through those steps with the provisions of the Corporations Act .

Reading activity 12.1

Read sections 436E, 436F, 436G, and sections 439A to 439C of the Corporations Act and answer the following questions:

1. When must the first creditors’ meeting occur? What is the purpose of the first creditors’ meeting?

2. What is a committee of creditors? What functions does it have? Can it give directors to the administrator? Can it require reports from the administrator?

3. When must the second creditors’ meeting occur?

4. What is the purpose of the second creditors’ meeting?

5. What resolutions can be made at the meeting?

12.3.3 Voluntary administration outcomes

The outcome of the administration may be:

1. A deed of arrangement: The deed of arrangement is prepared by the administrator to reflect agreement as to compromises or moratorium (among other issues) to allow the company to continue to trade. The deed becomes binding on all parties. The key provisions are contained in s 444 A to H.

2. That the company be released from its administration: The company may have regained its solvency (the Court may order the administration be brought to an end) and the company returns to director management.

3. The company may be wound up (section 439C). This may occur because creditors do not perceive any benefit in allowing the company to continue or it may be resolved by the company to do so.

12.3.4 The role of the court

Unlike in schemes of arrangement, the Court does not necessarily have to be involved in a voluntary administration, although it has an important supervisory role to ensure an appropriate balance of creditors’ interests. The Court is granted a broad power to make orders concerning the operation of Part 5.3A in relation to any particular company (s 447A) and to make any other order to protect the interests of creditors during the administration (s

447B). The court can also make any order it thinks fit if it is satisfied that an administrator is managing or has managed the company’s affairs in a manner which prejudices creditors (s

447E). The Court can to fill vacancies in the office of administrator (s 449C).

12.4 Receivership

Receivers are persons appointed to protect a secured creditor’s interest in the company. A company is said to enter receivership when such a receiver is appointed in respect of any of its property. This typically occurs when, for example, a creditor becomes entitled to enforce a security interest such as a charge over company property.

Reading activity 12.2

1. What rights do secured creditors normally have, if a company defaults under its loan agreement?

2. Are there any restrictions on how a receiver can use the proceeds of sale of an asset?

3. What duties apply to receivers when selling property owned by the company?

4. What effect does receivership have on the company and directors?

12.5 Liquidation

12.5.1 Introduction

Liquidation refers to that process whereby all the company’s assets are collected, debts paid, and balance, if any, distributed to its members. Once this process is complete, the company ceases to be a legal entity. The term ‘winding up’ is used in the same way as liquidation and is the same process. There are various reasons for a company to be wound up. The most obvious is insolvency but there are several others. By way of example, the members of a solvent company might simply wish to bring the enterprise to an end or there might be oppression on particular members causing them to make application.

The Corporations Act provides for two types of winding up:

· compulsory winding up: on ground s of insolvency or on grounds other than insolvency – this module focuses on the former only.

· voluntary winding up: by choice of creditors (if the company is insolvent) or by members (even if the company is not insolvent).

12.5.2 Compulsory winding up in insolvency

Reading activity 12.3

1. What is insolvency? What tests apply?

2. Who can apply to a court for winding up in insolvency?

3. Of what must the court be satisfied, before the court will order winding up in insolvency?

4. What is a statutory demand? What is the minimum amount for which a demand can be issued? How is it issued and what is the effect of an unpaid statutory demand?

12.5.3 Compulsory winding up on grounds other than insolvency

Under s 462(2) an application may be made for a winding up order by:

· the company

· a creditor

· a contributory

· the liquidator

· ASIC.

An application for winding up may be brought on any of the grounds listed in s 461, such as the company has no members or failure to commence business within one year of incorporation or suspension of business for a whole year.

12.5.4 Members’ voluntary winding up

A solvent company may be wound up voluntarily by members passing a special resolution appointing a liquidator (section 495). No more than five weeks before the meeting occurs, the directors have must passed a resolution declaring that the company is solvent and have lodged it at ASIC: s 494. Notice of the members’ special resolution needs to be lodged at ASIC and advertised in major newspapers as well.

