Exam Prep - Insolvency PDF

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InsolvencyNOTESFair Entitlements Guarantee (FEG) - A legislative safety net scheme of last resort with assistance available for eligible employees during a company's liquidation. - You might be able to claim: 1. Your unpaid wages - up to 13 weeks 2. Your unpaid annual leave and long service leave 3....

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Insolvency

NOTES Fair Entitlements Guarantee (FEG) - A legislative safety net scheme of last resort with assistance available for eligible employees during a company's liquidation. - You might be able to claim: 1. Your unpaid wages - up to 13 weeks 2. Your unpaid annual leave and long service leave 3. Payment in lieu of notice - up to 5 weeks 4. Redundancy pay - up to four weeks per full year of service. - The Federal Government steps in as a creditor in substitution of the employees. - Does not cover Superannuation. Pari Passu Principle It means that all unsecured creditors in insolvency processes, such as administration, liquidation and bankruptcy must share equally any available assets of the company or individual, or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor. Deed of Company Arrangement (DOCA) A binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with — and is agreed to after the company enters voluntary administration. The DOCA is generally proposed by the director (or any third party) and is administered by a deed administrator (usually the registered liquidator who was the voluntary administrator). The DOCA aims to: - Maximise the chances of the company, or as much as possible of its business,continuing, and/or - Provide a better return for creditors than an immediate winding up of the company. List of Priority of Payments 1. Preservation costs 2. Winding up costs 3. EXAD Costs (liquidator costs) 4. EXAD Fees (liquidator fees) 5. Employees (possible substitute with FEG) 6. Unsecured Creditors 7. Members List of Employee Priority Payments 1. Wages and Super 2. Compo 3. Leave (AL, LSL, LL) 4. Retrenchment (Redundancy, PILN) Zombie Company - Zombies are companies that earn just enough money to continue operating and service their debt, but are unable to pay off their debt. - Zombie companies have no excess capital to spur growth and are considered close to insolvency. - In rare cases, a zombie company might stretch itself financially, produce a lucrative product, and reduce its liabilities. Insolvency - Insolvency is a term for when an individual or company can no longer meet their financial obligations to lenders as debts become due. Before an insolvent company or person gets involved in insolvency proceedings, they will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses.

Safe harbour - A legal provision to sidestep or eliminate legal or regulatory liability in certain situations, provided that certain conditions are met. Phoenixing - An illegal practice that involves company directors transferring assets of an existing company to a new company, leaving the old company with the existing debt. The old company is then placed into liquidation, but as the company no longer has any assets there is nothing to be used to cover these debts. - Liquidation, voluntary administration and receivership - fair entitlements guarantee Cases ASIC v Plymin (2003) 46 ACSR 126 - significant because it set out 14 indicators that helps to understand when a company might be insolvent. Indicators of Insolvency As outlined by the judge in ASIC vs Plymin (2003) 46 ACSR 126. 1. Continuing losses. 2. Liquidity ratio below 1.0 3. Overdue Commonwealth and State taxes, and statutory obligations. 4. Poor relationship with present bank, including inability to borrow additional funds. 5. No access to alternative finance. 6. Inability to raise further equity capital. 7. Supplier placing the debtor on ‘cash on delivery’ (COD) terms, or otherwise demanding special payments before resuming supply. 8. Creditors unpaid outside trading terms. 9. Issuing of post-dated cheques 10. Dishonouring cheques 11. Special arrangements with selected creditors 12. Payments to creditors of rounded sums, which are not reconcilable to specific invoices 13. Solicitors’ letters, summonses, judgements or warrants issued against the company. 14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts. Sections Section 95A Solvent 1. A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. 2. A person who is not solvent is insolvent. Section 233 Orders the Court can make 1. The Court can make any order under this section that it considers appropriate in relation to the company, including an order: a. that the company be wound up; b. that the company's existing constitution be modified or repealed; c. regulating the conduct of the company's affairs in the future; d. for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law; e. for the purchase of shares with an appropriate reduction of the company's share capital; f. for the company to institute, prosecute, defend or discontinue specified proceedings;

g. authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company; h. appointing a receiver or a receiver and manager of any or all of the company's property; i. restraining a person from engaging in specified conduct or from doing a specified act; j. requiring a person to do a specified act. Section 236 Bringing in, or intervening in, proceedings on behalf of a company 1. A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company, is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or setting them), if: a. The person is: 1. A member, former member, or person entitled to be registered as a member of the company or of a related body corporate; or 2. An officer or former officer of the company Section 242 Power of the Court to make costs orders (make one party pay another party’s legal costs). The court may at any time, make any orders it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under section 237 or n application for leave under that section: a. The person who applied for or wa granted leave; b. The company c. Any other party to the proceedings or application. Section 435A Object of Part The object of this part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: a. Maximises the chances of the company, or as much as possible of its business, continuing in existence; or b. If it is not possible for the company or its business to continue in existence-results in a better return for the company’s creditors and members than would result from an immediate winding up of the company. Section 436A Company may appoint an administrator if the board thinks it is or will become insolvent. 1. A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: a. In the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and b. An administrator of the company should be appointed. Section 436B Liquidator may appoint administrator 1. A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company, if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. 2. A liquidator or provisional liquidator of a company must not appoint any of the following persons under subsections (1):

a. b. c. d. e.

Himself or herself If he or she is a partner of a partnership - a partner or employee of the partnership If he or she is an employee - his or her employer If he or she is an employer - his or her employee If he or she is a director, secretary, employee or senior manager of a corporation (unless a resolution is passed by the company’s creditors or an appointment is made by the court).

Section 436C Secured party may appoint administrator 1. A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company’s property may by writing appoint an administrator of the company, if the security interest has become, and is still, enforceable. Section 436E Purpose and timing of first meeting of creditors (1) The administrator of a company under administration must convene a meeting of the companies creditors in order to determine: a. Whether to appoint a committee of inspection; and b. If so, who are to be the committee’s members. (2) the meeting must be held within 8 business days after the administration begins, (3) the administrator must convene the meeting by: a. Giving written notice of the meeting to as many of the company’s creditors as reasonably practicable; and b. Causing a notice setting out the prescribed information about the meeting to be published in the prescribed manner - at least 5 business days before the meeting. Section 439A Administrator to convene meeting and inform creditors 1. The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed or extended. 2. The meeting must be held within 5 business days before, or within 5 business days after, the end of the concerning period.’ Section 439C What creditors may decide At a meeting convened under section 439A, the creditos may resolve: a. That the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied any notice of meeting); or b. That the administration should end: or c. That the company be wound up. Section 436DA Declarations by administrator - indemnities and relevant relationships Scope: (1) This section applies to an administrator appointed under section 436A, 436B or 436C. Declaration of relationships and indemnities: (2) As soon as practicable after being appointed, the administrator must make: a. A declaration of relevant relationships; and b. A declaration of indemnities ( note: means a security or protection against a loss or other financial burden). Notification of Creditors: (3) The administrator must: a. Give a copy of each declaration under subsection (2) to as many of the company’s creditors as reasonably practicable; and b. Do so at the same time as the administrator gives those creditors notice of the meeting referred to in section 436E.

Section 437D Only administrator can deal with company’s property (1) This sections applies where: a. A company under administration purports to enter into; or b. A person purport to entry into, on behalf if a company under administration; a transaction or dealing affecting property of the company. (2) The transaction or dealing is void unless: a. The administration entered into it on the company’s behalf; or b. The administrator consented to it in writing before it was entered into; or c. It was entered into under an order of the court. Section 438A Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: a. Investigate the company’s business, property, affairs and financial circumstances; and b. Form an opinion about each of the following matters: 1. Whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement; 2. Whether it would be in the creditors interests for the administration to end; 3. Whether it would be in the creditors interests for the company to be wound up. Section 437A Role of administrator 1. While a company is under administration, the administrator; a. Has control of the company’s business, property and affairs; and b. May carry on that business and manage that property, and those affairs; and c. May terminate or dispose of all or part of that business, and may dispose of any of that property, and d. May perform any function and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. Section 438B Directors to help administrator 1. As soon as practical after the administration of a company begins, each director must: a. Deliver to the administrator all books in the directors possession that relate to the company, other than books that the director is entitled, as against the company, and the administrator to retail and b. If the director knows where other books relating to the company are-tell the administrator where those books are. Section 443A General Debts 1. The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for: a. Services rendered; or b. Goods bought; or c. Property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goodsl or d. The repayment of money borrowed; or e. Interest in respect of money borrowed; or f. Borrowing costs. Section 448B Administrator must be registered liquidator 1. A person must not consent to be appointed, and must not act, as administrator of a company or of a deed of company arrangement

