Corp Law Week 12 - Liquidation, Receivership & Voluntary Administration Exam Questions with

Corp Law Week 12 - Liquidation, Receivership & Voluntary Administration Exam Questions with Complete Solutions Topic: Liquidation, Receivership & Voluntary Administration External administration: someone from outside is appointed to take over from the directors: either a receiver, administrator, or a liquidator or provisional liquidator External administration is what usually happens when a company becomes insolvent ( see s 95A CA and slides 17 and 18) Relevance of bankruptcy precedents - Correct Answers: Company gets deregistered and ceases to exist. External administration - when someone from the outside takes over Company is in trouble! Liquidation is similar to becoming bankrupt but this term is reserved for individuals External administration There are three main types of EA: 1) receivership 2) voluntary administration 3) liquidation (also known as winding up) Each serves a different purpose External administrators are 'officers' under s 9 CA. This means have statutory duties in addition to general law duties. Note aims of insolvency law: see Lipton et al at [22.10] - Correct Answers: Receivership most commonly comes about when a secured creditor appoints a receiver pursuant to their security interest and the role fo te receiver is to liquidate the secured assets and recover the money for the benefit fo the creditor VI is a mechanism that putst eh comp into a safety zone from the claims fo creditors whilst a decision is made abotut eh furute of the company. Company can either be wound up or returned to the directors and the admin comes to an end. Or a deed of comp arrangement is entered into - a plan of action to trade out of their difficulties etc goal is to maximise the comp staying in business but otherwise the best outcome for the creditors Liquidation results in the comp being deregistered and no longer being a company Insolvency tries to find a fair and just outcome. External administration and insolvency Focus: - how companies go into liquidation (and administration and receivership); - the powers of liquidator to bring proceedings on behalf of the company in order to increase the assets available for distribution to creditors; and - the order of priority for payment of creditors. - Correct Answers: Liquidatuion is for the benefit of unsecured creditors - a receiver will take care of the secured interests. Liquidation/Winding up Involves a 'liquidator' selling off company's assets and distributing the proceeds among creditors and members (if any surplus remains) At the end of the process the company is usually deregistered - Correct Answers: Usually only among the creditors unless there is surplus... rarely is, and then tot eh members. Liquidators must be independent Routes to insolvent liquidation Insolvent companies can be placed in liquidation in 2 ways. Either: - Compulsory liquidation or 'winding up in insolvency': Under Pt 5.4, creditors or other eligible applicants may force the company into liquidation by obtaining a court order - Creditors' voluntary winding up: ss 495-496 - does not require a court order and may arise, eg, if creditors of a company under administration vote to wind up the company - Correct Answers: Aims of liquidation of insolvent companies Note: General objectives of liquidation of insolvent companies is to ensure that: 1) creditors, especially unsecured creditors share equally and fairly in the distribution of an insolvent company's insufficient assets; 2) hopelessly insolvent companies cease trading for the good of the wider business community; and 3) there is an investigation into an insolvent company's affairs prior to the commencement of the winding up to try to determine the reasons for the insolvency: see Lipton et al at [22.120] - Correct Answers: Share equally and pro rate in the assets available Solvent liquidation Solvent companies can also be wound up: - Members' voluntary winding up: ss 497-500; or - Court may order a wining up on grounds other than insolvency -Compulsory liquidation on grounds other than insolvency, eg, to end oppression of members (ss 232-233) or because it is just and equitable to do so (s 461(1)(k)) - Correct Answers: Can be a remedy in the case of SH disputes Types of liquidation/winding up There are four types of liquidation: 1) Voluntary liquidation by members 2) Voluntary liquidation by creditors 3) Compulsory liquidation on grounds other than insolvency 4) Compulsory liquidation on grounds of insolvency - Correct Answers: Can read about these int eh text, just going to concentrate on the insolvent route to winding up Voluntary winding up There are 2 types of voluntary winding up 1) Members' voluntary winding up 2) Creditors' voluntary winding up A members' voluntary winding up: -- commences when the members pass a special resolution -- is only possible for solvent companies A creditors' voluntary winding up is similar to a members' voluntary winding up, except that the company is insolvent - Correct Answers: Creditors winding - rationale is that the creditors have a legititate interest in the winding up - allows the creditors to appoint the liquidator and their remuneration. Doesn't involve court