If a creditor considers the company to be insolvent, the creditor can still apply for a compulsory winding up by the court. If an application has been filed with the court for the company to be wound up in insolvency or the court has ordered that the company be wound up in insolvency, a company cannot resolve to be wound up voluntarily without the leave of the court: s 490.

12.5.5 Creditors voluntary winding up

Reading activity 12.4

1. What is the difference between a creditors’ voluntary winding up, and a winding up in insolvency?

2. How can a company enter a creditors’ voluntary winding up? What steps are involved?

3. What is the effect of a creditors’ voluntary winding up?

12.5.6 Liquidators

Role of the liquidator

In broad terms the role of the liquidator is as follows:

· Assume control of the company. While there is no express power in the Law, it is commonly accepted that directors lose their powers upon the appointment of a liquidator by a court (see Country Traders Distributors Ltd [1974] NSW LR 135). The void left by the departing directors is filled by the liquidator who may need to carry on the business of the company for a short period.

· To take into his custody and control the company’s assets.

· To convert the assets into a liquid form.

· To use the monies from the sale of the assets to pay the debts of the company, having first determined as accurately as possible the creditors of the company.

· After payment of the creditors to distribute the balance of the assets (if any) to the members.

· To bring about the dissolution of the company.

Functions of the liquidator

The functions of the liquidator can probably be best examined by looking at his powers and duties. Fundamental to this question of powers and duties is the nature of the liquidator’s position in relation to the company and the court. There are four relevant elements:

· The liquidator is not in the strict sense a trustee of the company. At times, however, his responsibilities closely resemble those of the trustee. It is clear that he is an agent of the company and is under a fiduciary duty to the company.

· An official liquidator is an officer of the court. He is appointed by the court and is ultimately answerable to it.

· While an official liquidator is not an officer of the company, his fiduciary position implies duties similar to those applying to a director.

· At all times the liquidator is bound by the Corporations Act.

Duties of the liquidator

While the Act and Regulations govern the duties of a liquidator, the legislation does not prescribe every single duty clearly, because it would be impossible to anticipate every situation in which a liquidator is likely to find himself and to set out the proper course of action. Your textbook well explains the liquidator’s general duties and specific duties.

Also, liquidator may be ordered to make good any loss suffered as a result of any misfeasance, neglect or omission on his behalf. In addition, there are numerous penal provisions which apply to offences committed by him under the Corporations Act.

Reading activity 12.5

1. What does a liquidator do? What powers does a liquidator have? What functions?

2. In which order must the liquidator distribute the assets?

3. What duties does a liquidator have?

4. If there is evidence of insolvent trading, how can a liquidator recover money from directors and/or a holding company?

Module 12 Tutorial Questions

1. The board of directors of Broke Ltd has resolved that the company is insolvent. The company decides to place itself in voluntary administration. It appoints, in writing under its common seal, Jim to be the administrator. Jim is appointed because he is a registered liquidator and, as the company’s auditor, he knows the company’s affairs. Jim is appointed on Wednesday, 2 September 2011. He convenes a meeting of creditors which is held on Friday, 9 October. The meeting confirms Jim in his position.

Jim convenes a second meeting of creditors on 19 October 2011. At the meeting the creditors resolve that the company enter a deed of company arrangement.

Advise in relation to any problems with the above facts.

2. (a) Equity Ltd, a company which has a floating charge over the whole of Distress’s undertaking, was advised on Tuesday, 13 October 2009 of the appointment of Sam as an administrator. On 14 October 2009, the managing director of Equity comes to you to seek your advice generally about Equity’s rights and what drawbacks may exist for it as the administration proceeds. What is your advice to Equity?

(b) During the administration, Sam, in order to maintain the business of Distress, ordered from Equity Ltd certain goods. The goods were delivered on Equity’ normal terms – payment after thirty days. Subsequently at the creditors’ meeting under s 439A the creditors decide that the company be wound up. Equity Ltd has not been paid for the goods delivered to Distress and Sam, who is now the liquidator of Distress, says that trade creditors will receive 10 cents in the dollar in the winding up. What is your advice to Equity?