#7385 - Corporate Mortality - Corporations Law

Topic 12: Corporate Mortality

1. Receivership

   1. Definition: secured creditor appoints a receiver to take possession of the secured property, sell it and, out of the proceeds, repay the secured debt owed to it

      1. If you are about to do business with a company, and you hear they have appointed a receiver, you will avoid the company. Anyone who has security runs in to enforce their security. Generally, after this, company's go into liquidation and shuts.

   2. Who is a receiver?

      1. A person who, on behalf of a security holder, sells company property that has been provided by the company as security for a loan

   3. Who is a ‘receiver and manager’?

      1. A person who, on behalf of a security holder, manages a company's business, where security is over the whole undertaking

      2. Has to be registered with ASIC as a liquidator and has to be independent

   4. When can a receiver be appointed?

      1. As per the loan / security agreement between the lender and the company

      2. it is a contractual relationship, you negotiate the triggers that allow the receiver to be appointed. Usually a cycle of no payment, or that other creditors are taking action.

   5. What are the receiver’s powers?

      1. As per the loan / security agreement between the lender and the company and s 420 of the Corporations Act

      2. Very wide – depends on the nature of asset provided as security – may include:

         1. carry on company’s business

         2. convert company’s property into money

         3. borrow on security

         4. execute documents

         5. bring/defend proceedings in company’s name

         6. use company’s common seal

         7. hire/fire employees

         8. appoint agents

   6. What are a receiver's duties?

      1. Receiver owes duties to the secured creditor who appointed him/her - in contract, tort and under fiduciary principles

      2. Receiver also owes duties to the company and other secured creditors

      3. Receiver also is an “officer” of the company (s 9) and owes duties under ss 180 - 184

      4. Also owes specific statutory duties, for example:

         1. duty of care when realising the secured property to realise market value or best price reasonably obtainable (s 420A)

         2. requirements to lodge notices/report to ASIC on certain matters

         3. Receiver liable for certain debts incurred in the course of the receivership (s 419)

2. Voluntary administration

   1. an independent administrator takes complete control of an insolvent company for a relatively short period of time in an effort to ensure the company's continued existence or, if this is not possible, to achieve a better return to creditors than would result from an immediate winding up

   2. Objective – s 435A

      1. “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:

         1. (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

         2. (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.”

   3. What is the administrator’s role (s 438A)?

      1. take control of company from directors

      2. investigate the company’s business, property, affairs, financial circumstances, etc

      3. form an opinion about what is in the best interests of the company's creditors, and make recommendations to the creditors about the best way forward

   4. How is an administrator appointed?

      1. by board resolution if directors conclude company is insolvent or likely to become insolvent (s 436A)

      2. by liquidator of the company if he/she thinks company is insolvent or likely to become insolvent (s 436B)

      3. by a secured creditor to enforce a security (s 436C)

   5. What is the effect of administration?

      1. no winding up

      2. debts against company cannot be enforced without leave of the court (exceptions)

      3. existing court processes are stayed

      4. directors’ powers suspended

      5. only administrator can deal with company’s property (s 437D)

      6. restrictions on the exercise of third party property rights (s440B)

      7. Company's can be put into liquidation, even when they are solvent. When a company decides to voluntarily wind up, liquidator might discover that they are insolvent and put them into administration to maximise value

      8. Secured creditor might know that if they put a receiver in, the company will die. Might choose this instead. Generally, besides large banks, they don't do this

      9. Administrator can freeze the company during administration.

   6. Powers of an administrator - per s 437A(1) and 442A

      1. control of the company's business, property and affairs

      2. carry on that business and manage that property and those affairs

      3. terminate or dispose of all or part of that business, and any property

      4. 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

      5. remove from office a director of the company

      6. appoint a person as such a director, whether to fill a vacancy or not

      7. execute a document, bring or defend proceedings, or do anything else, in the company's name and on its behalf

      8. whatever else is necessary

      9. Duties / responsibilities of an administrator

      10. administrator is an “officer” of the company (s 9) and owes duties under ss 180 - 184

      11. liable for debts incurred during the administration with a right to be indemnified by company (ss 443A-D)

   7. General process of administration (simplified)

      1. At least two creditors meetings

      2. Meeting #1 – within 8 business days after administration begins – allow creditors to appoint a committee of creditors (for consultation) and, if they wish, a new administrator

      3. Meeting #2 – within 20 business days after administration begins – to decide the company’s fate.

      4. Company could have hundreds of creditors, must choose some. The directors selected the administration. Creditor's might not like them, might be worried they don't have the skills. Usually put to a rudimentary vote: $1 debt = 1 vote. The bank's invariably are owed the most money. They will want to appoint their own creditor. The administrators are reliant on banks giving them an indemnity so they can conduct the administration confident that they will not lose.

   8. How does an administration end?

      1. The outcome of a voluntary administration is determined by the company’s creditors, after the Administrator has investigated the company’s affairs and made recommendations

      2. Normal outcome (per s 435C(2) / s 439C) is either -

         1. (a) a deed of company arrangement is executed; or

         2. (b) the company's creditors resolve that the administration should end (revert control back to the directors); or

         3. (c) the company's creditors resolve that the company be wound up.

   9. Deed of company arrangement (DOCA) (ss 444A – 445J)

      1. Prepared by administrator

      2. Voted on by the creditors – one dollar; one vote

      3. Binding on all creditors, the company, company officers, members, administrator

      4. binding on creditors that did not vote in favour of it

      5. Act is flexible as to the terms of a DOCA to enable the DOCA to be tailored to meet the particular needs and circumstances of the company and its creditors

      6. DOCAs typically may have the following features:

         1. provision for a moratorium under which the company has extra time to pay debts - company is permitted to continue operating its business under control of administrator

         2. provision for a compromise under which creditors agree to accept payment of a lesser amount in final settlement of their debts

         3. a combination of a moratorium and compromise with creditors

         4. a sale of the company’s property over an agreed period of time

3. Liquidations (Winding Up in Insolvency)

   1. a form of external administration pursuant to which the company's affairs are wound up, its property sold, debts owed to its creditors repaid, any surplus distributed to members, and the company is deregistered

   2. Two step process

      1. liquidator is appointed to liquidate and distribute company’s assets; and

      2. the company is then deregistered

   3. S 459A – “On an application under section459P, the Court may order that an insolvent company be wound up in insolvency.”

      1. winding up is taken to have commenced on the day the order is made (s 513A)

   4. S 459P - Who may apply for a company to be wound up in insolvency –

      1. (a) the company

      2. (b) a creditor

      3. (c) a contributory

      4. (d) a director

      5. (e) a liquidator or provisional liquidator of the company

      6. (f) ASIC

      7. (g) a prescribed agency.

   5. Presumption of insolvency – s 459C

      1. (2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made:

         1. (a) the company failed to comply with a statutory demand; or

         2. (b) the company failed to fully satisfy execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company; or

         3. (c) a receiver, or receiver and manager, was appointed under a power contained in an instrument relating to a circulating security interest in such property; or

         4. (d) an order was made for the appointment of such a receiver, or receiver and manager, for the purpose of enforcing such a security interest; or

         5. (e) a person entered into possession, or assumed control, of such property for such a purpose; or

         6. (f) a person was appointed so to enter into possession or assume control (whether as agent for the secured party or for the company).

   6. What is a statutory demand? – s 459E

      1. A formal demand for payment of a debt that if not responded to creates a presumption of insolvency that can then form the bass of a winding up application. Once you send it, you put the onus ton the company to take certain action. Can't argue you are solvent as a defence, if you were solvent, you would just pay

      2. ...