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LECTURE 11 RESTRUCTURING AND LIQUIDATION

Liquidation
Liquidation happens when a company is unable to restructure itself in order to deal with its insolvency and thus the company will be WOUND UP. (this means the company DIES and ceases to exist anymore) Voluntary winding up There are 2 types of voluntary winding up:

(a) Members voluntary: S 491: the company passes a special resolution (75%) and S 494: the directors write a declaration of solvency that the company will pay off its debts in 12 months and then a liquidator will be appointed. (b) Creditors voluntary: if the company is insolvent, creditors can decide at the SECOND CREDITORS MEETING to wind up. [S 439A] Compulsory winding up A court can wind up a company if it is INSOLVENT (S 459A) or for reasons other than insolvency (S 461). Winding up by the court on the ground of insolvency S 459A (who can apply to have company wound up) A Company which is insolvent will have to be wound up. An application that the company be wound up can be made by the COMPANY, a CREDITOR, a DIRECTOR, a MEMBER or ASIC. When a creditor seeks to apply that a company is wound up, 3 things must be proven: (a) insolvency (b) amount outstanding exceeds the statutory minimum ($2000) (c) the court has jurisdiction (the corporations act applies to it)

S 459C (presumptions to assume insolvency) - In the last 3 months (before the application was made) the company has failed to comply with statutory demand. A statutory demand is a document prepared by the solicitor of a creditor and this document states how much is owed and 21 days is given for the company to comply with payment. S 459E (statutory demand) A creditor may serve the company with a STATUTORY DEMAND which is basically a document that has the details of debt and a time limit of 21 days usually to pay it off. This document must be written and signed by the creditor. Failure to pay up will cause the company to be considered insolvent (S 459C) S 95A A person is solvent if he is able to pay all debts when they are due and payable. S 461 (reasons other than insolvency) The court may order a company be wound up for reasons besides insolvency. These reasons include:Company decided by special resolution that is was to be wound up Business has been suspended for one year No members Directors have acted to benefit their own interests Affairs of company handled in oppressive manner ETC

After a liquidator appointed S 471A: once a liquidator has been appointed, he will take all power of the board and creditors cannot bring any proceeding against the company or enforce any judgement

S 477: liquidator has power including running the business, beginning proceeding or selling property

The liquidator will have fiduciary duty and is bound by S 9 (directors obligations) and cannot use their position to gain advantage(S 182).

A liquidators role: Preserve existing assets Collect and sell assets Distribute proceeds(S 556) as following:

S 556: A liquidator will collect assets and distribute them like this: the cost of preserving the companys business and realising its property the costs of winding up (lawyer fee) wages compensation for injury holiday or sick pay entitlements retrenchment non-priority creditors ranked equally [S 555]

Recoup funds from voidable transactions (digging to find $$)


A liquidator is given the power by the Corporations Act to look back on past transactions that have occurred before the presentation of summons to wind up. Certain property dealt with in that period (by directors) can be recouped (claimed and sold) so that the funds can be distributed amongst creditors. There are 4 types of unfair preference (a) S 588FA (unfair preferences) relation-back period 6 months A transaction is an unfair preference if the company and creditor are parties to the transaction and if the transaction gives the creditor more than he would have had if the transaction had not been made and company was wound up.

(b) S 588FB (uncommercial transactions) 2 years any past transactions that would not have been made by a reasonable person in the companys circumstance Defence of this would be That director believed at the time that the company was solvent and That it would remain solvent and That he thought that it would be in the best interest of the company to do so. (c) A transaction with a related party (4 years) (d) A transaction to defeat creditors (10 years) S 588FC (Insolvent transaction) A transaction is an insolvent transaction if it happens when the company is insolvent or if the company becomes insolvent due to that transaction S 588FE (Voidable transaction) If a transaction is an insolvent transaction it is VOIDABLE.

INSOLVENT TRADING Directors are not allowed to incur more debt if they suspect or have reason to believe that the company is insolvent. The liquidator will investigate decisions of directors and is allowed to claim such funds in order to pay creditors back. in other words, if S 588G has been breached, the liquidator is therefore allowed to collect such funds and redistribute it to the creditors S 588G (Insolvent trading) A director has the duty to PREVENT insolvent trading by the company. This applies when a director incurs debt at a time of insolvency or if insolvency comes due to that transaction.

A director is not supposed to incur more debt if he thinks/has reason to believe that the company is insolvent or is going to be insolvent.

A breach of S 588G will allow liquidators to SUE directors for compensation. It is also a civil penalty and may result in fines up to $200,000 and/or disqualification (S 206C).

Defence for insolvent trading S 588H provides a defence for a director who has reasonable grounds to expect solvency and did not expect at the time the debt was incurred that the company would become insolvent. S 588H also says that a director is not liable IF he has reasonably relied on another person to provide information regarding the companys solvency and from this information the company appeared solvent. S 588H also excuses a director from liability IF he is not involved with the management of the company due to illness. This does not include passive management where the director is simply choosing not to be involved.