...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...
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...‘The most efficient way to treat insolvent companies INTRODUCTION: The adverse effect of the collapse of corporate enterprise is the principal concern of Corporate Insolvency Law. Its dramatic implications on the society at large, both locally and internationally, are so drastic, that corporate insolvency law, putting the repercussions of this cankerworm into serious considerations, is always torn between the two options of either protecting the private rights which is basically maximizing returns to creditors on the one hand, or preservation of the company or its business [1] , considering the effect of such on the public at large. In a bid to strike a balance between the above alternatives to ensure that best results are achieved in addressing the insolvency issues, Insolvency Law, following the recommendations of the cork report [2] , which is the bedrock of modern corporate insolvency regimes, legislations including the Insolvency Act 2000( as amended) and the Enterprise Act 2002, has made provisions for five insolvency regimes [3] ,that can be applied in the case of a financially distressed company depending on the state of such company. This essay attempts to provide an exposition on liquidation, which is the oldest and the eventual outcome of a financially distressed company, and to critically analyze it as the best option for an insolvent company. To begin with, the origin, fundamental principles and objectives of this insolvency regime will be discussed, bringing out...
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...formed in numerous ways. To be specific, the main concentration shall be placed on formation of a company by registration. Registered companies are formed by registration under the Companies Act CAP 388. This is the most common way of forming a company. According to Section 13 of the Companies Act, There are two main types of companies; public company and private company. Private companies are divided into three different types. A private company limited by shares; a company limited by guarantee and an unlimited company. Types of Registered Companies A private company limited by shares, usually called a private limited company (Ltd.) has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company (plc). It is a company whose liability to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A private company limited by guarantee is an alternative type of corporation used primarily for non-profit organisations that require legal personality. A company limited by guarantee does not usually have a sharecapital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of...
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...DIRECTORS' DUTIES – THE INSOLVENT TRADING ISSUES FROM A LAWYER’S PERSPECTIVE 1. OVERVIEW The aim of this paper is to: provide an overview of the insolvent trading provisions under Australian law; look at the liabilities which might be imposed on a director for breach of those provisions; examine the defences and in particular: when directors can rely on someone else to tell them about the solvency of their company after Manpac v Ceccatini and Scott v Williams; and the loss of the Southern Cross Interiors defences; look at the decisions in the Solomon; Murawai and the Clark v Perkins cases and the potential for de facto or shadow directors to be exposed to an insolvent trading action; and finally to look at the potential for directors to set-off any exposure they have to a company for insolvent trading from any liability owed by the company to them such as unpaid salary or outstanding loan repayments. 1.1 So what is insolvent trading? Section 588G of the Corporations Act (the Act) imposes liability on a director of a company who allows the company to incur a debt at a time when the company is insolvent when at the time that the debt was incurred there existed reasonable grounds for suspecting that the company was, or may become as a result of incurring the debt, insolvent. A director will be liable if at the time the debt was incurred he or she was actually aware of the existence of reasonable grounds to suspect insolvency or a reasonable person in...
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...Alvin and Derrick are directors and shareholders of Condos Pty Ltd, a condominium construction company. The market for condominium construction is very competitive and so each of the directors devise expensive advertising campaigns. Unfortunately, Irene, Alvin and Derrick are not very good financial managers so they have employed a financial accountant, Angela, to manage the financial side of the business. Angela is in charge of paying Condo’s subcontractors. Angela advises Irene, Alvin and Derrick them to cut back on their advertising campaigns as the company’s cash flow is in peril. The directors tell Angela not to interfere with managerial decisions. Angela finds it increasingly hard to pay Condo’s creditors, and starts only paying select creditors to allow the company sufficient cash to continue operating. In frustration, Angela resigns. The directors realise the position that Condos is in and put the company into voluntary liquidation. The liquidator investigations the action of Irene, Alvin and Derrick in the months leading up to the liquidation. Advise the liquidator as to whether the directors may be liable for insolvent trading. Answer Issue Have the three directors, Irene, Alvin and Derrick breached the insolvent trading provisions of the Corporations Act 2001 (Cth) (Corporations Act)? Rule Section 588G applies to impose liability upon a person if (relevantly for the facts in question): (a) the person is a director of the company when...
