Lecture notes, lectures 9 - note 9 - external administration PDF

Preview

Summary

Note 9 - External Administration ...

Description

NOTE 9: EXTERNAL ADMINISTRATION 1. Relevance Business, accountants, and insolvency practitioners need awareness of different types of external administration because of the way in which it impacts on the different stakeholders:  Creditors (secured and unsecured)  Employees  Shareholders  Directors They also need to understand what each of the different types of EA (under Ch 5 of CA) can offer and the advantages and disadvantages of each type. Aims of insolvency law (Harmer Report, 1988: Purposes that should guide Australian insolvency law, it should:  Provide ways that enable both debtors and creditors to participate with least possible delay and expense.  Make insolvency administration impartial, efficient and expeditious.  Provide a convenient means of collecting/recovering properly that should be used to pay the debts and liabilities of the insolvent company  Retain principles of equal sharing between creditors (pari passu)  Support the commercial and economic processes of the community Types of External Administration:  Schemes of arrangement (with creditors)  Receivership  Voluntary administration  Liquidation (Winding up)

2. Alternative to Liquidation – Schemes of Arrangement Governed under Pt 5.1 of CA, ss 411-412: Making a deal with creditors Types:  Creditors (Moratorium – asking for extension of time e.g. 12 months; Compromise – pay lesser amount for full debt settlement; or combination of both)  Members (amalgamation – mixing, uniting; reconstruction – restructure the company) Scheme Procedure (ss 411 – 412) – Financially distressed company can propose a scheme of arrangement with its creditors, required:  Explanatory statement (lodged with ASIC)  Court application and approval for class meetings  Creditor approval (Special majority) (creditors) – ensure the company is still able to  Court approval of scheme survive (not hopelessly insolvent), meeting with affected class of creditors Creditors’ scheme in practice:  Rarely undertaken today due to cost and cumbersome procedure (centres around court involvement). Use of creditor’ schemes diminished since introduction of (Pt. 5.3A Voluntary Administration) in 1993, following Harmer Report which also has object of corporate rescue. Policy grounds:  Court will refuse scheme if company is hopelessly insolvent (danger to the business community) or attempts to avoid scrutiny of director’s conduct.  Re JWD Pty Ltd (1991) held: ‘most significantly, the proposed scheme had its genesis in an attempt to avoid any investigation by a liquidator into the company’s affairs.’ *Extensive investigative and recovery powers of liquidator

3. Alternative to Liquidation – Voluntary Administration (Pt5.3A of CA, p. 724 for flowchart) Twin aims: (s 435A) 1. Maximise chance of company continuing in existence OR 2. Result in a better return for creditors/members than from an immediate winding up (minimize risk) Potential outcomes: 1. Creditors determine at 2nd Statutory Meeting, following recommendation and report of Administrator, whether: o VA should end (company be allowed to continue as business, rare outcome) OR o Deed of Company Arrangement (DOCA) should be executed for corporate rescue OR o Company should be wound up (stops trading and a liquidator is appointed under S 439C) Overview of Pt5.3A: 1. ‘Initiating’ Stage: starts with appointment of administrator, mainly concerned with notices of appointment, holding and conduct of an initial/first meeting of creditors, and effect of appointment on rights of creditors and other persons with interest in company property. (generally 28days from appointment to prepare administrator report) 2. ‘Decision’ Stage: moves to holding and conduct second/main meeting of creditors. Administrator’s option as to what form of administration would be in the interests of the creditors, and the creditors decide on 1 of 3 options (potential outcomes): o Company executes a DOCA o End administration (continue business) o Company be wound up OR 3. ‘Transition stage’: Depending on outcome of decision stage, VA either: o Ceases and company is returned to directors (rare) OR o Transits to corporate rescue via a DOCA OR o Transits to a creditors voluntary winding up (stops trading) Design Principles – Lehman Brothers Holdings Inc v City of Swan (2010), held:

   

‘Part 5.3A is drafted in a way that emphasises the need for prompt action in implementation, and prompt decisions by creditors about the company fact to which administrators are appointed. Statement in s 435A makes plain, the central concern is regulation of the administration of an insolvent company.’ Compared Schemes with VA: Structure and detailed terms of Pt. 5.1 (schemes) are different from those of Pt.5.3A (VA). Court approval in advance is always required under schemes, in VA the role of the court is only belated and occasional. After the DOCA has been entered, and even then only if the creditor complains. The much more ample oversight of the court under schemes contrasts with the significant things which can be done under VA (such as entering into DOCA) without court sanction.

4. Voluntary Administration (Pt5.3A) – Detailed (Corporate Rescue) Gives company a temporary safety zone from creditors while the creditors decide (at the 2 nd creditors meeting), what to do next (select one of the 3 options)  Administrator takes control of company’s assets during a short period (usually for 4-6 weeks) BUT with provisions for extensions with court consent (based on size/complexity of company business, can be extended for many months. Who is an administrator (under S 448-448D)  Registered liquidator (by ASIC) o with academic/professional qualification o Normally an accountant with experience in insolvency work o Independent of the company (e.g. the company’s auditor , a debtor to the company for more than $5,000 and creditor for more than $5,000 are generally disqualified) Who may appoint the administrator? 3 ways (SS 436 A-C)  Company through written board resolution (instigation by directors). All directors must have same view. Expedient and efficient way – S588G/H (5) to relieve from liability.  MAJOR secured creditor with security interest over all or nearly all of company’s property (‘fully secured creditor’). Without this power, would be forced to rely on more drastic remedy, like receivership.’  A liquidator in the process of winding up (who thinks company can continue to trade under supervision if creditors were to adopt a DOCA) *Advice: go into VA first, then go to liquidation* Power to appoint must not be abused – Aloridge Pty Ltd v Christianos (1994)  Court exercise its wide discretion under s 447A to make orders about operation of Pt5.3A.  Ordered VA to be terminated. It inferred that the administrator’s appointment was made for improper purpose of wresting control from the provisional liquidator. Impacts on Company/Officers (SS 437A-D, S 438)  Administrator: o Is an ‘officer’ (s 9) and subject to Ss 180-184 fiduciary duties o Acts as company’s agents (s 437B) o Can carry on company’s business: s 437A (1) (d)  Company officers are not removed from officer, but in general, they cannot act without administrator’s written approval (s 437C) o Controls company’s property – any dealing affecting company’s property entered into by somebody else without admin’s prior written consent is void (unless court consents): s 437D  Directors: o Expected to deliver company’s books (s 438B) and prepare/submit a report as to the company’s affairs (RATA) to administrator within 5 business days of start of VA: s 438B (2)  Creditors: o Series of statutory moratoriums on creditors’ claims from date of administrator appointment (generally, all creditors’ hand are tied). Recovery actions are frozen (with limited exceptions). Aim to facilitate a ‘cooperative/constructive’ approach to achieve objects of Pt5.3A, to facilitate DOCA outcome if feasible. o Unsecured creditors can’t take steps or continue with steps to enforce claims against company without consent (Admin/court). Secured creditors can enforce rights before appointment of administrator (s 441B) and within 13 business days after the appointment (S 441A)  Overall: o Aim to give company ‘breathing space’, remove creditor pressure. Allow focus on trading: also to give time to investigate company’s affairs and prepare report (within 20 business days) with recommendations on each of 3 options available to creditors at 2nd statutory meeting (held within 25 business days) Serious of Moratoriums during VA – Company in temporary safety zone (given ‘breaching space to determine its future)  Enforcement processes are restricted (unless court agrees): S 440F  Legal actions against company are restricted (unless admin/court agrees): S 440D  Secured creditors rights are generally restricted: S 440B (bank cannot enforce personal guarantee. Unless substantial secured creditor, or with security interest over perishable goods: S 441C and S 441G)  Owners/lessors of property rights are restricted (unless admin/court agrees): S 440B  Enforcement of personal guarantees are restricted: S 440J  Shareholders right to transfer shares are suspended Rationale for suspension of all legal actions (S 440D): 1. No creditor is to be free to advance their own individual interest as against the interest of creditors generally 2. Administrators should not be distracted from their statutory duties and obliged unnecessarily to incur legal costs Rochford Ltd (admin apptd) v Textile Clothing & Footwear Union of NSW (1998), Austin J said: 

‘The fulfilment of that object (as stated in s 435A) requires that an administrator be permitted to investigate the company’s affairs and make a proposal to creditors within a brief period of time, without being diverted from this task by such things as litigation brought against the company’

5. Voluntary Administration (Pt5.3A) – Rights of Creditors and Creditors Meetings Rights of secured creditors to enforce security:  Note: secured parties who have taken steps to begin enforcement before appointment of admin can continue enforcing (S 441B). Thus, it is possible to have a receiver acting alongside administrator if secured creditor/receiver took possession or assumed control of that property.  Security interests over whole, or sub the whole, of company’s property: S 441A o Such holders have a ‘decision period’ (s9) of, in general, 13 days from admin’s appointment within which to enforce security (e.g. appoint receiver, powers of admin subject to powers of receiver: s 442D (1)) o Otherwise, barred from enforcement until end of VA (without admin’s consent or court consent) Creditors Meetings:  First creditors meeting (held within 8 business days of administrator’s appointment): S 436E, creditor has chance to: 1. Reject director’s choice and appoint someone else 2. Appoint a creditors committee (Functions of creditors committee are stated in s 436F)  Second creditors meeting (‘proposal meeting’): S 439A (convened within 20 business days of appointment). Administrators report with recommendations:  End administration OR  Wind up company OR  Enter into a DOCA, corporate rescue to save the financially troubled company

6. Voluntary Administration (Pt5.3A) – DOCA Proposal for DOCA can be put to creditors by Administrator. He must recommend whether DOCA is in best interests of creditors.  Test is whether creditors will receive a higher dividend than in liquidation (objects of Pt5.3A)  Use of DOCA slightly drops over 10 year period  Creditors must first approve DOCA proposal at 2 nd statutory meeting (if approved by at least 50% of the creditors (in number and value). It is legally binding on the company, officers, members, deed admins (s 444G), all unsecured creditors (S 444D).  Secured creditors, owners/lessors of property only bound if voted for it. Note: court may also order that these people are bound by the deed even if they didn’t vote for it (s 444F)  Execution of DOCA terminates VA, admin must prepare document setting out its terms (s 444A). Company now becomes a company under DOCA (s 435C) and lodge copy with ASIC.  Publicity: Company must set out in every public document, and in every negotiable instrument, after the company’s name, the expression (‘subject to deed of company arrangement’): S 450E (2). DOCA is versatile and flexible tool to achieve corporate rescue, keep trading, or restructure. It provides:  Immediate one-off payment (usually 3 rd party contribution made by a director/shareholder, equity in family home) to creditors in full and final settlement of claims.  Immediate payment to creditors (with prospect of further payment from litigation proceeds or through asset sale)  Series of payments to be made from the profits of future trading for a specified period  Claims of related parties (directors and their associates) may be deferred until DOCA ‘wholly effectuated’ (ended)  DOCA typically gives administrator power to admit or reject claims, determine size of creditor pool and assess whether an interim dividend can be paid.  Company’s business to be conducted by deed administrator (not unusual, acts as company’s agent) or the directors (subject to monitoring by deed administrator) *NOTE: DOTA can’t force creditors to give up legal rights they may have against parties other than debtor’s company (e.g. right to sue 3 rd parties such as related companies or directors). Lehman Bros (2010) – LB unsuccessfully sought to prevent creditors from suing 3rd parties related to debtor’s company (e.g. directors, related entities and insurers) Protection against abuse of DOCA:  Court has power to set aside DOCA (SS 445D-F) if company/creditor can show: o Misleading information o Oppression o Prejudice o Material omission o Discrimination Judicial Approach: *Prejudice/discrimination must be ‘unfair’  ‘the mere fact that a creditor is prejudiced by operation of the DOCA will not be sufficient because the mere existence of the DOCA procedure usually means that some creditors will gain something and some creditors will lose something out of the rearrangement: Lam Soon case (1996)  E.g. unfair prejudice if DOCA offers creditors a small return than in winding up

7. Voluntary Administration (Pt5.3A) – Advantages and Disadvantages Advantages:  Speedier and cheaper process than Schemes  Easier to start – no need to refer to court, creditors or members; no supermajority approval required, unlike Schemes  Administrator is accountable – owes fiduciary duties, subject to ss 180-183 duties, personally liable for contracts entered into during VA (s 443A). Has statutory right of indemnity (Right to be reimbursed for personal liability). – Give encouragement for creditors to give credibility / confidence to keep going Disadvantages:  DOCA – no compulsory court scrutiny

Potential abuse of VA is disadvantage for creditors (but note CA allows for court order to terminate DOCA) Liquidator’s recovery provisions for voidable transactions, such as unfair preferences or loans or uncommercial transactions (ss 588FA-588FJ) do not apply to VA. Impacts on directors:  Directors lose control of company’s business, property and affairs – S 437A-B  Directors powers are suspended: may only act with consent of admin - S 437C  Administrator has ‘whistle-blowing’ function – reports breaches of CA to ASIC  Creditors control company’s fate at 2nd meeting – may lead to winding up Impacts on members:  During VA, the members, in general have no part to play. E.g. administrator can use wide statutory powers of disposal of the company’s property without reference to members  S 437F makes void a transfer of shares during VA (unless administrator consent – if he or she is satisfied that the transfer is in the best interests of the company’s creditors as a whole: S 437F (2))  Members can’t commence a member’s voluntary winding up Empirical study – Early studies showed:  Companies under VA produced an average return of 37c per dollar, compared to 7c per dollar return to unsecured creditors in winding up.  Brash Holdings V Shafir (1994): Assets valued at $40 million estimated to realise $2 million in winding up  Fewer loss of jobs with companies under VA  

8. Alternatives to Liquidation – Receivership (with secured creditors) Method of appointment:  Receiver is usually appointed by secured creditor to take possession of secured asset, sell and pay the secured creditor from the proceeds of the sale  Receiver is a registered liquidator (s 418)  Receivers can be appointed in 1 of 2 ways: o Appointed by court (judicial discretion) – rare (court: you should look after your stuff yourselves) OR o Private appointment by secured creditor (under terms of the loan agreement/security instrument) – common method, typical trigger clauses (e.g.)  Default (failure to pay principal debt/interest)  Breach of restrictive loan covenants  Winding up action taken against company  Failure to keep secured property in state of good repair Powers of receiver:  Traditional distinction between a receiver and a receiver and manager no longer significant. S 420 gives wide powers to all receivers including power of managing the business (subject to any limitations in the document of appointment)  Extent of receiver’s power ultimately dependent on those found in the security instrument (e.g. document of appointment). Otherwise, see s 420 powers for default position – extensive power S 420 Powers – subject to powers given to receiver in security instrument. Powers include:  To carry on company’s business  Take possession/control of company’s property  To bring or defend any legal action  To lease, let on hire or dispose of property  To engage or discharge employees on behalf of  To borrow money on the security of company’s company property  To convert company’s property into money Impact of Receivership:  Company - remains alive  Company’s business - keeps trading  Directors’ power of management - affected to the extent of powers of management conferred onto receiver by appointment document or S 420  Company contracts – receiver is personally liable for adopted/new contracts  Contracts of employment – Not automatically terminated (liquidation: company closed, auto lose job) Statutory powers and liabilities:  Receivers have wide powers, including management, sales of property and inspection of company books (SS 420, 431)  Receivers – subject to many statutory duties such as public notification of appointment, maintaining proper accounts and financial records and reporting company offences under CA to ASIC  Receivers – personally liable for debts incurred during the course of receivership: S 419. Can be indemnified out of the company’s assets Duties of Receivers:  Primary duty to appointing creditor: Due care and diligence, good faith  Duty when exercising power of sale: o Equitable - good faith o Statutory – S 420A (Does not create separate cause of action, statutory test imposed onto equitable cause of action  Duties as ‘officers’ of the corporation  Reporting obligations  Must not pay holders of circulating security interests (floating charge) until employee entitlements are paid (s 433)  May be removed by the court (s 423)

Power of sale and duty of care: s 420A – Most significant duty (frequent litigation)  Risk of fire sales; recklessly sacrificing company’s property  Risk of prejudicing interests of company and unsecured creditors by not extracting best value of secured property  Duty to take all reasonable care to sell property for o Market value OR o Best price reasonably obtainable, having regard to the circumstances when the property was sold

9. Receivership – End of receivership Once receiver has repaid the company debt to the secured creditor, control of the company is passed back to the directors (together with surplus fund, if any from asset sale).  Aim is for the company to continue trading without the asset sold BUT whether the company can do so depends on whether it has been weakened by the sale of its assets.  If strong, company will survive. If weak, company is likely to collapse or slide into liquidation, in which case a liquidator will be appointed to wind up the company  Query whether receivership is an effe...