Section 450A Appointment of administrator 1. Where an administrator of a company is appointed under section 436A, 436B or 436C, the administrator must: a. Lodge a notice of the appointment before the end of the next business day after the appointment; and b. Cause a notice setting out the prescribed information about the appointment to be published, within the period ascertained in accordance with the regulations in the prescribed manner. Section 459A Order that insolvent company be wound up in insolvency On an application under section 459P the Court may order that an insolvent company, be wound up in insolvency. Section 459E Creditor may serve statutory demand on the company. 1. A person may serve on a company, a demand relating to: a. Single debt that the company, owes to the person, that is due and payable and whose amount is at least the statutory minimum: or b. 2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum. 2. This demand: a. If it relates to a single-debt--must specify the debt and its amount: and b. If it relates to 2 or more debts--must specific the total of the amounts of the debts; and c. Must require the company to pay the amount of the debt, or the total of the amounts of the debts or to secure or compound for that amount or total to the creditor’s reasonable satisfaction ,within the statutory period after the demand is served on the company; and d. Must be in writing; and e. Must be in the the prescribed form (if any); and f. Must be signed by or on behalf of the creditor 3. Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that: Note: an Affidavit is a written statement prepared by a party or witness. It is the main way you present evidence to a court. a. Verifies that the debt or the total of the amounts of the debts, is due and payable by the company; and b. Complies with the rules. 4. A person may make a demand under this section relating to a debt even if the debt is owed to the person as assignee. Section 459P Who may apply for order under Section 459A 1. Any one or more of the following may apply to the Court for a company to be wound up in insolvency: a. The company b. A creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor); c. A contributory; d. A director e. A liquidator or provisional liquidator of the company f. ASIC g. A prescribed agency 2. An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court:

a. A person who is a creditor only because of a contingent or prospective debt; b. A contributory c. A director d. ASIC Section 533 Reports by liquidator (1) If it appears to the liquidator of a company, in the course of a winding up of the company, that: a. A past or present officer or employer, or a member or contributory, of the company may have been guilty of an offence under a law of the Commonwealth or a State of Territory in relation to the company; or b. A person who has taken part in the formation, promotion , administration, restructuring, management or winding up of the company: 1. May have misapplied or retained, or may have become liable or accountable for, any money or property of the company; or 2. May have been guilty of any negligence, default, breach of duty or breach of trust in relation to the company; or c. the company may be unable to pay its unsecured creditors more than 50 cents in the Section 555 Debts and claims proved to rank equally except as otherwise provided - Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately. Section 556 Priority Payments Subject to this Division , in the wind up of a company, the following debts and claims must be paid in priority to all other unsecured debts and claims. a. First, expenses properly incurred by a relevant authority in preserving, realising or getting in the property of the company, or in carrying on the company’s business. SEE PRIORITY PAYMENTS IN NOTES. REFERENCE THIS SECTION. Section 588G Directors duty to prevent insolvent trading by the company. 1. This section applies if: a. A person is a director of a company at the time when the company incurs a debt; and b. The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and c. At that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and d. That time is at or after the commencement of this Act. Section 588H Defences about reasonable grounds, illness or reasonable steps 1. Reasonable grounds to expect, and actual expectation, that the company was solvent. 2. Non-participation in management due to illness or some other good reason, or 3. The taking of all reasonable steps to prevent the company incurring the debt. Section 588GA Safe Harbour - taking a course of action reasonably likely to lead to a better outcome for the company. Section 558GA(1) of the Act sets out the safe harbour defence. This section states that the duty in section 588G(2) does not apply to a director and a debt if both of the following conditions apply: 1. at a particular time after the director starts to suspect the company may become or be insolvent, the person starts developing one or more courses of action that are reasonably

likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator; and 2. the debt is incurred directly or indirectly in connection with any such course of action during the period that starts at that time, and ends on the earliest of the following times: a. the end of 'reasonable period' after the time that the course of action is determined, if the director does not begin to take the course of action in that time. The Act does not provide any further guidance on what would constitute a 'reasonable time'; b. when the director ceases to take the course of action; c. when the course of action ceases to be reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator; and d. the appointment of an administrator or liquidator of the company. Section 588GAAA Safe harbour - temporary relief in response to the coronavirus. 1. ...