This essay will assess the student’s research skills. It will also deal with a real life situation within a corporate law context.
The student must have a basic understanding of the corporate regulatory context.
This paper examines how to save a company from liquidation or how to deal with insolvency.
You will be asked to address the following questions in this presentation.
What are the signs that a company might be insolvent? How can directors respond to these circumstances?
What are the liability potential for directors of company companies in the event of insolvency?
What are the possible avenues for the company, including the directors, if the company becomes insolvent?
What is the distinction between voluntary and uninvoluntary interventions of different parties affected by the possibility of insolvency in a company?
What could be a positive outcome for a company if it is not wound up by creditors? And how can this be achieved.
What are the statistics about insolvency among Australian companies
Are there any issues that are relevant regarding the insolvency or liquidation of Australian companies
What is the role and responsibilities of ASIC, and other statutory authorities with regard to insolvent companies?
Your research has led you to make any pertinent observations about insolvency.
Refer to any situations from your life in your presentation.
Answer to Question: CLAW314 Corporate Law
Insolvency is defined as the situation where the company’s liabilities exceed its assets.
Section 95A (Corporate Act 2001) states that an individual is considered to be solvent if they pay all of their company’s debts, and then discharge all of their liabilities. If the debts become due or payable, the person or organization are considered to be insolvent.
Sutherland Construction Materials Pty Ltd (2009) ruled that Solvency could be determined by the cash flows of the company.
But, it is worth noting that the position on the balance sheet wasn’t considered a solvency test (Corporation Act of 2001).
This essay examines the various aspects and roles of directors, ASIC, creditors, and other stakeholders in insolvency.
Finally, it concludes with a short conclusion.
Signs of insolvency
The ASIC Regulation Guide 217, Duty to Prevent Insolvent Trading – Guide for Directors (2010) lists the following signs of insolvency.
Trading losses have been part of the company’s past on a consistent basis.
The company faces cash flow challenges.
Company is in difficulty of selling their stock, or in collecting on its debts.
When Company negotiates a new limit with its current financier.
External creditors and parties threatened with or commenced legal action against the company.
Directors take these measures in these situations:
Director must take all reasonable steps to avoid insolvency. The following measures are provided:
Director must not take on any more debt unless there is a chance of restructuring the business and refinancing it. There should also be equity funding to recapitalize the company.
Directors can nominate voluntary liquidators or administrators.
Director is responsible for considering the best interests of the creditors, employees, and all other stakeholders in the event that the company becomes bankrupt or is at risk.
Other duties include the obligation to limit trading in the event of company insolvency (ASIC, 2010,).
Section 588G (corporation Act 2001) imposes duties on directors to prevent insolvent trading.
This section applies to the directors and those not appointed, but acting as the directors of the corporation.
Taylormaid Marine Industries Pty Ltd v Beaurepaire & Ors explains this point.
Court in this case stated that section 122.9 of the Act permits a director to be considered a director of a company in certain circumstances.
This section states, that the director is responsible for preventing the organization’s debt from accruing if:
Company is considered insolvent if it has incurred debt.
If the company has also incurred a range of debts, such as that one, it is considered insolvent.
If the company has defaulted on its debts, then there are enough reasons to suspect the company of insolvency or imminent insolvency.
This section also lists the two categories that are contraventions.
If the director of the company fails or is not able to prevent the debts from being incurred, even if they know there are reasons to suspect insolvency, they will be liable under the civil penalty provision.
Second stage: Directors can be convicted of criminal offense if sufficient reasons exist to believe company is insolvent.Consequences Of Breach Of Section 588G:
Court may issue compensation orders under section 588J/1317H. Director is personally liable for the payment of the compensation.
The compensation amount is equal to the company’s loss.
The court can issue a penalty order in pecuniary terms up to $200,000.
Under section 206, a court can exempt a director of managing a corporation.
Director of the company who is charged with a criminal offense could be subject to a fine of up to 2000 penalty units and five-year imprisonment (Corporation Act, 2001; AICD).
Options Available to Directors & Company:
Directors have many options available to them if they suspect that there is insolvency.
Directors may seek professional advice. Director’s advice can be used for voluntary administrative purposes, that is, to restructure the company and keep the business going.
Send an invitation to the secured debtor to appoint your receiver.
Directors must end all trading and prevent the company’s incurring more debt.
Section 436A provides that administrators are appointed for companies if they believe that the company is insolvent, or is likely to become insolvent. (Corporation Act. 2001).
Voluntary or involuntary Interventions
In Australia, voluntary administration has been deemed the most popular method for reorganization. This is due to its simplicity and speed.
It is also applied when secured creditors or directors of the company, on most of its assets, charge was made) appoint an outside administrator. This is known as voluntary administrator.
Voluntary administrator examines the affairs of the company to report creditors and give advice to creditors about whether company should enter into deeds of company arrangement, liquidation or both.
If the directors feel that the company has become insolvent or is insolvent they will usually appoint a voluntary administrator.
This is explained through the case law Long V. Home Health Services, 43 Wn. App. 729, 734 (1986).
A voluntary administrator can also be involuntary.
The administrator who is appointed by the liquidator, provisional or company liquidator as administrator of the company’s assets is called an involuntary administrator.
