Tutorial Week 13 Blackboard Questions and Solutions

Chapter 21: Insolvency and Liquidation
REVIEW QUESTIONS
1. Outline the role of an administrator appointed to a company which is insolvent. Once an administrator is appointed, what roles do the directors of the company have?

If a company is insolvent, the directors can get themselves into serious trouble with the Law if they allow the company to continue to trade. According to Section 436A of the Act, directors are expected to appoint a voluntary administrator to the company even before it becomes insolvent:
(1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed.

Section 437A(1) spells out the role of an administrator:
(1) While a company is under administration, the administrator: (a) has control of the company’s business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may 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.

According to ASIC’s website and s. 438A of the Act, the administrator, after taking control of the company, must investigate and report to creditors information as to the company’s business, property, affairs and financial circumstances, and on the three options available to creditors. These are: 1. End the administration and return the company to the directors’ control 2. Approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or 3. Wind up the company and appoint a liquidator. The administrator must give an opinion on each option and recommend which option is in the best interests of creditors (s. 439A). The creditors then make the decision as to which option should be taken (s. 439C). If option 2 is taken, the administrator will continue his or her duties in order to see the deed of arrangement through to its end, if suitable to the creditors. If option 3 is taken, the administrator can become the company’s liquidator and, according to s. 446A, the liquidation process will proceed under the requirements of a creditors’ voluntary winding –up. The administrator takes over all the powers of the company and its directors, and the powers of directors are suspended (s. 437C). The administrator has the power to sell or close down the company’s business or sell individual assets in the lead up to the creditors’ decision on the company’s future. The administrator must also report to 1

Tutorial Week 13 Blackboard Questions and Solutions ASIC on possible offences by people involved with the company, as strict liabilities apply to officers who continue to trade on the company’s behalf. According to s. 437D, only the administrator can deal with company’s property and any such transaction or dealing is void unless: (a) the administrator entered into it on the company’s behalf; or (b) the administrator consented to it in writing before it was entered into; or (c) it was entered into under an order of the Court. (s. 437D(2)) The company’s directors are required under the Act to help the administrator in performing his or her necessary tasks. According to s. 438B(1) and (2), each director must:
(a) deliver to the administrator all books in the director’s possession that relate to the company, other than books that the director is entitled, as against the company and the administrator, to retain; and (b) if the director knows where other books relating to the company are—tell the administrator where those books are. (2) Within 5 business days after the administration of a company begins or such longer period as the administrator allows, the directors must give to the administrator a statement about the company’s business, property, affairs and financial circumstances. (3) A director of a company under administration must: (a) attend on the administrator at such times; and (b) give the administrator such information about the company’s business, property, affairs and financial circumstances; as the administrator reasonably requires.

Additional powers are given to the administrator under s. 442A which states:
Without limiting section 437A, the administrator of a company under administration has power to do any of the following: (a) remove from office a director of the company; (b) appoint a person as such a director, whether to fill a vacancy or not; (c) execute a document, bring or defend proceedings, or do anything else, in the company’s name and on its behalf; (d) whatever else is necessary for the purposes of this Part.

Even though the administrator is given wide powers under the Act, he or she is also given wide responsibilities. For example, under s.443A, the administrator of a company is liable for debts he or she incurs, in the performance or exercise of any of his or her functions and powers as administrator. According to s. 438E of the Act, an administrator is required to keep proper accounting records and to submit a statement of receipts and payments each six months.

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Tutorial Week 13 Blackboard Questions and Solutions

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Briefly discuss the ways in which a company may be wound up, indicating in each case the likely circumstances in which each is applicable.