proceedings. S439 creditors may resolve that the company is to be wound up Court ordered winding up There are 2 types: 1) On grounds of insolvency: governed by Pt 5.4 CA, ss 459A- 459T which adopts the phrase 'winding up in insolvency' to emphasise the distinction between the compulsory liquidation of solvent and insolvent companies 2) On grounds other than insolvency - Correct Answers: On grounds of insolvency: is our focus!! Court ordered winding up on grounds other than insolvency The application may be made by the company, a creditor, a member or ASIC The grounds include: - The company has suspended business for a whole year - The directors have conducted the company in their own interests rather than in the interests of the members as a whole - The affairs of the company have been conducted in a manner oppressive or unfairly prejudicial to or unfairly discriminatory against a member or members - The court is of the opinion that it is just and equitable that the company be wound up: s 461 - Correct Answers: Court ordered winding up on grounds of insolvency/ 'winding up in insolvency' An application is made to the court for the company to be wound up: s 459A Section 459P(1) lists who may apply to the court for a winding up in insolvency. The eligible applicants include: - *creditors (usually unsecured creditors); the company; - a director; and - ASIC. Note: certain applicants require leave of the court under s 459P(2) There are several stages to obtaining a compulsory winding up order: see Lipton et al at [25.55]. Note: application must be determined within 6 months: s 459R Between the filing of the application and the making of the order the court may appoint a provisional liquidator to protect the company's assets: s 472(2) - Correct Answers: Plus a contributory defined in s9 S459P(2) - directors and ASIC - to prevent mischievous and harmful winding up application that are brought to harass the company Import to note that the application must be determined within 6 months of the app being made to ensure the info is up to date Bw finalising of app and making order the court must appoint a provisional liquidator to protect the comps bus and the directors cant act without approval of the provisional liquidator or the court - s471A(2) On grounds of insolvency cont At the hearing of the application, the court must be satisfied that the company is insolvent before it will make an order to wind up the company in insolvency. Q: How does a creditor prove that a company is insolvent? A: A number of presumptions available under s 459C(2). The most common is that company is presumed to be insolvent if it has failed to comply with a statutory demand for at least $2000 (currently the 'statutory minimum') that creditor served on the company: s 459C(2)(a) - Correct Answers: Hard to prove a comp is insolvent - court uses presumptions The procedures must eb followed to the letter due to the significance and benefit of the presumption. Need to wait 21 days aftert eh statutory demand. Court can set a stat demand aside if it contains a significant defect: s459J Or there is a genuine dispute about the existence or amount of eh debt :s459H A company is expected to put its case that the stat demdn is defective or the debt is not genuine at the point of contesting the state demand It is entirely the courts discretion as to whether they will make an order that the comp is insolevent persuent to one of these applications. S532 sets out various things that will disqualify people from acting as a liquidator. And the court will appoint the liquidator under s472 When is a company insolvent? A company is insolvent when it is unable to pay its debts as and when they become due and payable: s 95A CA 'commercial' or 'cash flow' test (contrast 'balance sheet' test - assets exceed liabilities). The mere fact that assets exceed liabilities does not necessarily establish solvency, but it is relevant to consider the extent of assets, the available credit and future events: Leslie v Howship Holdings Pty Ltd (1997). Relevance of cash flow test? - Law concerned with liquidity (although temporary lack of liquidity does not necessarily mean company is insolvent) and the position of the company in its trading situation. Essentially, is the company viable? Re New World Alliance Pty Ltd (rec and magr apptd) (1994) - Correct Answers: Assets must exceed liabilities - although not decisive ie can the comp borrow money still? Can they sell off assets etc When is a company insolvent? cont See also Austin Australia Pty Ltd v De Martin Gasparini Pty Ltd [2007] for 'the usual indicia of insolvency': Lipton et al at p 874 Evidence of a company's insolvency is largely a question of fact to be determined as a matter of commercial reality in light of all the circumstances: Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] - Correct Answers: Austin - History of dishonored cheques, suppliers insisting on COD terms, the issue of postdated cheques, special arrangements having to be made with credit, inability to produce timely audited accountsors, history of statutory demands for debts Southern Cross interiors Evidence of a companies insolvency is largely a question of fact to be made in light of commercial circumstances