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...:Topic 1:Introduction and Regulatory Framework- Regulation can relate to two things: Regulate what an organisation can or must do (eg trade, pay tax, employ staff, pay debts), Regulate how an organisation functions (eg how it comes into being, how it is managed and operated and how and when it ceases to be). Why are corporations used (good and bad)? To allow for investment, To allow capitalism to flourish, To permit the sharing of risk, To permit investors to shelter from risk, To permit investors to deny responsibility, To distribute responsibility, To misallocate resources, To allow efficient allocation of resources. Two theories: Contractualist theory, Stakeholder theory. Regulation tends to try to connect the two theories by acknowledging the importance of the corporation in encouraging economic growth and appropriate risk taking BUT also recognising that there should be some control over corporations given their importance to society (as a conduit or pipeline through which resources are channelled into goods and services). Where is this regulation?-Corporations Act 2001, Australian Securities and Investments Commission Act 2001, These are both federal or commonwealth (central government). Subordinate legislation also (regulations under these Acts plus ASX listing rules, statements and Guides, Accounting Standards). Finally, A lot of the important principles relating to corporations and their responsibilities have evolved via case law. The (Corporations) Act has been described...
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...5 Application of Law 6 Conclusion 6 The Director’s Liability for insolvent Trading 7 Principle of Law 7 Application of Law 9 Conclusion 9 The Director’s are under the obligation to ensure the goods were insured in their duty to act with due care and diligence. Area of Law The area of law involved in this particular case to prove director’s duty to take due care is the Corporation Law. Principle of Law The Director’s duties fall under two categories the fiduciary duty and the duty to exercise care, diligence and skill while they are discharging their duties under the position. The Corporations Law provides that that a Director has to exercise reasonable degree of care and diligence while he is exercising his or her duties (Section 232 (4), The Corporation Law n.d.). If there is a failure to comply with the provision of 232(4) it leads to an offence punishable with fine up to $5000 and shall also lead to civil proceedings (Fisse 1992). Austin J was the first to review the statutory duty of care and diligence where the entire history of the same begins (ASIC v Vines 2003) (ASIC v Rich 2003). The circumstances which ae necessary in such a case are the size and the nature of the business, whether it is a listed or an unlisted company, the constitution of the company, the board composition and the manner in which work has been distributed among the board and its various officer (ASIC v Rich 2009). A director or any other officer of the corporation must always guarantee...
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...responsibilities and liabilities of directors factsheet factsheet The duties, responsibilities and liabilities of directors RESPONSIBILITIES INCLUDE: The board of directors of a company is primarily responsible for: • determining the company’s strategic objectives and policies; • monitoring progress towards achieving the objectives and policies; • appointing senior management; • accounting for the company’s activities to relevant parties, e.g. shareholders. The managing director/chief executive is responsible for the performance of the company, as dictated by the board’s overall strategy. He or she reports to the chairman or board of directors. APPOINTMENT The first directors of a company are appointed at the time of its registration. On registration, the persons named in form IN01 will be deemed to have been appointed as the first directors. Subsequent appointments (which are made on form AP01) are governed by the company’s articles of association but any Shareholders Agreement should also be checked. Typically the articles will provide for the board of directors to fill any casual vacancies or to appoint additional directors up to the maximum number specified by the articles. On appointment a new director will be asked to provide certain personal information (i.e. full name, address, date of birth and business occupation) to be included in the relevant form which he/she will be required to sign to signify consent to act as a director. It is possible for a director to file a service...
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...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 s. 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...
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...The liability protection provided to directors as a result of incorporation is referred to as the "corporate veil". However, there are exceptions to this general rule at Common law and under Statute law, which allow lifting the veil and making the directors liable for breach of their duties. For instance, there is a duty placed on directors by the Corporations Act 2001 to make sure their company does not trade while it is insolvent. A director has a duty to prevent the company from incurring a debt if the company is insolvent at the time the debt is incurred or becomes insolvent by incurring the debt, section 588 G of Corporations Act 2001. Section 588 G does not apply to officers other than directors. However, s. 9 of the CA defines a director as a person who is appointed to the position of a director or is appointed to the position of an alternate director and is acting in that capacity, regardless of the name that is given to his or her position. The definition is broad but it is clear that s. 588 G will be applicable to both shadow and de facto directors. It is also clear that s. 588 G of the CA is designed primarily to protect the interests of creditors because when company becomes insolvent, unsecured creditors might be unable to get their funds back. Determining whether a company is insolvent predominantly involves using a cash flow test, but must be determined by reference to the facts of each case. A number of factors that a reasonable person would take into account...
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...discussing the issues that are confronted by the directors of Hampton Park Pty Ltd (HP). The directors, William, Jack, Susan and Gail had their company liquidated shortly after declaring the dividend to their members. Unbeknown to the directors, the Chief Financial Officer of HP, George has been withholding information regarding the company’s deterioration of their financial position. Although late in realizing, George also failed to inform the board regarding the change in the dividend payment rules before the signed off their financial statement in 2010. The new payment rules that was enforced on 28 June 2010 stated in s254T of the Corporations Act 2001 points out that the company’s asset must exceed the liabilities immediately before the dividend is declared and the excess must be sufficient for the payment of the dividend. The company than went into liquidation after the dividend was paid. These issues will be discussed in further detail throughout the essay by examining the directors’ duty of care and the directors’ duty to not trade whilst insolvent and whether there is any breaches of these duties. These duties are set up to allow directors hold accountability and to minimize risk of wrongful or illegal behavior. Duties of a “Director” The term “director” is clarified under s 9 of the Corporations Act 2001, which states that “definition of a 'director' includes those appointed to the position of a director, an alternate director and those acting in the position even if not...
