INSOLVENT
when a company is unable to pay its debts as and when they become due and payable (s 95A).
CREDITOR
someone to whom the company owes money.
SECURED CREDITOR
creditor whose debt is protected by a security interest (eg bank has a fixed charge over a company’s land, plant and equipment; and a floating charge over the company’s cash, stock and book debts).
UNSECURED CREDITOR
creditor whose debt is not protected by a security interest (eg a firm that has supplied stationary to the company, on the basis that the company has 30 days to pay).
SECURITY
a charge or other legally recognised interest in a company’s property that gives some kind of protection to a person who loan money (or provides goods or services on credit) to a company.
CHARGE
a mortgage or an agreement to give or execute a charge or mortgage, whether on demand or otherwise.
FIXED CHARGE
one that is intended by the parties to attach to a specific item of property (such a land/piece of equipment) in such a way that the company cannot dispose of the property without the consent of the lender.
FLOATING CHARGE
is intended by the parties to cover a class of property but not to attach to specific items within the class until some future event occurs.
WHAT IS EXTERNAL ADMINISTRATION
- When a company becomes insolvent, it should go into external administration of some sort
› Ch 5 of the Corporations Act External Administration - ‘External Administration’ means administration of companies by a person/people appointed to take over control from the directors
- In Australia, the three types of external administration are:
- Where insolvency is the reason for the company entering external administration, the three types of external administration serve different purposes
THREE TYPES OF EXTERNAL ADMINISTRATION
› Receivership;
› Voluntary administration (VA);
Deed of company arrangement (enter into this after company enters into VA).
› Liquidation (or winding-up)
- Note also: scheme of arrangement can be used to implement a restructure to avoid insolvency but is not a formal insolvency regime.
S 95A
SOLVENCY AND INSOLVENCY
(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable
(2) A person who is not solvent is insolvent.
CASH FLOW V BALANCE SHEET TEST
› ASIC v Plymin, Elliot & Harrison (No 1) [2003] VSC 123 at 370, Mandie J quoting Professor Keay “The insolvency factor in avoidance of antecedent transactions in corporate liquidations” (1995) 21 Monash University Law Review 305 at 307:
“The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors”
Mere consequence under cash flow test that assets exceed liabilities.
Use the cash flow test over the balance sheet test (Austin & Ramsay).
INSOLVENCY V TEMPORARY LACK OF LIQUIDITY
ASIC v Plymin, Elliot & Harrison (No 1) [2003] VSC 123 at 374:
› “In Sandell v Porter [1966] HCA 28 the High Court - - - observed that it was important not to confuse insolvency with a temporary lack of liquidity and said (per Barwick CJ): ‘Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s moneys are not limited to cash resources immediately available. They extend to moneys which he can procure by realising by sale or mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of debts and to the circumstances, including the nature of the business, of the debtor’”.
NATURE OF DUE AND PAYABLE
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at [54] per Palmer J:
› “The commercial reality that creditors will normally allow some latitude in time for payment does not, in itself, warrant a conclusion that the debts are not payable at the time contractually stipulated and have become debts payable only on demand.”
INDICATORS OF INSOLVENCY
- ASIC’s Regulatory Guide 217 Duty to prevent insolvent trading: Guide for Directors and Table 2 of the Appendix:
› The company is experiencing cash flow problems;
› The company has a history of continuing trading losses
› The company is experiencing difficulties selling its stock
› Creditors are not being paid on agreed trading terms (creditors then requiring cash only delivery terms or special payments on existing debts before supplying further goods/services)
› The company is not paying its taxes
› Cheques are being returned dishonored
› The company can no longer obtain appropriate or further finance
› The company cannot produce accurate financial information on a timely basis
AIMS OF INSOLVENCY LAW
- Insolvency law plays an important role in corporate regulation; it is inevitable that some companies will fail leaving unpaid debts
- The consequences of insolvency can affect many parties; employees, creditors, tax authorities, directors, suppliers, customers, the community
- Insolvency law may:
› Provide a fair and orderly process for dealing with the financial affairs of insolvent companies
› Provide mechanisms that enable both debtor and creditor to undertake administration tasks with least possible delay and expense
› Insolvency administration should be impartial and efficient as possible
› Insolvency law should provide a convenient means of collecting or recovering property that should be applied toward payment of debts and liabilities.
RECIEVERSHIP
- Available to secured creditors – a secured creditor may appoint a receiver to realise its security
- Primary objective is to sell secured assets for benefit of secured creditor
- Powers of receiver set out under s 420
- Receiver has duty of care under s 420A to sell property for the ‘best price that is reasonably obtainable’
- Receiver has control of secured property rather than liquidator or administrator
PART 5.2
- Receivership involves appointing a ‘receiver’ or controller of property of a company
› Usually appointed by a secured creditor (usually a bank or financial insitiution - The purpose of a receivership is to use an external administrator to take possession of a corporation’s property and realise it to satisfy or repay the corporation’s debt owed to the secured creditor
- The definition of ‘property’ is broad: s 9 Corporations Act
- The person appointed as receiver must be a registered liquidator, ensuring that the receiver is independent and experienced in managing insolvent companies
- There are two ways to appoint a receiver:
› Appointment by secured creditors (usually a bank) (private appointment by contract)
› Appointment by the court
S 420
provides for both a general power and numerous specific powers available to receivers:
› (1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed.
S 420(2)
provides additional powers, such as, the power to enter into possession and take control of the property of the company; to lease or dispose of it; to borrow money security of it; to insure it; and to convert it into money
S 420A
requires that a receiver sell the property for the best price reasonably obtainable or its market value
DUTIES OF RECIEVERS
- Duties are owned to the appointing secured creditor, but receivers also owe duties to the debtor company to exercise powers in good faith and for proper purpose and a duty of care not to sacrifice the company’s interests recklessly
LIABILITY OF RECIEVERS
- s 419: the receiver is liable for debts incurred in the course of the receivership for services rendered, goods purchased or property hired, leased, used or occupied under s 419
- The receiver, as an agent, would expect to be reimbursed by the company for these debts
- A receiver is considered an officer of the company and will be subject to officers’ duties as found in ss 180-184
PART 5.3A
- The voluntary administration scheme is governed by Part 5.3A of the Corporations Act
- The aim of voluntary administration provisions are to maximise the chances of the company or its businesses remaining in existence and, if this is not possible, to achieve a better return to creditors than would result from an immediate winding up: s 435A