Liquidation Effect of appointment of liquidator includes that: - secured creditors' rights are unaffected: s 471C (but note certain security interests may be challenged and parties with 'circulating security interests' may have their claims postponed by, eg, employee claims under s 561) - other creditors (ie, unsecured creditors) cannot take action - the company cannot carry on business except for the purposes of the winding up - the company is managed by the liquidator, not the - Correct Answers: All of the comps property will come under the control of the liquidator under s474, ( s471C although the rights of secured creditors will not) so they are severely restricted in how they deal with the property So secured creditors can still appoint a receiver to sell off secured property The fact unsecured creditors cant take actin is to ensure fairness amongst them Comp is managed by the liquidator from this point on What are the liquidator's functions? - To take possession of the company's assets: s 478(1) - To realise (sell) the company's assets - To work out what debts are payable by the company and what valid claims exist against the company (eg, for breach of contract) - To distribute the proceeds of the realised assets among the creditors and others with legitimate claims against the company - If there are any surplus funds, to distribute these amongst the members -To bring about deregistration of the company - Correct Answers: What are a liquidator's duties? Under the Act the liquidator must: - conduct an impartial investigation of the company's affairs - collect the company's assets keep proper books during the winding up lodge the required notices and reports with ASIC(including notice of appointment as liquidator, report whether any breaches of CA and statements on financial position in the w/up at 6 monthly intervals) - The liquidator also owes fiduciary duties to the company -The liquidator is also an 'officer' of the company under the Corporations Act - Correct Answers: Liquidators owe the same duties as directors do to the company s181 - 183 What are the liquidator's powers? - Power to sell the company's property or dispose of it in some other way - Power to carry on the company's business, but only to the extent necessary for the beneficial disposal or winding up of that business: s 477(1)(a) - Power to make a compromise or arrangement with creditors or others with claims against the company, or with debtors of the company - but approval of the court or the creditors is needed for compromise of a debt owed to the company worth more than $20,000 - Correct Answers: What are the liquidator's powers? - Power to defend or bring legal proceedings in the company's name - includes bringing any statutory actions which will increase the pool of assets/money available for distribution - Power to make calls on contributories, eg, a call on owners of partly paid shares - Power to obtain information about the company - Correct Answers: What funds are available to the liquidator? Assets owned by the company at the time the court makes the winding up order (or the members pass the special resolution to wind up the company), except for: - assets over which a secured creditor has a valid security interest - assets that the company holds on trust - Correct Answers: Date of winding up is the date the court makes the winding up order Funds available to the liquidator cont Assets that come into the company's ownership after the winding up order is made, such as: - compensation recovered by the liquidator from a director who has breached a duty owed to the company, eg, duty in s 588G - funds received from contributors, such as owners of partly paid shares, after the liquidator has made a call on them - funds that the liquidator has 'clawed back' via court proceedings under the 'voidable transactions' provisions -funds recovered from the holders of void security interests - Correct Answers: Bc of s471C Voidable wehre tey have moved assets away prior to insolvency so they are not avail for creditors Proceedings for insolvent trading: s 588G Duty owed by 'directors' only (not officers) Three steps: 1) Does s 588G(1) apply? 2) If so, have the directors contravened s 588G(2)? 3) Are any of the defences in s 588H available? - Correct Answers: s588G duty only applies to directors - de facto and shadow directors are included! Daniels v Andrews - minimum standard applies to all directors regardless of type -applied in ASIC v Pliman Go through the steps 1- does the duty applies 2 - contravention? 3- defence? Section 588G(1) S 588G(1): Section applies if - person is a 'director' of company; - debt is 'incurred' (Note also s 588G(1A)); - company 'insolvent' at time debt incurred or becomes insolvent by incurring the debt (Note presumptions of insolvency relevant to s 588G in ss 588E(3) (insolvent at any time during the previous 12 months) and 588E(4) (failure to keep proper financial records)); and - reasonable grounds for 'suspecting' insolvency: Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756; Queensland Bacon Pty Ltd v Rees (1996) 115 CLR 266 - Correct Answers: 1 - Must prove they were a director at the time, 2 - that a debt has been incurred (gen by placing for an order for goods or service - Hawkins v bank of china, if the comp incurs an unavoidable obligation to pay a sum of money in the future then that is incurring a debt - this case actually dealt with the providing of a guarantee, which also constitutes a debt) ie paying a dividend, buying abck shares, reduces share capital 3- the comp must be insolvent at the time of incurring the debt or that the debt caused the insolvency. See presumptions that apply under 588E(3) - rebuttable presumption that if the comp was insolvent for the 12 month period before the insolvency than they are insolvent but if the comp can prove that they were solvent at some point during that period then they rebut the presumption. 