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Flashcards in Week 10 Deck (25)
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1

Different processes in winding up a company

Different processes, driven by a combination of legal and commercial considerations:

Receivership
Voluntary Administration
Deed of Company Arrangement
Liquidation

2

Different processes in winding up a company

Legal issues include:

Is the company solvent? How can the directors protect themselves from liability under section 588G?
Does the company have secured creditors? What action can they take? What action can unsecured creditors take?

3

Receivership

Comes about because of failure of company.
Receivership is a way for a secured creditor to enforce its rights without going to court.
Receivership is to deal with the financial affairs of the company and pay outstanding debts.
A receiver appointed by secured creditor takes possession of secure property, sells it, repays the secured creditor and accounts for any surplus to the company.
A company is in receivership when a receiver is appointed over some or all of the company’s property

4

Receiver is:

A person who receives income , pays outgoings but does not manage the property

5

A receiver manager is:

A receiver of property of a body corporate is also a manager if the receiver manages, or has under the terms of the receiver's appointment power to manage, affairs of the body.

Both receivers and receiver managers are included in the definition of officer and controller in the Act and therefore come under duties of directors.

6

Who appoints a receiver?

slide 8

7

Impact of appointment

Directors still remain with all responsibilities and duties of director
Company still exists and is the legal owner of the assets even though a receiver has been appointed.
Directors can challenge the appointment of the receiver
Unsecured creditors are still in the same position and may have less security if the company is wound up.

8

Powers of a receiver

The powers of the receiver are derived from the charge/debenture/loan document and from s. 420


Power under Act to:
Take possession and control of property
Lease, hire or sell the property
Borrow money on security of the property
Sell property for cash
Run the business of the company (incl. hire and fire the employees)
Execute any document or do anything on behalf of the company
Wind up the company

9

Duties of Receiver

Duty to secured creditor and enforces the charge.
Also duty to company if they carries on the business of the company
As officer also liable under s 180, 181,182 and 183
Statutory duties:
S 420A
Reasonable care in selling the secured assets
Sell at no less than market value or the best price reasonably obtainable
If a breach then a fine up to $550
S 423 breach of duty by receiver
Court or ASIC can look at his activities and take action
Can be ordered to make good any loss

10

Liabilities of Receiver

Receiver is an officer of the company (and also an agent) and any breaches may impose civil penalty liability on receiver.

Liability for contracts entered during receivership:
For example: s. 419 makes the receiver personally liable for rent payable by the company. Liability commences 7 days after the receiver is appointed.
Not personally liable for debts arising from contracts entered into by the company before appointment.

11

Consequences of Receivership to other creditors

Primary duty is to the secured creditor.
Any creditors claim to payment is deferred until the secured creditor is paid.
Employees are treated as preferential creditors over a secured creditor secured by a circulating security interest and not a non-circulating security interest (see s 561).

12

Termination of receivership

When objective achieved then appointment is terminated:
Secured creditor is paid
Any surplus on sale of assets goes to the company

13

Administration

Administration is where the company is placed under the control of an external administrator
Administrator appointed by:
Directors
Secured creditor (e.g. debenture holder) holding a charge over most of the company’s assets
Liquidator

14

Voluntary Administration (VA)

VA is a way for an insolvent company to have a moratorium or safety zone from creditors claims while a decision is made about the future of the company
The VA’s objective is to investigate the affairs of the company and report whether a compromise or arrangement can be agreed and is acceptable to the company and creditors
The decisions for a company are:
Execute a “deed of company arrangement”
Wind up the company by going into liquidation
Return control to the board of directors

15

Voluntary Administration – Statutory Aims

s 435A sets out the aim of VA to:
(i). maximize its chances of survival (rehabilitate the company and continue); or
(ii). if (i) is not possible, then it would achieve a better return to creditors and members than would result from an immediate winding-up of the company.

16

Alternative: Safe Harbour Reforms

In 2017 amendments to the Corporations Act were introduced that now provide protection to company directors from liability for insolvent trading. The new section 588GA introduces a carve-out to the section 588G(2) (i.e. an exception, not a defence).
Directors can avoid liability for insolvent trading on certain debts if, after suspecting insolvency, the directors initiate a course of action reasonably likely to lead to a better outcome for the company as compared to the immediate appointment of an administrator or liquidator.
The safe harbour protects directors from insolvent trading liability arising from debts incurred directly or indirectly in connection with any such course of action. 
Safe Harbour is not available if the company does not (i) keep proper books and records, (ii) properly provide for employee entitlements (including superannuation), (iii) keep tax reporting up-to-date and (iv) obtain advice from an ‘appropriately qualified’ restructuring advisor. 

