- Information
- AI Chat
Liquidation - Summary Understanding Company Law
Corporate Law (MLL221)
Deakin University
Recommended for you
Related Studylists
Valedictorian study listPreview text
LIQUIDATION – Chapter 25
Liquidation is a process under which the company’s affairs are wound up, its property sold, debts owed to its creditors repaid and the surplus (if any) distributed among its shareholders
Insolvency
Section 95A (1) – a person is solvent if the person is able to pay all their debts as and when they become due and payable o Person unable to do this is insolvent – s 95A (2)
Relevant factors of insolvency – Austin Australia v De Martin & Gasparini o A history of dishonoured cheques o Suppliers insisting on cash on delivery terms o The issue of post-dated or rounded sum cheques o Special arrangements with creditors o Inability to produce timely audited accounts o Unpaid group tax o Demands from bankers to reduce overdraft o Receipt of letters of demand for debt
Temporary inability to pay debts does not amount to insolvency – page 888
Presumptions of Insolvency Section 459C (2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made: a) the company failed (as defined by section 459F) to comply with a statutory demand; or b) execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied; or c) a receiver, or receiver and manager, of property of the company was appointed under a power contained in an instrument relating to a circulating security interest in such property; or d) an order was made for the appointment of such a receiver, or receiver and manager, for the purpose of enforcing such a security interest; or e) a person entered into possession, or assumed control, of such property for such a purpose; or f) a person was appointed so to enter into possession or assume control (whether as agent for the secured party or for the company).
Effect of Winding Up On Creditors – page 900 Ensures that the rights of unsecured creditors are held on par with secured creditors Creditors cannot enforce any judgments made against the company after liquidation has started and any dispossession of property will be void unless the court orders otherwise – s 468 (1) Compulsory winding up is taken to have begun on the day the court order was made – section 513A (e)
On the Company Property belongs to the company, but their powers are severely restricted – s 468 Directors lose their power to manage company affairs – s 471A All public docs must have “in liquidation” after its name – s 541
Shareholders lose rights to transfer shares – s 468A (1)
On Employees Publication of compulsory winding up order serves as dismissal notice for employees o Re General Rolling Stock Co Dismissal notice can be waived where liquidator wishes to continue employment o Re English Joint Stock Bank Voluntary Liquidation doesn’t necessarily operate to dismiss employees o Re Matthew Bros
On Receivers Receiver’s power to take possession of and sell secured property of the company is not affected by liquidation Can still bring action in name of company for secured property o Gough’s Garages v Pugsley Liquidation terminates receiver’s position as agent for the company o Visboard v Federal Commissioner of Taxation Can still carry on company’s business with either the liquidator’s consent or court approval – s 420C
Termination of Winding Up Court can order the winding up to be stayed or terminated Where an application is made under s 483 to a company subject to a DOCA, it will take into account: o Any report of liquidator alleging that an officer has engaged in misconduct o Decisions of creditors that the company execute a DOCA o Whether the DOCA is likely to result in company remaining insolvent S 482 (2A) Previous breaches might be serious enough to satisfy the courts that the company will not be a good corporate citizen in the future o Seviour v Morgan
Appointment of Liquidators Appointed via court order in compulsory winding up – s 472 Applicant for winding up is required to obtain and file with court the liquidator’s consent to the appointment Liquidator appointed by members in a voluntary winding up – s 495 Creditors can nominate a liquidator for creditors’ voluntary winding up – s 496(5) Court may appoint liquidators to oversee particular parts of the winding up o Re Spedley Securities (1991)
Powers of Liquidators Statutory powers – s 477 Sale of legal actions Supervision by courts and creditors Application to court for directions Application to court to advantage certain creditors Access to books and information Preventing absconding and removal of assets
(i) a receiver or trustee, with specified powers, of property of an officer or employee of a company, or of property of a related entity of a company that is a natural person; or (ii) a receiver, or a receiver and manager, with specified powers, of property of a related entity of a company that is not a natural person;
c) an order requiring an officer or employee of a company, or a related entity of a company
that is a natural person, to surrender to the Court his or her passport and any other specified
documents;
d) an order prohibiting an officer or employee of a company, or a related entity of a company
that is a natural person, from leaving this jurisdiction, or Australia, without the Court's
consent.
Section 486B – arrest warrant on application by liquidator or ASIC
Disclaimer Has power to disclaim property under s 568 o Aims to rid company of assets that are really liabilities Power can be used for property that is unsaleable or valueless o Re Middle Harbour Investments Able to liquidate burial contracts for a company running a cemetery o Re Nottingham General Cemetery Co A person whose rights are affected by disclaimer is taken to be a creditor and any loss suffered may be proved as a debt of winding up – s 568D (2)
Section 586 (1) (disclaiming property) Subject to this section, a liquidator of a company may at any time, on the company's behalf, by signed writing disclaim property of the company that consists of: a) land burdened with onerous covenants; or b) shares; or c) property that is unsaleable or is not readily saleable; or d) property that may give rise to a liability to pay money or some other onerous obligation; or e) property where it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property; or f) a contract;
General Duties of Liquidators Agency relationship means there is a fiduciary duty of care o Section 9 definition of officer includes liquidator Hence are responsible un ss 180 - 184 Main duties (Re Partridge) o Take possession of and protect assets o Make lists of contributors o Have disputed cases adjudicated upon o Realise the assets o Apply proceeds in due course of administration amongst creditors/others
Official liquidators in compulsory winding up are officers of the court – hence have a duty to investigate past activities connected with the company o Re Allebart Liquidator failing to act in the interests of parties will have to make up the deficiency of the wound up company – Commissioner of Corporate Affairs v Harvey Liquidator must be impartial
Specific Duties Proper Administration Acquaintance with the company’s affairs Collect the company’s assets Preserve assets Sell assets Distribute assets Report on breaches of law Effect of deregistration / at conclusion of liquidation
Proper Administration One of the first tasks is to open a bank account – the ‘liquidator’s general account’ Depositing money received into the company’s general trust account is a breach of duty – Commissioner of Corp Affairs v Harvey Liquidator must notify ASIC of appointment within 14 days – s 537 Keep books recording minutes of meetings with creditors – s 531 Keep accounts in prescribed forms to prepare every six months – s 539
Acquaintance with Company Affairs - Directors and sec at time of winding up must submit reports in a compulsory winding up to liquidator about company’s affairs – s 475(1) - Present or former officers, employees and promoters may need to submit – s 475(2)
Collect the Company’s Assets - As soon as practicable, liquidator must take into personal custody/control of all property to which the company is or appears to be entitled – s 474 (1) - Liquidator can take action on behalf of company to recover property - Holder of partly paid shares must pay amount owing when company is wound up under section 516
Preserve Assets - Liquidator has a duty to preserve the company’s assets until they can be sold - A liquidator is permitted to carry on the business of the company – s 477(1)(a) - The business can only be carried on for the purpose of a beneficial winding up o Re Wreck Recovery & Salvage co
Sell Assets - S 427(2) (c) and (d) gives power to sell all company’s property to execute documents in its name - Liquidators have no specific duty to obtain best possible price o The duty of liquidators is to the company, not the creditors or shareholders Hausmann v Smith
- Unless court otherwise orders, disposals of company property under such circumstances is void
- Certain dispositions are allowed under s 468(2) o Dispositions by liquidator pursuant to corp act and court orders o Dispositions by administrator in good faith o Payments made by an Australian bank out of the company’s account before orders of winding
- Court can validate otherwise invalid dispositions
Voidable Antecedent Transactions
Transactions are known as antecedent as they were entered into before winding up
Types: o Unfair Preferences (s 588FA) o Uncommercial Transactions (s 588FB) o Unfair loans (s 588FD) o Unreasonable director-related transactions (s 588FDA) o Transactions for the purpose of defeating creditors (s 588FE (5)) o Transactions that discharge liability of guarantor related entities (s 588FH) o Invalidation of circulating security interests (s 588FJ)
Elements of avoiding a transaction o The transaction fits the definition in the corp act o The company was insolvent at the time of entering into transaction or became insolvent due to the transaction (definition in s 588G) o The insolvent transaction was entered into during a defined period
Unfair Preferences – s 588FA (1) 1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: a. the company and the creditor are parties to the transaction (even if someone else is also a party); and b. the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
- Repayment of unsecured debt prior to liquidation is an unfair preference
- Court considers purpose of payment in order to determine unfairness
- Unfair if the series of transactions has a net effect of improving creditor’s position o Airservices Australia v Ferrier
- Where there is a running account, the last payment is always a UP o Sutherland v Lofthouse
Uncommercial Transactions – s 588FB
- A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter.