588E(4) if a comp is being investigated for insolvent trading and they destroy their books then the presumption that they were insolvent will apply!! 4 -Reasonable grounds - credit corp tells us the conduct of the director will be judged against a reasonably ordinary competent director with a basic understanding of comp affairs. Bacon - suspicion requires more than mere speculation you must have an positive feeling actual apprehension that there is insolvency. Section 588G(2) 2. By failing to prevent the company from incurring the debt, the person contravenes the section if: - The director was aware at the time the debt was incurred that there were reasonable grounds for suspecting that the company was insolvent, or - A reasonable person in a similar position in a company in the company's circumstances would have been aware that there were grounds for suspecting that the company was insolvent: see Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699; Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC - Correct Answers: Diector is judged as credit corp and atkins in above slide - against a reasonably ordinary competent director with a basic understanding of comp fin status Defences 3. Defences: s 588H - 4 defences: a) reasonable grounds to 'expect' solvency: s 588H(2) see Metropolitan Fire Systems v Miller b) reasonable reliance on information provided by others: s 588H(3) c) non-participation in management because of illness or some other good ground: s 588H(4) see Deputy Commissioner of Taxation v Clark (2005) 21 ACLC 1063 d) Reasonable steps to prevent the company incurring debt: s 588H(5) - note action directors took in regard to appointing an administrator s 588H(6) - Correct Answers: Expect - expectation must be differentiated from mere hope to satisfy this defence, it implies a measure of confidence that the comp is solvent. Harder to rely on the defence than to prove a contravention as to suspect something requires a lower threshold of knowledge than to expect it. Metro fire systems HC case Reasonable reliance on info provided by others Non participation - comments made here b vicki are relevant to reliance on info given by others - approach of the courts in deputy comm v Clark - family comp with H&W as directors small prop comp - it was a carpentry comp for the husband to do his work through and the wife wasn't really doing much except answering the phones. In court she said she did what every her husband did including signing papers but the comp was insolvent and she tried to rely on non involvement and ignorance as a defence but since AWA a nd Daniels cases it's a core duty of a director to be aware fo te comps status so she was still liable. So illness, reliance on another's info and non involvement is not going to be a good defence. You cant be a director in name only - you will be liable regardless. Reasonable steps to prevent the incurring of the debt -Subsections 5 and 6 - the courts will take into account any actions the directors took to appoint an administrator. Bc of the fact 588G is a statutory provision that pierces the corporate veil - it makes the directors personally liable for the debts of the company - directors are motivated to appoint an administrator in circs where they think the comp might be insolvent. Consequences of breach 1) Director may be ordered to pay compensation. If company being wound up, liquidator may sue director for compensation: s 588M (although may be possible for individual creditors to sue with either written consent of liquidator: s 588R or permission of the court: s 588T) 2) S 588G is a civil penalty provision so director liable to civil penalties under Pt 9.4B Note: can be a criminal offence : see s 588G(3) Note also action against parent company for insolvent trading by subsidiary: ss 588V-X - Correct Answers: It's a stat lifting of the corp veil where the directors are personally liable and the director can be sued for compo by the liquidator for the unsecured debtors. 