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...Cover Title of report Subject for which the report was written Class Team number Titel Page Title of the report Initials and surname of writer Course IBMS Date of completion Class Team number Executive Summary See writing report skills Table of contents See report writing skills Introduction In October 2008 Iceland was one of the first countries to be seriously hit by the international financial crisis and the consequences were enormous. In Iceland, around 85% of its banking system collapsed in just a few days. One of these banks, a privately owned commercial bank named Landsbanki Íslands had been operating an online savings brand, Icesave, in the UK since 2006 and the Netherlands since 2008. After the bank was taken into receivership in October 2008, more than 400,000 Icesave deposit holders in both countries were unable to access their online accounts. The UK and Dutch authorities announced that all deposits would be guaranteed. According to Directive 94/19/EC deposits were guaranteed up to 20,887 Euros per account.[1] The UK authorities decided to pay out to depositors in full, while the Dutch authorities paid up to 100,000 Euros. It became clear that the Icelandic Deposit Guarantee Fund, established under EU legislation to cover losses in the event of a bank failure, was not in a position to cover the losses incurred by Icesave depositors. Talks therefore started on the aspects of the payout by the UK and the Dutch authorities...
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...recession, directors may well be concerned that their conduct will be scrutinised should they be involved in a corporate collapse. Honest directors risk becoming embroiled in litigation and face “the associated reputational damage and the potential for ultimate financial ruin”2. A director must make commercial decisions. These decisions often involve some form of commercial risk and are sometimes made on the basis of limited information. It would be unjust to hold directors personally liable for a breach of duty, regardless of the situation. Section 1318 of the Corporations Act 2001 (Cth) (Corporations Act) provides some protection for company officers3 against the consequences of a breach of duty in limited circumstances4. The section confers a discretionary power on courts, which reads: If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach 2 John Story, Chairman of Suncorp and Tabway quoted in the article “Directors urge overhaul of corporate law” published in The Australian Financial Review on 10 May 2008 Section 1318 applies to an officer or employee of a corporation, an auditor of a corporation, an expert and a receiver, a receiver and manager or a liquidator. The focus of this paper is on company directors. I have used...
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...seppuku, whether or not its financial condition was due to the fundamental unsoundness of its business or merely a temporary run in with bad luck. This lack of any real corporate rescue vehicle characterized the legal environment that prevailed under the regime of Act No. 1956 (otherwise known as the “Insolvency Law”) from the time of its enactment on 20 May 1909 until the early 1980s1. Act 1956 by itself introduced major changes to corporate law and removed the distinction in the Spanish system between “insolvency” and “bankruptcy.” Nonetheless, the Insolvency Law’s approach to corporate rescue was simply to provide a “solvent but illiquid” debtor temporary relief from payment of its debts while an “insolvent” corporation was forced to undertake a gradual and organized liquidation process2. The Insolvency Law of the Philippines is in fact a derivative of even older laws from other jurisdictions, such as the California Insolvency Law of 1895 and the American bankruptcy Act of 1867 [See Sun Life Assurance Co. of Canada v. Frank B Ingersoll, et. al.; GR No. 164758 (November 1921)] 2 1 The three main remedies under Act 1956 are: a) Petitions for the suspension of payments by an individual, sociedad or corporation under Section 2 of the Insolvency Law: Section 2. The debtor who, possessing sufficient property to cover all his debts, be it an individual person, be it a sociedad or corporation, foresees the...
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...Employees Government Interest Groups Owners Lenders Types of Company Company’s Characteristics: P 1.05 Separate legal entity Limited liability Perpetual succession Under Corporations Act 2001 “Upon registration, a company becomes a separate and distinct entity from its members / shareholders, directors and officers. A company can sue and be sued in its own name. The property of the company does not belong to its members, but to the company alone. A company exists in perpetuity until it is deregistered. Type A: Limited Liability Company Companies limited by Shares P 1.06 Characteristics: Most common type Liability is limited to the amount outstanding to the company when the share were issued; Any amount that is owed by the shareholder is available only to the liquidator upon the winding up of the company to pay the company’s creditors e.g. if a share issued at $1.00 is paid to only $0.25, the shareholder would owe the company 75 cents per share in the event of liquidation. 2． Companies limited by Guarantee P 1.06 Characteristics: They are restricted to being public companies The company does not have a share capital and members are...
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