#10847 - Winding Up - Business Associations 1

• Winding up is one of the forms of external administration of insolvent companies (administration of company affairs being taken from the company’s director’s and put into others hands). It sees the extinction and closure of its operations though portions can be resurrected by sale by the liquidator

• There are other forms of external administration that can avoid the finality of this outcome:

  • Voluntary administration

  • Receivership and

  • A creditor’s scheme of arrangement

[3.190] Voluntary Administration (VA)

• Is found in Pt 3A and involves either:

  • The company resuming operations with a reduced debt burden under a deed of arrangement approved by creditors

  • A secured creditor exercising its rights to appoint a receiver to obtain repayment of its debt by disposal of the company’s assets and who effectively displaces the administrator to do so

  • The creditors put the company into liquidation

• Under any of these directors are displaced in favour of creditors and the receiver/administrator/liquidator – but this can be temporary depending on the type of administration

• Unlike winding up, VA doesn’t require court approval but the court exercises a supervisory jurisdiction over it

• VA is popular since it seeks to maximize the changes of an insolvent company surviving or at least a better return for creditors and members if it does not

• It is initiated by the company if the directors resolve that the company is insolvent or likely to be at some future time and that an administrator should be appointed (s 436A(1))

  • During administration the administrator has control over the property and business of the company (s 437A) and the powers of the corporate officers are suspended and cannot be exercised without the administrators written approval (s 437C(1)) but they aren’t removed from their office (s 437C(2))

  • The administrator must be a registered liquidator independent of the company (ss 448B-C)

  • The VA procedure provides directors a safe harbour from future insolvent trading liability but it is coupled with the loss of control of the company (ss 437A-D)

  • Administrators can also be appointed by liquidators (s 436B) or secured creditors entitled to enforce a charge on substantially the whole of the company’s property (a ‘substantial charge’ (s 436C)

    • See page 124 on substantial charges

  • If there is no substantial charge or if it doesn’t opt to enforce its charge, there is a general moratorium upon actions or proceedings against the company and its property by creditors and owners or lessors of property used by the company (ss 440A-D, F) which provides a period to assess the company’s options

  • There are exceptions for proceedings commenced before the administration’s commencement or in respect of perishable property (ss 441F-G)

  • There is also a stay of enforcement of guarantees given by directors of their relatives of a liability of the company without leave of the court in order to address the disincentive to get an administrator (s 440J)

• ASARP the administrator has to investigate the company’s business and financial circumstances (s 438A) and within strict but not inflexible time limits, convene two meetings of creditors to make decisions.

  • Within 5 days of appointment the first meeting is convened to determine whether to appoint a committee of creditors for consultation (s 436E-F)

    • At the first meeting they may also replace the administrator with someone else qualified (s 436E(4)

  • The second meeting makes the major decisions to decide the company’s future and happens within 21 days of appointment (s 439A)

    • With the notice of meeting the administrator has to report to the creditors about the business, property and financial circumstances of the business (s 439A(4)9a)) and the creditors resolve either (which the administrator has to give their opinion on in their report – s 439A):

      • TO execute a deed of company arrangement specified in the resolution

      • For the administrator to end the company and for it to be returned into the director’s control

      • The company be wound up [s 439C]

• A resolution is then passed at a meeting of creditors if it is decided on the voices, unless a poll is demanded (reg 5.6.19) – if it is it is it’ll be based on the value of their debt (reg 5.6.21)

• Deeds of arrangement are referred to as moratorium deeds (granting the company additional time to repay its debts) or compromise deeds (whereby the creditors agree to receive less than the full amount) or a combination

  • These deeds can treat groups differentially but if they provide for distribution among creditors significantly different from the order under winding up the court can terminate it on application (s 445D) – especially if they deviate from preserving the priority to employee creditors (unless waived)

    • Other administrative issues on 125.5

• The deed binds all unsecured creditors and secured creditors and owners or lessors of property used by the company who voted for the deed, the company, its officers and shareholders (ss 444D-G)

• The court can order that secured creditors and owners and lessors voting against it are nonetheless bound where enforcement of their rights would have a material adverse effect on the achievement of the deed’s purposes and their interests will be adequately protected (ss 444D(2), (4), 444F)

  • Where there is doubt on a specific ground whether a deed of company arrangement applies with Pt 5.3A, courts can declare it to be void or validate it despite a contravention (s 445 G)

• To facilitate offers to creditors to substitute equity for all or part of their debt there are fundraising provisions in Pt 6D.2 [See 125.10]

• Courts have general powers to terminate VA – e.g. if the provisions are being abused or if the company is solvent (s 447A(2)) or alter the times fixed under Pt 5.3A (s 447A(1)) – the powers under this section are broad and are exercised in the public interest (Cowthorn v Kiera) and extend to winding up of the company for insolvency (Paradise Constructors; Pong Property v Sleiman)

• The administrator is personally liable for debts incurred in the administration (s 443A-BA) but has a right of indemnity out of company property for debts or liabilities incurred in good faith and without negligence in the performance of their functions and powers as administrators (s 443D)

  • This right of indemnity ranks in priority over other debts except certain secured debts, and is secured by a lien on the company’s property

[3.195] Recievership

• F

[8.140] Introduction

The idea is that the general law doctrines are insufficient because:

1. Despite the statutory derivative action, its scope is unclear and form uncertain

2. They focus on a single act/transaction rather than a whole pattern of conduct over time

3. The remedies are directed to particular transactions and are confined to the restraint of conduct, recovery of property or ordering of financial compensation

The statutory remedies on the other hand address two broad categories – the compulsory liquidation remedies and the remedies for oppression and injustice. They both concede clear and unequivocal standing to individual shareholders. The former permits the court to make an order for winding up if:

1. The court is of the opinion that it is just and equitable (J&E) that the company be wound up (s 461(k)

2. Directors have acted in affairs of the company in their own interests rather than for the members as a whole, or in any other manner that appears to be unfair or unjust to the other members (s 461(e))

3. Affairs of the company are being conducted in a manner oppressive or unfairly prejudicial or unfairly discriminatory against, a member or in a manner contrary to the interests of the members as a whole (s 461(f))

4. AN act or omission or a proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of a class of members of the company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole (s 461(g))

[8.145] The just and equitable ground – the history and broad scope of the remedy

• The ejusdem generis rule initially constrained this ground to a residual operation in the 1848 English Acts but when freed from this interpretation, it was limited to particular categories by reference to a which a shareholder need frame the complaint to have any prospects of success

• But in Ebrahimi the HOL disparaged the tendency to create such categories and advocated keeping it general

• The ground itself has a legacy in partnership and provided a bridge between doctrines of partnership and company law – the applications of the ground itself derives from these roots and are given contend in Ebrahimi

• Other ‘illustrations’ under the J&E clause arise where the company has abandoned its main objects or entered activities beyond the general intention of the corporators (‘the failure of the substratum’) where the company cannot carry business because of a deadlock in management (e.g. Wagner v IHP) or where its management so characterised by fraud, misconduct or otherwise gives rise to a justifiable lack of confidence by shareholders

  • For the latter Loch v John Blackwood it was said that this must be a ‘justifiable lack of confidence’ in the conduct and management of the business, grounded on conduct of the directors, not in regard to their private affairs but to the company business.

    • It must not spring from a dissatisfaction of being outvoted on the business...