588G is a civil penalty under part 9.4B - liable for management disqualification orders and penalties of up to 250K for each breach and compo - which can be brought by ASiC or the liquidator - most cases it will be the liquidator who brings the action. What is a voidable transaction? A voidable transaction is a certain kind of transaction entered into by the company in the period leading up to its w/up, which the liquidator is able to reverse and recover any funds paid by the company to another person - Correct Answers: One of the actions that liquidators can bring to increase the pool available for creditors There are seven voideable transactions next slide What is a voidable transaction? TYPE 1 insolvent transaction within 6 months before relation back day s 588FE(2) TYPE 2 insolvent transaction and uncommercial transaction within 2 years before relation back day s 588FE(3) TYPE 3 insolvent transaction with related entity within 4 years before relation back day s 588FE(4) TYPE 4 insolvent transaction to interfere with winding-up within 10 years before relation back day s 588FE(5) TYPE 5 unfair loan any time on or before winding up s 588FE(6) Type 6: Unreasonable director-related transaction entered into during 4 years ending on relation-back day, or after that day but on or before w/up: s 588FE(6) Type 7 Unfair preference or uncommercial transaction or unfair loan or unreasonable director-related transaction entered into between relation-back day and the w/up where co was in VA and not entered into on behalf of co by administrator: s 588FE (2A)-(2B) - Correct Answers: Voidable transactions cont - The first 4 types of voidable transactions involve an 'insolvent transaction' - Type 5 involves an 'unfair loan' - Type 6 involves an 'unreasonable director-related transaction' - Type 7 involves voidable transactions that were entered into by the company during VA or a deed of company arrangement - Six types of voidable transactions involve the concept of 'relation-back day' The relation-back day is either the day on which an application for a liquidation order was filed or the day on which the liquidation is deemed to have begun, depending on the circumstances: s 9 - Correct Answers: Relation back day is in s9 - day on which either application for liquidation is filed or day on which liquidation is deemed to have begun What is a voidable transaction? An insolvent transaction is either: - an 'unfair preference' OR - an 'uncommercial transaction' either: - entered into when the company was insolvent OR - which caused or contributed to the company's insolvency: s 588FC - Correct Answers: An 'unfair preference' is a transaction between a company and an unsecured creditor which results in the creditor receiving more from the company than they would have received if they had to prove for the debt in a winding up: s 588FA. Might occur when there are a number of creditors but one is being pushy and so the comp pays that debt but then may not have enough to pay the others so the liquidators can retrieve that money and bring it back in to the pool An 'uncommercial transaction' is one that a reasonable person in the company's circumstances would not have entered into: s 588FB An 'unfair loan' is a loan which has an extortionate interest rate or charges: s 588FD - Correct Answers: 'Unreasonable director-related transaction' is a transaction made by a co in favour of a director or certain relatives of a director: that involves -1) a payment made by the co 2) a disposition of co property 3) the issue of shares or other securities; or 4) the incurring by the co of an obligation to make such a payment, disposition or issue, and that a reasonable person in the co's circumstances would not have entered into, having regard to: (i) the benefits (if any) and detriment to the co; (ii) the benefits other parties gain; and (iii) any other relevant matter: s 588FDA - Correct Answers: Where the directors are trying to move assets that would otherwise have been avail for creditors Voidable transactions - Any exceptions? A party to a Type 1, 2, 3 or 4 voidable transaction will NOT have to repay the liquidator if: - they became a party to the transaction in good faith AND - they had no reasonable ground for suspecting that the company was or would become insolvent AND - the provided valuable consideration under the transaction or changed their position in reliance on the transaction: s 588FG(2) - Correct Answers: Defences for creditors What is a void security interest? A void security interest is: - a floating charge or any other circulating security interest granted by the company during the six months ending on the relation-back day (or between the relation-back day and the start of winding up), except where the company was solvent immediately after the charge was created, or the company benefited from the charge: s 588FJ OR - A security interest that is not perfected - eg, a security interest that has not been registered on the personal property securities register: PPS Act, ss 267,267A OR - a security interest created within the last six months in favour of an officer of the company: s 588FP - Correct Answers: What is a void security interest? A void security interest is: - a floating charge or any other circulating security interest granted by the company during the six months ending on the relation-back day (or between the relation-back day and the start of winding up), except where the company was solvent immediately after the charge was created, or the company benefited from the charge: s 588FJ OR - A security interest that is not perfected - eg, a security interest that has not been registered on the personal property securities register: PPS Act, ss 267,267A OR - a security interest created within the last six months in favour of an officer of the company: s 588FP - Correct Answers: Liquidator's functions - Collect and realise assets - Work out what debts are payable by company, and what is owed to the company - Distribute proceeds of realised assets among creditors - If any surplus, distribute among members - Correct Answers: How are funds distributed? The order in which funds are distributed by the liquidator is: - secured creditors THEN - liquidation expenses (including liquidator's remuneration)THEN - unpaid wages, unpaid superannuation contributions, and other employee entitlements THEN - unsecured creditors THEN members (if there is a surplus): s 556 - Correct Answers: Secured creditors go first - they always have right to their secured interests and get this by appointing a receiver This order is found in s556 Distribution of funds cont NOTE: If there are not enough funds to pay all employee claims, the liquidator must pay these claims before paying a secured creditor with a circulating security interest: s 561. - Correct Answers: Even though employee claims are unsecured they come before secured creditors if there are insufficient funds BUT only if the secured debts are over easily liquidated assets ie NOT property but rather shares etc Distribution of funds cont - Under s 433, certain debts are treated as preferential debts that have priority to the claims of a secured creditor holding a circulating security interest, ie, where a secured creditor holds a circulating security interest, this will be deferred to certain preferential debts. - Those debts include employee claims under s 561. - Correct Answers: Employees are treated preferentially Distribution of funds cont - Employees' wages: s 556 (1)(e) - Employees' leave entitlements: s 556(1) (g) - Retrenchment pay: s 556(1)(h) Note: if not enough to pay all, will be a pro rata claim. - Correct Answers: Distribution of funds cont Note: excluded employees' (directors, spouses and relatives of directors) claims are limited. - Amounts paid in respect of wages cannot exceed $2000: s 556(1A); leave limited to $1500: s 556(1B); and retrenchment limited under s 556(1C). - Correct Answers: Deregistration deregistration brings the company's existence to an end The three types of deregistration are: - deregistration following winding up voluntary deregistration - deregistration initiated by ASIC --- In certain circumstances, the registration of a company can be reinstated: s 601AH - Correct Answers: Topics: Receivership and Voluntary Administration 1) Receivership 2)Voluntary Administration - Correct Answers: What is receivership? Receivership (CA, Part 5.2: ss 416-434) involves the appointment of an independent, experienced insolvency practitioner as a receiver. - Correct Answers: Who can be appointed as a receiver? A registered liquidator: s 418 Usually appointed by a secured creditor, eg, a debenture holder when the company has breached one or more of its obligations under the loan agreement to: - Take possession of the secured property - Sell it and - Repay the secured debt owed by the company out of the proceeds of sale - Correct Answers: Registered with ASIC Who may appoint a receiver? While a receiver is most commonly appointed by a secured creditor who wishes to enforce their security, a receiver may also be appointed by: the court, eg, -- under s 1323(1)(h) in course of ASIC investigation; -- under s233 - as a remedy for oppression - Correct Answers: Why are receivers appointed? - To enforce a secured creditor's security - As a remedy in an oppression action - During an ASIC investigation - Correct Answers: What is the receiver's function? Broadly, where appointed under a security interest (eg charge) the receiver's function is to collect the secured property, sell it and distribute the proceeds to the secured creditor - Correct Answers: What are the receiver's powers? The sources of the receiver's powers are set out in: - the loan agreement or debenture (or court order) under which receiver was appointed; and - CA, s 420. - Correct Answers: Receiver's powers under s 420 The powers under s 420 include power to: - carry on the company's business/businesses - convert the company's property into money - borrow on security - execute documents - bring and defend legal proceedings in company's name - hire and fire employees - appoint agents - Correct Answers: General receivership Where the receiver is appointed to take control of all, or nearly all, of the company's business and assets, the receiver will: - take over the control of the company's bank accounts and insurance arrangements - work out what property the company owns and have it valued - review all uncompleted contracts arrange the continued supply of essential goods and services - fire any employees who are not required during the receivership - review the company's system of internal control and ordering - sell assets where necessary - Correct Answers: What are the receiver's duties? Since the main power of the receiver is to sell the secured property, the receiver is under a duty of care when selling company assets: CA, s 420A Also in regard to the sale of company property, the general law imposes a duty on receiver to act in good faith: see, eg, Pendlebury v Colonial Mutual Life Assurance Society Ltd Under