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?) A company is insolvent if it is not able to pay off its debts when it is due and payable

If a company is insolvent (i.e. cannot pay off its debts), and something is not done, the company will eventually be liquidated. Upon liquidation, most creditors are not paid off (i.e. do not get their money back) thus, the Corporations Act has certain mechanisms in which the company is given time (and help) to stabilise and attempt to get back enough money to pay off its creditors. When a company is in financial difficulty, creditors may pressure directors to pay off the company debts. This may in turn distract the directors from actually running the company thus leaving the company to fall into even more financial distress.

Dealing with the insolvency with the Corporation Act

There are 4 main ways of dealing with insolvent companies. 3 ways will result in restructure of company (i.e. Company is saved) include scheme of arrangement, voluntary administration and receivership The fourth way is liquidation (i.e. Company is put to rest. DEAD)

Restructure (to allow the rehabilitation of the company) :(a) Schemes of arrangement S 441 deals with this. It may be used between the company and its creditors in an attempt to rescue a company in financial difficulties But seldom used because it is too slow to complete and need for the courts consideration. (b) Voluntary administration ** Important!

Voluntary administration is quick (last approximately a month) and is a way of assessing the companys position and then leaving the decision regarding its future to its creditors. The administrators task is to investigate the affairs of the company and to report on whether a compromise or arrangement can be negotiated that would be acceptable to both the company and its creditors. Creditors will have the final say as to what the decision on the future of the company will be. Does not involve court intervention

The aim of voluntary administration is to give companies the opportunity to trade out of their difficulties.

Steps to voluntary administration:(1) Appointment of Administrator by either:S 436A: Directors (Directors must make opinion that company is insolvent or is likely to become insolvent before they decide to appoint an administrator) S 436B: Liquidator or provisional Liquidator (A liquidator must not appoint themselves administrator without leave of the court or a resolution) S 436C: Chargee (secured creditor). Voluntary administrator is super secured creditor, company pay back to voluntary administrator first (2) First Creditor Meeting S 436E: within 8 working days after the commencement of the administration. S 436E(3): administrator convenes the meeting by giving written notice to the creditors or relevant state newspaper at least 5 business days before the meeting

(3) Substantial chargees that enforces within the decision period is not bound by the stay The decision period is 13 days of the commencement of administration begin S 441A: a substantial chargee that enforce within the decision period define in S9 S 441B: a chargee that enforces prior to appointment is not bound

S 441C: a chargee with a charge over perishable property in not bound Chargee exercising their rights under SS 441A, 441B, 441C will affect the possibility of a successful restructure (4) Second Creditors Meeting

S 439A: Within 5 business days before or after , the end of the convening period(it is a period of 21 days after commencement of administration)

S439A(3): creditors must be given written notice of the meeting The second creditors meeting is the termination of administration; creditors consider the report of administrator and vote on the companys future decision, this meeting also contact restructure and liquidation. (5) S 439C: alternatives decision whether to:Administration ends Deed of company arrangement Company wound up

Effect of the administration When under voluntary administration, all claims on debts of the company are paused (i.e. Creditors are not supposed to claim $ so as to give the administrator breathing room to perform his job) This means that creditors are not allowed to enforce charges and lessors cannot receive possession of leased property during this time.

This excludes secured creditors S 441A: A secured creditor is allowed to make claim if claim is made 10 days into the administration S 441B: A secured creditor that has made claim before the administrator is not bound and thus is allowed to continue to make claim. A secured creditor with a charge over the whole property of the company does not have to wait until the administration is over before it claims its charge S 436A (appointment of administrator) A company may appoint an administrator if it thinks it is or will become insolvent. S 436E (purpose and timing of meetings) The administrator must arrange a meeting with creditors to determine whether or not to appoint a committee of creditors. This meeting is held 5 days after the administration has begun. The administrator has to give notice to all creditors before the meeting The creditors have the right and power to remove the administrator and appoint someone else during this meeting. S 437A (Role of administrator) During the administration, the administrator has:control over the companys business, property and affairs must carry on business and manage the business affairs may terminate and dispose parts of the business S 437A: exercising all of the functions that officers could perform S 438A: investigate the financial position of company Organise a meeting of creditors Recommend to creditors to S 439C: enter into deed of company arrangement or end administration return to directors management or wind up

* S 438A also requires administrators to investigate the company in order to perform a successful voluntary administration. S 439A (meeting to inform creditors) A meeting must be held 5 days after the administration has been complete, and must be called by written notice and the publishment of this notice. The creditor must be given a copy of he administrators report and the administrators statement regarding what he/she thinks would be in the best interest of the company S 439C (What options do creditors have?) After the second creditors meeting, creditors may decide to either:(a) cause the company to execute a deed of company arrangement The aim is saving the business of company and preserving employment S444D: all creditors are bound by the deed S445D: a deed of company arrangement may be terminated if the information was based was false or misleading (b) end administration (c) wind up company SS 440A-J (Moratorium) S 440A: winding up ( company cannot be wound up voluntarily) S 440B: no enforcement of charge S 440C: owner or lessor cannot recover property S 440D: court proceedings stayed S 440F: enforcement processes suspended S 440J: no actions under guarantees given by directors , spouses of directors , etc S 441(charge) S 441A: the whole or substantially the whole of companys assets subject to charge S 441C: holders of other types of securities ( E.g. perishable property)

Liability of the administrator

administrators have a fiduciary duty to the company (because in S 9 they are considered to be directors at this time and thus S 181 causes them to have to act in good faith for the best interests of the company)

S 443D: administrator has right of indemnity from the companys property in relation to any liability

Effect on directors -S 437D: When going through an administration, administrator is the one in control. Directors are not allowed to enter into contracts without prior written consent from the administrator. Outcome of administration If the administrators report suggests that the company has some chance for survival, creditors may decide to allow it to continue running as a business. If this is the case, a DEED OF COMPANY ARRANGEMENT will be arranged. (this is considered a restructure and is the best result of voluntary administration) If the administrator thinks that there is no hope for the company, creditors may opt to WIND UP the company and thus the administrator becomes the LIQUIDATOR and is therefore in the position to investigate directors under S 588 for insolvent trading. - Deed of company arrangements basically refers to what a company can do to fix its mistakes and this includes:(a) Extra time to settle its debts (b) Compromise with creditors so that they accept less payment (c) Selling off company period eventually over a period of time.

(c) Receivership

Creditors may choose to enter receivership where a receiver is appointed to take possession of the companys secured possessions, sell it and out of the proceeds repay the secured debt owed by the company.

In most cases a receiver will be a registered liquidator

S 1323: Receiver must be appointed by court or by creditor under charge. Court appointed: inherent jurisdiction of court , in order to protect interests in relation to liability, damage or compensation Privately appointed: under a charge, issues arising before appointment include mechanics of appointment, consequence of appointment and powers and duty S 420: powers of receivers

(a) enter into possession and take control of the companys property (b) carry on the business of the company (c) execute the documents and to bring proceedings (d) engage or discharge employees Duties of receivers (a) S 420A: receiver is under a duty of care to sell company property at market value (b) S 9: receiver is an officer subject to statutory duties (c) S 180: act with care and diligence (d) S 181: in good faith and in the best interests of the company for proper Purpose