There are two types of "windings-up" of companies:  court ordered; and  voluntary winding up by creditors or members. Court Ordered This type of winding up may proceed on a number of grounds although the most common is the presentation of a statutory demand by a creditor to repay a sum exceeding $2 000 owed by the company (S459E). Other than a creditor, the following may make an application to the court for the winding up of a company:  the company itself;  director(s);  ASIC; and a  contributory (present or past shareholder in the company S9. Under S459C(2), the Court must presume that a company is insolvent if three months after an application is made (under S459A and S459B) the company has failed to comply with a statutory demand (i.e. repayment of a debt of greater than $2 000). Other circumstances are given in the text in Section 21.2. Other than a statutory demand made by a creditor referred to above, the court may wind up a company if: a. b. c. d. e. the company has by special resolution resolved that it be wound up by the court the company does not commence business within one year from its incorporation the company has no members the directors have acted in their own interests rather than in the interests of members the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to members of the company.

Other less common grounds are dealt with in S461(g) to (k) presented in Section 21.2 of the text. Voluntary Winding Up – Members A voluntary winding up by members commences with the passing of a special resolution to wind up the company. The statutory requirement is that the company can pay its debts as and when they fall due. Accordingly the directors will make a written declaration that they believe that the company can pay its debts in full within a period not exceeding twelve months. This is known as a "Declaration of Solvency". Voluntary Winding Up – Creditors There is no declaration of solvency in this case as the company is unable to pay its debts. The winding-up proceeds under the control of both members and creditors in separate meetings (see Section 21.3 of the chapter). The members still resolve that the company be wound up but their choice of liquidator is subject to ratification by creditors, at a meeting held immediately after the members meeting which places the company in liquidation.

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Tutorial Week 13 Blackboard Questions and Solutions
9. List the following liabilities in order of priority of payment in the event of winding up a company:  Costs of administration prior to liquidation  Long-service leave payable  Amount payable for research into mining techniques  PAYG income tax instalments  Salary of an employee who is the spouse of a director, $3 000  Directors' fees  Liquidation expenses  Telephone bill payable  Audit fees payable for normal audit of company's accounts  Debentures secured by floating charge  Workers’ compensation claim  Accounts payable  Deferred tax liability The order of recovery in terms of S556(2) of the Corporations Act is as follows: a. Secured Creditor (i) Debentures secured by a floating change Preferential Unsecured Creditors Liquidation expenses (the liquidator is a relevant authority (i) (ii) Costs of administration prior to liquidation (iii) Other liquidation expenses (iv) Salary (maximum of $2 000) (v) Workers’ compensation (vi) Long service leave Unsecured Creditors (rank equally). NB No order of listing:  Research costs  PAYG income tax  Salary excess of director's spouse $1 000  Directors' fees  Telephone bill payable  Audit fees  Accounts payable/Trade creditors

b.

c.

* the status of Deferred Tax Liability is unclear. This account normally arises from the application of Accounting Standard AASB112 – Income Taxes and does not represent a legal liability to make payment to a third party. On this basis it would be excluded as it is not a provable debt in terms of the Corporations Act, but the liquidator may be required to lodge an income tax return and taxation consequences from pre-liquidation could be relevant.

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Tutorial Week 13 Blackboard Questions and Solutions

13. Outline the role of a receiver.

A receiver or a receiver and manager may be appointed by a court or by creditors, e.g., debenture holders, according to the terms of the agreement, in order to protect the security of those creditors. A receiver must always be a registered liquidator. In general, receivers are appointed at the instigation of a secured creditor who is given such power in his or her trust deed. For example, a receiver may be appointed by a debenture holder as a result of failure by the company to abide by the provisions of the trust deed. The main effect of appointing a receiver (and manager) would be that relevant property can be sold in order to repay the debt of the secured creditor. The receiver is responsible to the secured creditor, not to the company. A court-appointed receiver needs the permission of the court to sell property of the company. In accordance with Section 429(2)(b), when a receiver is appointed, the company is required to submit to him or her a statement of affairs of the company in accordance with Form 507. A receiver is required to open his or her own special bank account (Section 421) and, in accordance with Section 432, to lodge every 6 months an account of the receiver’s receipts and payments. Form 524 (see Figure 21.1) is used for the purpose of submitting this information.

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