17

Voluntary Administration phases

Phase One: s 435C
Appointment of administrator with powers to take control of the company’s affairs
Moratorium on claims against the company applies
Holds first creditors meeting
Form a committee of creditors
Phase Two: s 439A
Within 20-25 days meet to decide at creditors’ meeting the company’s future which are:
Deed of company arrangement (DOCA)
Wind up company
VA finishes and control of company handed back to directors and shareholders
Voting is by creditors and resolution passed by poll. If by hands creditors vote one way but by value another then VA has casting vote. E.g. many employees want company to continue but bank does not.

18

Appointment of an Administrator

Administrator must be a registered liquidator (ss. 448B and s 448C)
Who may appoint administrator?
The company (directors by majority if company is insolvent or likely to be insolvent) – s 436A;
No approval needed of shareholders, creditors and court
Why would the directors appoint administrator? Avoid s 588G trading insolvent and personal liability
A liquidator or provisional liquidator – s 436B(1)
A substantial secured creditor – s 436C

19

Length of Administration

Starts on day administrator is appointed
There is a stay on all claims against the company
Ends when meeting of creditors decide fate of company

20

Notification

Must be publicised by:
Lodging notice with ASIC within one day of appointment
Publish notice in national newspaper within 3 days of appointment
Give notice to debenture holders
(s. 450A)

21

Powers of Administrator

Carry on, terminate or sell the business
Manage or sell the company’s property
Remove and appoint directors
Act in company’s name or on its behalf
Outsiders dealing with the VA can rely on assumptions in s 129 and 128
Can not sell property subject to charge unless it is a circulating charge or secured creditor consents or court agrees

22

Effects of administration

Administrator is officer and agent of the company and actions bind the company
Effects of appointment of administrator
i. The company directors
Lose rights to exercise power as officers
Not removed from office
Still have duties as director
ii. The company’s property can only be dealt with by the administrator (s 437D, s 437E).
iii. The company’s secured creditors:
Substantial chargee Security over whole or substantially the whole of the property (s 441A) can enforce charge within 13 business days after notice given of appointment (decision time)
Other chargees ( s 440B, s 441B) can not enforce charge with out consent of court or administrator
Chargee over perishable goods can enforce claim and no time limit (s 441C)

iv. Proceedings against the company
moratorium on civil proceedings e.g. winding up unless administrator or Court consents and other exceptions (s 440A, s 440C,s440D and s 440F).

v. Members
- cannot transfer shares without Court’s consent
(s 437F)

vi. Directors’ guarantees- s 440J
Can not be enforced
This protects Julie and Jonathan who gave personal guarantees for the debenture to the company

vii. Owners and lessors of property – s 440C
- can not recover property with out consent of administrator or court

23

Liability of an Administrator

Administrator is a fiduciary and owes duty to the company
Administrator is also an officer and owes duties to the company (see directors duties)
If a breach then liable for compensation and civil penalties
If Administrator orders goods and services the Administrator is personally liable see (s 443A), but can be indemnified from property of the company (s 443D)
If the company is leasing property and it is in VA then Administrator can be personally liable for the rent if the company continues to use the premises. Administrator is liable if it continues to rent the premises for more than 5 days after the start of administration (s443B) (note: VA again can be indemnified from company’s asset for this liability).

24

Deed of company arrangement

The deed of company arrangement (DOCA) prepared by the administrator stating the things the creditors agreed upon s 444A
Typical clauses include:
A proportion of debts be extinguished
Order of priority for payments be made
Must retain priority for employee’s claims for wages and super and leave entitlements

25

Who is deed binding on?

Binding on:
All creditors (whether they voted for it or not)
The company
The officers
The members
The administrator
Other effects:
The company’s debt is extinguished/modified by the deed
Secured creditors rights under a guarantee still exist (s 444J)
Legal proceedings not allowed unless Court consents (s 444E)
Court can invalidate deed if appropriate (s 445G)