- Definition requires a balance of benefit and detriment of transaction to company o Lewis v Doran
- Test in 588FB is objective – Tosich Constructions v Tosich
- Buying a ring for fiancée with company funds is uncommercial o Re Pacific Hardware Brokers
- Forgiveness of debt can be a UT o Lewis v Cook
- UTs amount to a debt – liquidators thus have another means of collecting funds
Unfair Loans – s 588FD - When determining whether interests or charges are extortionate, consider (588FD (2): (c) the risk to which the lender was exposed; and (d) the value of any security in respect of the loan; and (e) the term of the loan; and (f) the schedule for payments of interest and charges and for repayments of principal; and (g) the amount of the loan; and (h) any other relevant matter. - UL provisions don’t protect bad bargains, but transactions which are grossly unfair
Unreasonable Director Related Transactions – s 588FDA
- A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is: (i) a payment made by the company; or (ii) a conveyance, transfer or other disposition by the company of property of the company; or (iii) the issue of securities by the company; or (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and
(b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or (ii) a close associate of a director of the company; or (iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
“circulating security interest " means a security interest that is:
(a) a PPSA security interest, if: (i) the security interest has attached to a circulating asset within the meaning
of the Personal Property Securities Act 2009 ; and
(ii) the grantor (within the meaning of that Act) has title to the asset; or (b) a floating charge.
Insolvent Transactions – s 588FC Insolvent if unfair preference or uncommercial transaction AND: o Transaction is entered into at a time when the company is insolvent o Or company becomes insolvent because of the transaction Presumptions of recovery procedures – page 939 – 941
Voidable Transactions Relation back days and time periods – all in s 588FE Unfair preferences: six months Uncommercial transactions: during or before two years ending on relation back day Unreasonable director-related expenses: within four years Insolvent transaction: within ten years Unfair loan: any time
Court Orders in Relation to Voidable Transactions Section 588FF (1) allows court to make orders o Requiring person to pay company that fairly represents the benefits that the person received because of the transaction (s 588FF (1)(C) o Declaring an agreement to be void or an order varying an agreement (s 588FF (1)(h) and (i) o Releasing or discharging debt incurred by the company in relation to the transaction – s 588FF (1)(e)
Defences
Section 588FG provides defences for 588FF orders S 588FG (1) prevents court from making orders that prejudice the interest of persons who are not party to the transaction S 588FG (2) protects persons who are parties to voidable transactions other than unfair loans to the company
Section 588FG
(2) A court is not to make under section 588FF an order materially prejudicing a right or
interest of a person if the transaction is not an unfair loan to the company, or an
unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as
mentioned in paragraph 588FC(b); and
(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
Test of good faith (588FG (2)(a)) is subjective o Downey v Aira o Creditor must prove that they did not believe that the company was insolvent or would become insolvent by paying the creditor Reasonable grounds for suspecting (pending) insolvency (Mann v Sangria) o See page 943
Grounds that don’t cause suspicion of insolvency (Burness v Supaproducts) o See page 944
Liability of Directors to Indemnify Commissioner of Taxation Where liquidator obtains an order against Commissioner of Taxation to recover a voidable transaction, each director at the time of the transaction is liable to indemnify the Commissioner: s 588FGA (2) Defences under s 588FGB: see page 944
Division of Assets Debts due to creditors are paid first and any surplus distributed amongst shareholders
Provable Debts Creditor must satisfy the liquidator that he is owed money In every winding up, all claims against the company (Present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company (s 553(1))
Set-Off of Mutual Debts A person might be a debtor and a creditor of the company Where there are mutual dealings between insolvent company and a person who wants to have their debts admitted the account is to be taken of what is due from one party to the other in respect of those mutual dealings Debts incurred after winding up commenced are capable of set-off if they exist as contingent liabilities prior to winding up o Grapecorp Management v Grape Exchange Management
Quantification of Debts Amount of debt of the company is to be computed as at the relevant date – s 554 Uncertain values/debts are calculated via s 554A: o (2) – liquidator must make estimate of value of a debt or claim of uncertain value or refer the question to court o (3) – a person who is aggrieved by the liquidator’s estimate may appeal to the court against estimation o (4) – court must make own estimate or determine a method to be applied where liquidator refers estimation question to court o (8) – estimated or worked out value of the debt or claim is admissible to proof against the company
Secured Creditors See page 950
Liquidation - Summary Understanding Company Law
Course: Corporate Law (MLL221)
University: Deakin University
This is a preview
Access to all documents
Get Unlimited Downloads
Improve your grades