the laws of contract, tort and fiduciary principles the receiver owes duties to the secured creditor who appointed them The receiver also owes fiduciary duties to the company NOTE: receiver is an 'agent' of the co. Consequences? NOTE: Receiver is also an 'officer' of the company under s 9 of the CA, Consequences? - Correct Answers: Sell at market price r the best price possible - they don't have ot wait if market conditions are bad just need to get best price in the current market Receivers are fiduciaries - owe a duty to those who appoint them and to the company. And they're also considered an officer so they also owe the duties in s180-183 too! See next slide What are the receiver's liabilities? A receiver may be liable for: - breach of duty - invalid appointment - some contracts created before the receivership - contracts created during the receivership A receiver will usually insist upon getting an indemnity from the secured creditor who appoints them - Correct Answers: What is VA? CA, Part 5.3A VA is a mechanism by which an insolvent company can enter a temporary 'safety zone' from creditors' claims while a decision is made by its creditors on whether the company should: - execute a 'deed of company arrangement' (DOCA) OR - be wound up OR - be returned to the control of its board of directors - Correct Answers: Objective of VA The goal of the VA provisions is to: - maximise the chance of the company, or as much as possible of its business, continuing in existence; or - if that is not possible, provide a mechanism for creditors and members to get a better return than from an immediate winding up: s 435A - Correct Answers: Creditors generally fair better if a comp goes into vol admin for a period prior to being wound up rather than being wound up immediately Remember The directors of an insolvent company have an incentive to appoint an administrator under the VA provisions because doing this provides some protection for them against liability: see s 588H(5) and (6). - Correct Answers: IMPORTANT VA process The two phases of VA are: - the administration phase - when company is under administration - the deed phase (assuming option 1 above has been chosen) - when the company is subject to a DOCA - Correct Answers: Administration phase The administration phase begins with the appointment of the administrator An administrator can be appointed by: - the board OR - a liquidator or provisional liquidator OR - a secured creditor entitled to enforce over all or substantially all of the property The administrator must be an independent person who is a registered liquidator: ss 448B, 448C - Correct Answers: Administration phase cont The administrator's task is to investigate the financial affairs and decide on a course of action that is in the best interests of the creditors The administrator effectively takes over control of the company's business from the directors - Correct Answers: Administration phase cont During the administration phase the company's property goes into a "safety zone" (moratorium): - There are restrictions on winding up - Owners and lessors of property cannot recovery their property - Legal proceedings against the company are restricted - Enforcement processes are restricted - Officers cannot act without administrators agreement - Members cannot transfer shares without court permission - Correct Answers: Safety zone doesn't just prevent creditors claim also includes those things on the list, whilst a decision is made on the fate of the company Administration phase cont Creditors are prevented from taking action against the company during the administration, except a secured creditor with: - a substantial charge: s 441A, or - a charge over perishable property: s 441C. - Correct Answers: Big exceptions to the barring of credtors taking action during the safety zone is big creditors First meeting of creditors The administrator must arrange a meeting of creditors within 8 business days of appointment to form a consultative committee or to replace the administrator if desired: s 436E - Correct Answers: Administration phase cont A second meeting must be called within 20 business days to decide whether to: - end the administration and hand the company back to the directors OR - enter into a deed of company arrangement OR - wind up the company - Correct Answers: Deed phase The deed phase of VA commences if the 2nd meeting of creditors decides to proceed with the execution of a deed of company arrangement A majority of creditors in terms of both number and value must vote to adopt the deed - Correct Answers: The deed is a DOCA- plan to operate the business and get it out of trouble End of lecture Deed phase cont The deed contains the arrangements made between the company and its creditors at the second meeting, e.g.: - debt compromise - repayment schedule - debt converted into equity - creditors to supervise management - Correct Answers: Deed phase cont Once adopted, the deed binds all unsecured creditors so far as concerns claims on or before the day specified in the deed Secured creditors who voted against adoption of the deed are not barred from enforcing their security - Correct Answers: Variation and termination of the DOCA -- See LG p 102 - Correct Answers: