Week 12 Corporations Notes PDF

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lecture slides' notes, academic year 2018. Enough to score you a Credit at least, a Distinction if you study these notes hard, but not a HD, unless you do reading notes as well....

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Week 12 Corporations Notes Finish off Voidable transactions: Restrictions: - Capital maintenance rule was the flipside of limited liability – a company cannot buy back its own shares (Trevor v Whitworth). This court – studying the CM Rule in the context of company dividend (paid to a shareholder). But it also affects:  Share capital reductions  Share buyback  Financial assistance in the acquisition of shares Dividends: - Shareholders generally expect to make money either from an increase in market value of shares or from return in the form of dividend payments during life of the company. - The company may choose to give all or part of its profits to members in the form of a dividend. - In public companies, payment of div attracts investors to purchase shares in the company which assists in maintaining or increasing the company’s share price. - In private companies, where the market for shares is illiquid, div are a way for SHs to be returned some of the company’s profits. -

In closely-held proprietary companies like family corporations, the constitution may provide that the consent of a particular party is required before a dividend is determined OR that a dividend may only be paid if its declared by shareholders at GM on recommendation of directors.

Section 254V: When does the company incur a debt? - (1) company does not incur debt merely by fixing the amount or time for payment of a div. The debt arises only when time fixed for payment arrives, and the decision to pay the div may be revoked at any time before then. - (2) however, if company has constitution and it provides for the declaration of dividends, the company incurs a debt when the div is declared (not the date when it is paid). Determined: - a div is “determined” when a decision is made that it shall be paid. Who makes this decision depends upon whether section 254U applies or there is a different provision in the corporate constitution. - When the dividend is “determined” a contract is created which only becomes binding once the time for payment arrives.

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For example, if directors determine a specific date to pay, the payment ONLY becomes enforceable on that day by shareholders, not anytime before (even if revoked by company before that date).

Declared: - A corporate const could provide that shareholders in a GM may declare div on recommendation of directors - In this case the company incurs a debt at the time the dividend is declared (s 254V(2)), and this declaration cannot subsequently be revoked. This can cause problems for companies where their financial circumstances change. Dividends in insolvency context: - Under 588G(1A) a debt is incurred when a div is paid or declared. - S 563A requires that debts payable to shareholders by way of dividends on winding up will be postponed until non-member unsecured creditors have been paid out. - Depending on circumstances, the payment of a div can be a voidable transaction. Rules on Dividends: - Most rules in CA relating to dividends are replaceable rules. Can be altered by corporate constitution. 

E.g. s254U (replaceable rule, see s135): Directors may determine that a div is payable and fix, the amount, time and method (cash, issue of shares, assets) of payment. Interest is not payable on a div.

Other Dividend Rights: - May be payable to members on the register at the time the div is payable or declared. - S 254W(2) (RR) gives directors in a proprietary company significant discretion in relation to dividends. - By contrast, public companies... S254W(1)??

Test for when Dividends can be paid: Section 254T – Circumstances in which div may be paid: (1) Company must not pay div unless: a) Company’s assets exceed its liability immediately before dividend is declared and the excess is sufficient for the payment of the div, and b) The payment is fair and reasonable c) The payment does not materially prejudice the company’s ability to pay its creditors

Proving Insolvency (finishing off liquidation) Section 95A: definition of insolvency - Inability to pay all debts as and when they become due and payable - Based on common law “cash flow” test:

Company is insolvent where it is proved by evidence that company cannot pay debts as they fall due from its cash resources or form selling or mortgaging its assets (Sandell v Porter). s588E which contains two rebuttable presumption can be used for 588G proceedings or to prove an insolvent transaction. i. If a company is insolvent at different times in a 12 month period prior to the relation back day – presumed to be insolvent thereafter; and ii. In circumstances where the company has failed to keep or maintain adequate accounting or financial records Section 459C: Statutory presumptions of insolvency for purposes of a winding up application • These include situations where: • A receiver has been appointed; • There is an unsatisfied writ of execution; or • There is a failure to comply with a statutory demand.

Statutory Demand Sections 459E and 459F • Demand in writing signed by or on behalf of a creditor, and accompanied by a verifying affidavit • Alleges that the company owes the creditor a debt that is due and payable, and specifies the amount of the debt [must be more than $2000 total] • Requires the company within 21 days after the demand is served on the company to pay the debt or to come to some other arrangement with the creditor. • Company may apply to Court to have statutory demand set aside, s 459G • Different timeframes may apply in relation to the time when the company is deemed to have failed to comply with the demand, see s 459F Statutory Demand can be set aside in circumstances including: - Defective: but only on grounds of substantial injustice or if there is some other reason to set the demand aside (s 459J(1)) - If there is a genuine dispute concerning the existence or amount of the debt (s459H)  The statutory demand, among other things, must be set aside if the debt is less than $2000 (459H(3)),  and if more than $2000 can be varied (459H(4)).

Court order to wind up  court can make order un s459A Court has discretion and the company/creditors may argue against making the order 

effect of the order:

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affects all creditors and contributories: s471 stay or proceedings in court/enforcement activity against company and its property: s471B BUT, does not affect the right of a secured creditor to deal with their secured property: s471C.

Commencement of winding up - Generally winding up commences on the day the order for winding up is made: s513A(e) Appointment of Liquidator - Court appoints a registered liquidator or a regi provisional liquidator – s 472. - Liquidator takes control of company’s property – s474 - Company cannot dispose of its property – s 468 - Power of directors and officers are suspended – s 198G - Members cannot transfer shares without consent of liquidator – s 468A - Creditors cannot proceed with individual debt enforcement - Employees – employment terminated, though the liquidator has the capacity to extend employment. Liquidator’s powers & duties: - General powers: s 477(1) - Specific powers: s 477(2)  Synonymous power for voluntary winding up: s 506 

General powers incl power to carry on business for purpose of winding up, the power to make arrangements and compromises with creditors (unless over prescribed amount).

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Specific powers incl the power to appear in court in company’s name, to dispose of property and power to do all things necessary to wind up the company and distribute its assets.

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Other specific duties include: Collect, realise & preserve company assets s 474 Draw up list of contributories s 478 Repay company debts s 478 Bring about dissolution of company ss 480, 481 Liquidator also owes fiduciary duties to company and duties owed by directors (ss180-183).

Dividing up the assets: - Creditors lodge a proof of debt with the liquidator - Secured creditors not required to lodge a proof of debt, they can retain the security – s 554E

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However, if secured creditors requires more than security to satisfy the debt, they need to prove for the remainder on the same level as an unsecured creditor – s 554E.

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Liquidator must deal with a formal proof of debt within 28 days after receiving it or as further allowed by ASIC. If there are sufficient funds, everyone gets paid (rare). Otherwise, creditors are paid proportionately in “pari passu rule”.

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Ranking of preferred debts – s 556: 1. Secured creditor (non-circulating security interest 固定资产), like mortgagee 2. Preferential unsecured, like employee entitlements and liquidation expenses 3. Secured creditor (circulating security interest 流动资产), like debentures 债劵 4. Unsecured creditors, like trade creditors 5. Subordinated debt 6. Shareholders (preference rank above ordinary holders)

Receiverships (Summary) (1) - Function is to take control of property secured, sell it and distribute the proceeds to the secure creditor who appointed the receiver. - Receive appointed by secured creditor pursuant to security interest granted by company. - Can be appointed by either a secured creditor or less commonly by the court. - Main job to look after interest of secured creditor, they also owe a common-law duty to the debtor company to exercise its powers in good faith and not to act recklessly – exercise reasonable care when selling property for not less than market value – s 420A. -

Receiver is an “officer” under s 9 (directors’ duties apply) Must be a registered liquidator – s 418 The appointment does get rid of company’s directors, but their powers are severely restricted. In contrast to VA or liquidation, there is no moratorium on unsecured creditors suing the company or seeking to have it wound up. Receivership ends when secured property is sold, the debt is discharged, and the receiver’s fees are paid.

Voluntary Administration – Summary: Regulated by Part 5.3A of the CA. An administrator (registered liquidator) is appointed to a company that is or is likely to be insolvent. - Their function (over a period of usually 4 weeks) is to prepare a report:  Examining the company’s financial position;  Setting out any potential breaches of directors’ duties, together any voidable transactions; and  Recommending to creditors are to how they should proceed.

Possible 3 outcomes: 1. Return the company to the control of its creditors 2. Recommend that company be wound up 3. Enter into a deed of company arrangement Voluntary Administration – objects: S 435A: The object of voluntary administration is for the business, property and affairs of an insolvent company to be administered... (refer to CA). Appointing the Administrator S 436A: The board of directors appoint an administrator where they are of the opinion that...  The company is insolvent or likely to become at some future time; and  Administrator should be appointed. Why would directors appoint an administrator? • To achieve a better outcome for either creditors, shareholders or both • To avoid paying compensation for a breach of s 588G if the company is insolvent or at risk of trading whilst insolvent – any such liabilities are suspended while the VA is in effect; • Even if the company goes into liquidation, it would help a director make out the defence under s 588H(5) – namely that they took all reasonable steps to prevent the company from incurring a debt when there were reasonable grounds to suspect insolvency. See also s 588H(6) • Personal guarantees can’t be enforced against directors or their spouses or relatives whilst the company is under voluntary administration s 440J Effect on other parties: Directors: - Retain in office but cannot exercise powers w/o the administrator’s written approval. - Must provide the administrator with necessary info – s438B Shareholders: - Don't make any decisions at meetings convened by the administrator Creditors: - Freeze on creditors bringing court actions, winding up or other actions – ss 440A440J - Secured creditors cannot usually enforce security interests without admin/court’s approval – s 440B - Involved in important decisions on the company’s future. Deed of a company arrangement: - Are very flexible

Usually the administrator becomes the deed administrator, and provides for: - A moratorium 暂停 in relation to debts incurred prior to VA. The company can continue to trade under the control of the deed administrator as it tries to pay its debts. - A compromise by creditors on their debts; and - In some instances, an orderly sale of the company’s property over a longer period of time....