#7402 - Winding Up - Business Associations I

Class 19 Winding up

Redmond [3.185]-[3.215] (for an explanation of winding up on insolvency).

• External administration: where administration or control of company affairs is taken from the company’s directors and put into external hands. Forms of external administration include:

  • Winding up

  • Voluntary administration

  • Receivership and

  • Creditor’s scheme of arrangement

• The outcomes available under the procedure are:

  • the company will resume operations but with a deferred or reduced debt burden under a deed of company arrangement approved by its creditors

  • a secured creditor will exercise its rights to appoint a receiver to obtain repayment of its debt by disposal of company assets and who will effectively displace the administration while doing so

  • the creditors will vote to put the company into liquidation

• Under either option, shareholders and directors will be displaced in favour of creditors and the receiver, administrator or liquidator.

  • Displacement may be permanent/temporary depending on the circumstances.

• Does not require curt approval for initiation but exercises supervisory jurisdiction.

• The procedure seeks to maximise chances of an insolvent company or as much as possible its business surviving, and if it cannot be saved, to achieve better run from creditors.

• S448B and C require an administrator to be independent of the company.

• If directors of a company in financial difficulties allow it to continue to trade and incur debts while the company is insolvent they may be personally liable for losses sustained by creditors; ss 588G, s 588FA. Such potential liabilities therefore provide a strong incentive for directors to appoint an administrator if the company’s solvency is in doubt.

• The administrator must investigate the company’s business, property and financial circumstances (s438A) and within strict but not inflexible time limits, convene two meetings of creditors to take decisions with respect to the administration. Within 5 business days they must convene a meeting with creditors to determine whether to appoint a committee of creditors to consult with the administration 436E-F. The first meeting creditors may replace the administrator with a qualified person of their choosing under s436E(4) but the second meeting the creditors take the major decisions. Within 21 days of appointment the administrator must convene the second meeting of creditors to decide the company’s future s439A. With the notice of the meeting the administrator must report creditors about the company’s business, property and financial circumstances under 439A(4)(a). The company may be wound up under 439C. If a poll is demanded the resolution is carried if a majority of creditors of the company vote for it.

• A deed of company arrangement may treat groups of creditors differently but if it provides for distribution among creditors significantly different from the order of application of assets under a winding up the court may terminate it under 445D. They can alter it under 444DA. The deed binds unsecured creditors and secured creditors and owners and lessors of property used by the company who voted for the deed, the company and its shareholders ss444D, 444G.

• An administrator does not have the same power as a liquidator to set aside transactions and pursue remedies against directors and their officers. They have time limits so cannot have detailed investigations so they can be used to avoid closer scrutiny. The administrator is personally liable for debts incurred in the administration (ss443A-443BA).

• Securities given by companies to lenders commonly grant the lender the right when a defined act of default occurs to appoint a person to take possession and control either a particular asset or a group of assets or the whole of the property and undertaking of the company.

• The receiver is empowered to deal with the assets in such a way as may be necessary to obtain repayment of the debt hat is the subject of the security.

• Although receivership need not result in winding up on the company, that is a common outcome since the remaining assets will usually be inadequate to discharge unsecured debts.

• While the receiver is appointed under powers contained in a private instrument, director’s powers are displaced but only to the extent of inconsistency with the receiver’s powers.

• A receiver strictly only has power to receive property and income and not to undertake the management tasks such as asset disposal that may be necessary for this purpose. A court may appoint a receiver to protect particular property or funds of the company under s1323(1)(h) but it is rare to do it for an entire company.

• Director’s powers over the property are suspended and revive on termination of receivership. Receivers cannot deal with company property beyond right and have their powers in s420 or they may be exposed to liability.

• Winding up: is the process leading to the liquidation of the company and termination of its registration and existence.

• Winding up is made either upon the order of the court (compulsory liquidation) or by voluntary decision of a company’s members or creditors.

• A winding up order may be made on the application of members of a solvent company complaining of unfairness or oppression in the conduct of its affairs or that it is just and equitable that the company be wound up; Pt 5.4A. [Winding up for these reasons does not usually concern insolvency.]

• However mostly, a compulsory winding up order is made upon the grounds of the company’s insolvency; s 459A.

• An application for winding up may be brought by a wide range of persons specified in s 459A. [Contributory = member],

  • Rely upon presumed insolvency arising from non-compliance with a statutory demand.

  • Statutory demand is one made in the prescribed form requiring payment by the company of a debt of $2000 minimum value that is presently due and payable to the creditor; s 459E.

  • Company s presumed to be insolvent if, within 21 days after service of the demand, the company fails either to pay them sum or make arrangements for payment which satisfy the creditor or apply to the Court to have the demand set aside; s 459C(2).

• If the company wishes to dispute the debt or raise an offsetting claim, it must apply to set aside the demand within 21 days of its service; ss 459G-459H.

  • If the company does not do so, it may oppose a winding up application by proving its solvency at the hearing of the application; s 459S.

The order of application of company assets

• After the liquidator has realised the assets of the company, the funds are applied to discharging the claims of creditors.

• The fundamental rule is the pari passu principle, viz, that all debts and claims 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; s 555.

  • HOWEVER principle is displaced in respect of certain claims.

    • The fund is available for distribution to creditors is determined after enforcement of securities of secured creditors.

    • Certain unsecured claims are given priority in that they must be paid sequentially and each in full before all other unsecured debts and claims, these priority payments are for the expenses of the liquidation and any earlier voluntarily administration, and for employee entitlements for wages, superannuation contributions, claims for injury compensation and retrenchment; ss 556, 558.

      • Within the debts of each class or grouping the pari passu principle applies; s 559.

• Any surplus is distributed to the shareholders according to the rights concerned under the terms of issue of the shares and the CN of the company.

Recovering property and compensation for the benefit of creditors

• The liquidator may expand the fund available for distribution to creditors by recovering property and funds passing under voidable transactions and seeking compensation from directors and other...