This is where you will see the major difference between voluntary intervention and involuntary intervention.
Voluntary administrator allows the director to have some control over the company as well as in future business. It also allows the companies to reopen their trading.
Voluntary Administration is best for companies that become insolvent, and who can be structured.
Involuntary administration means that companies are at a stage where it is no longer possible to restructure.
A different option than creditor’s winding up:
A company member can vote for voluntary winding up to wind up its operations.
The company members can adopt special resolutions to wind down the company or to appoint liquidator (ASIC, not.).
Section 495 of the Corporation Act 2001 appoints the liquidator. According to this section, the general meeting must appoint the liquidator.
The company must appoint a liquidator to wind down all its affairs and distribute any property that is needed for the payment of all outstanding debts.
The following section states that members have the obligation to appoint a liquidator to fill the vacancy if there is a vacancy at the office of he liquidator as resulting from death, resignation, or for any other reason.
The general meeting, for subsection 2, can be held by any contributory. If there were two or more liquidators, then those liquidators will also hold it.
General meetings must be held according to the provisions in this Act or the constitution.
It can be stated in any other manner as permitted by the Court (Corporation Act), 2001.
It should be noted that liquidators can be appointed for the purpose to pay out all the company’s debts, as well as paying dividends to shareholders if the company has surplus assets. The company will then be deregistered.
Statistics on Insolvency
ASIC released quarterly insolvency statistics for 2016/17. They showed a significant increase of 28% in companies that were placed under external administration.
There are almost 2198 administrators, as opposed to 1717 administrators the previous financial years.
The June 2016 quarter saw 3.7% more insolvency cases than the previous year.
For the quarter, 4 % of EXAD-related companies were included.
There are many states in which the % of liquidation has increased.
It can rise to 25.5% at the national level. This is especially true in Western Australia, Victoria, and New South Wales, where it rose to 127.9%.
These winding ups are initiated by directors and can be increased up to 35%. The largest increases in this category are in Victoria (57.8%), Queensland (28.6%) and New South Wales (14%).
Problems related to insolvency
Corporation Act defines the solvency under section 95A. A person is solvent if they pay their debts and have all their liabilities paid when due. Organizations or persons are considered insolvent, if not.
The Australian Company’s long-term prospects were not taken into consideration when insolvency laws related to Australian Companies were passed.
This law also neglects to account competition skills, brand value, as well reasons for premature liquidation and closure of the company.
Insolvency law provides no assistance or guidance to companies in restructuring their organizations.
Insolvency law is different in other countries. It focuses primarily on restructuring an organization, rather than liquidating it.
11) is the most liberal Code. It focuses on restructuring the organization.
The Australian Government may use this code to model the insolvency provisions.
There are important provisions in this chapter that should be incorporated into Australia’s insolvency laws.
Be able to rely on long-term planning, and avoid short-term profit while making the decision.
Permanently, workers receive wages and benefits from the employer in the event that they are insolvent.
Measures to preserve the skills and experiences, goodwill and relationships (ASIC).
ASIC could deregister the company if ASIC believes the company has stopped operating or is owing penalties and fees.
ASIC may deregister a business for certain reasons.
If company fails within 12 months to pay annual fees.
Company fails to reply to the compliance notice. They also fail to file the documents within 18 month. ASIC has reasonable grounds to believe that the company is not in operation.
Company is being wound-up, and no liquidator was appointed (ASIC. n.d.).Observation:
All of these facts make it clear that insolvency laws mainly deal with liquidation and interest of creditors. They fail to take into account the actions related to restructuring and interests of all stakeholders, other than creditors.
Additionally, companies will be liable for paying the costs of the liquidator.
This can be seen in case law Ascot Community Sports Club Incorporated.  QSC 268, p.
In this case liquidator claimed the cost of $70000, and Court determined that company was responsible to pay.Conclusion:
All provisions relating to insolvency law will be discussed. Also, the liability of directors under the Act.
This discussion will be centered on insolvency issues, and how legislation and case laws can help.References:AICD.
Insolvent trade. Available at: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx.
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Director’s Guide: Duty to prevent insolvent dealing Available at: https://download.asic.gov.au/media/1241384/rg217-29july2010.pdf.
This document was accessed on 21 August 2017.ASIC. Corporate insolvencies: June quarter 2017. Available at: https://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf.
Accessed 21 August 2017.ASIC.
Types Of Insolvency. Available at: https://asic.gov.au/regulatory-resources/insolvency/types-of-insolvency/.
Accessed 21 August 2017.ASIC.
ASIC initiated deregistration. Available at: https://www.asic.gov.au/for-business/closing-your-company/deregistration/asic-initiated-deregistration-of-company/#ReasonsforDereg.
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Ascot Community Sports Club Incorporated, (in liquidation),  QSC 258.
Gupta N. Australia’s insolvency laws. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/InsolvencyLaws.
This page was last accessed on 21 August 2017.Long v. Home Health Services, 43 Wn. App. 729, 734 (1986).Quinlan, M. (2005).
Formal Reorganization, Australia. Available at: https://www.allens.com.au/pubs/pdf/insol/pap15mar05.pdf.
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