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W11 Workbook Week 11 10052019
Company Law (2106AFE)
Griffith University
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2106AFE Company Law Workbook No. 1 2 3 4 5 6 7 Workshop Objective Explain and apply four of the insolvency regimes (DOCA, liquidation, receivership, VA) Explain the types of and process associated with voluntary winding up Explain the types of and process associated with compulsory (court ordered) winding up Explain what a statutory demand is and the circumstances in which the Court will set aside the demand Explain the rights of creditors, employees, directors and other parties to contracts during a winding up Explain who can appoint liquidators, how they can be appointed, the type of liquidations they can manage, their powers and duties and relationship with company officers Explain and apply the five step test for voidable transactions (unfair preferences and uncommercial transactions) under Part 5 Corporations Act Key Law Key Reading Know it? N) 497 588E(4) 459J Workbook 471B (court ordered winding 500(1) and (2) (creditors voluntary winding up) Workbook 533 (liquidators) 556 (distribution of assets) 9 Re Pacific Hardware McDonald and Anor v Workbook Note: Cases denoted will be discussed in class. Contents Corporate Insolvency Introduction............................................................................ What are the insolvency regimes?........................................................................... Video: Liquidation........................................................................................................ 1 Video diagrams: Liquidation..................................................................................... Voluntary Winding Up.............................................................................. Voluntary Winding Up.............................................................................. Compulsory Winding Up: Insolvency....................................................................... Statutory Demand.................................................................................................. What is the legal effect of winding up?.................................................................. Liquidators................................................................................................................. Appointment........................................................................................................... Powers.................................................................................................................... Duties of the Liquidator.......................................................................................... Relationship with other Officers............................................................................. Liquidation Voidable transactions........................................................................... Unfair Preferences................................................................................................. Uncommercial transactions.................................................................................... Insolvent transaction.............................................................................................. Voidable transaction............................................................................................... Defences................................................................................................................ Remedies............................................................................................................... Workshop exercises: to be completed in class......................................................... Workshop exercise for you to do before and in class............................................... Workshop Revision Question.................................................................................... Workshop Revision Answer................................................................................... Voidable transactions: What to put in your Law and Application.............................. 2 Video: Liquidation The video below provides a summary of liquidation. The diagrams on the pages which follow are used during the video. The video is interactive, requiring you to fill in the details in each of the diagrams. Video: Liquidation types Video diagrams: Liquidation Types of Liquidation T y p e s o f L iq u id a t io n L iq u id a t io n V o lu n t a r y M e m b e r s v o lu n t a r y w in d in g u p C r e d it o r s v o lu n t a r y w in d in g u p C o u r t O r d e r e d w in d in g u p I n I n s o lv e n c y O n o th e r g ro u n d s Voluntary Winding Up 5 Step Process Step 1: Step 2: Step 3: Step 4: Step 5: 4 Voluntary Winding Up Voluntary Winding Up OR No solvency declaration OR Solvency declaration but liquidator finds insolvency DOCA or VA end 1 of 3 options available to liquidator Compulsory Winding Up 5 Appointment: Members Creditors Court Types: Powers: Unregistered Registered Official Carry on business Pay creditors (CR) Compromise with CR Dispose of property Subject to Court: Limit of powers Guidance on powers Duties: Statutory duties as officer Independence Familiar with business Preserve assets Sell assets at best price Report to ASIC, creditors Liquidation: Legal Effect Officers: Lose management powers Assist liquidator Subject to particular Court orders sought liquidator Creditors Employees Contracts with the company 7 Voluntary Winding Up A voluntary winding up is a liquidation of a solvent company. What are the requirements for a voluntary winding up? A special resolution of the company (section A liquidator, who is appointed members in general meeting (s A declaration of solvency the directors (section 494). Section 9 defines a voluntary winding as meaning where a declaration of solvency has been made and lodged. Leave of the Court, if an application has already been filed with the Court for a Court ordered winding up or the Court has already ordered winding up (section 490). The company is not in voluntary administration (section 446A). A voluntary winding up cannot commence whilst a voluntary administration is in place. What is the declaration of solvency? Section 494(1) CA: The majority of directors provide a written declaration saying that they made an inquiry into the affairs of the company and that, at a meeting of directors, they have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up. Section 494(2) CA: A Statement of Affairs of the company is attached to the Declaration, setting out the assets, including total amount expected to be realised from those assets, liabilities and the estimated expenses of winding up. Voluntary Winding Up A voluntary winding up occurs where the company is insolvent and the creditors pass an ordinary resolution to wind up the company. In which circumstances does a voluntary winding up start? The members pass a special resolution to wind up the company but the directors do not make a declaration of solvency (section 497) The directors make a declaration of solvency, a liquidator is appointed but the liquidator finds the company insolvent and decides to proceed as a voluntary winding up (section 496) As the result of the company failing to execute a Deed of Company or the creditors terminate the Deed of Company Arrangement 8 Can the person apply to the Court? Section 459P lists the persons who can apply. They include the company, a creditor (including contingent or prospective creditors), liquidators, directors, the ASIC and APRA. For creditors, contributories, directors and the ASIC, each party must seek leave of the Court, and the Court must be satisfied that there is a prima facie case of insolvency, before the application can proceed any further (section 459P(2)). Insolvent and presumptions of insolvency The applicant must then establish that the company is insolvent. This will require a consideration of section 95A and the various tests for insolvency that we discussed with the duty to prevent insolvent trading. In addition to the insolvency tests, section 459C(2) assists the applicant providing various presumptions of insolvency, including: The company failed to comply with a statutory demand A creditor has not been fully paid in respect of a Court ordered debt A receiver, or receiver and manager was appointed in relation to a circulating security interest on property (also known as a floating charge to be discussed next week) Most compulsory liquidations rely on the first presumption, namely the failure to comply with a statutory demand, to prove insolvency. With presumptions of insolvency, the onus switches to the company to prove that it is solvent. Statutory Demand What is a statutory demand? Section 459E(2): A statutory demand: is a written document is in the prescribed form (Form 509H) specifies the debt and its amount, which must be at least is signed or on behalf of the creditor is served a creditor on the company requiring payment of a debt(s) owed to the creditor within 21 days after the demand is served on the company must be accompanied an affidavit which confirms that the debt is due and payable the company (unless the debt is a judgment debt) 10 When will the Court set aside a statutory demand? Section 459G: The company must first apply to the Court for an order setting aside the statutory demand within 21 days after the demand is served. There are four grounds for challenging a statutory demand: Section 459H(1)(a): There is a genuine dispute about the existence or amount of the Section 459H(1)(b): The company has an offsetting claim Section 459J(1)(a): There is a defect (see section 9 definition) in the demand and substantial injustice will be caused unless the demand is set aside Section 459J(1)(b): There is some other reason why the demand should be set aside Case examples include: No substantial injustice: a minor miscalculation in the amount of the demand, stating the amount in not when the contract related to provision of services in Substantial injustice: Failure to provide the company with reasonable opportunity to pay the debt Other reason: Substantially overstating the debt amount or failing to inform the debtor of the due date for payment When does the company fail to comply with the statutory demand? Section 459F: The company fails to pay the debt within 21 days after the demand is served, unless the company applies to have the demand set aside the Court (i. a different period will apply). What is the legal effect of winding up? Commencement of Winding Up The general rule is that the compulsory winding up starts on the date the court order is made (s513A(e)) and a voluntary winding up commences at the time of passing of the resolution for voluntary winding up (s513B(e)). That general rule is subject to any current external administration such as VA, winding up or DOCA (refer ss The winding up is deemed to have taken place from the date the original administration began. In the case of a VA or DOCA, this is when the administrator is appointed (s 435C). In the case of a winding up, it is the date the court order is made. 11 1. An unregistered liquidator: A liquidator who is not registered the ASIC. An unregistered liquidator can only do a voluntary winding up of a Pty Ltd company (section 2. A registered liquidator: Insolvency Practice Schedule (IPS) (Corporations) Div 20 a. The applicant must have qualifications in accounting or have other relevant qualifications and and b. The applicant is a fit and proper person c. Maintain adequate professional indemnity insurance d. ASIC is satisfied with the experience in winding up and capability of performing and When is a liquidator disqualified from an appointment? Section 532(2) CA provides that a liquidator is disqualified from an appointment under a number of grounds, the main ones being: 1. They owe the company or the company owes them or more 2. They are an officer, employee or auditor of the company or a partner of those people 3. They are an officer or employee of a company that is a mortgagee of the company Points 2 and 3 above do not disqualify a liquidator from conducting a voluntary winding up of a Pty company (section 532(5)). Powers What are the powers? Section 477 gives liquidators a wide range of powers, including: Carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business pay any class of creditors in full according to the CA make any compromise or arrangement with creditors in respect of their claims bring or defend any legal proceeding in the name and on behalf of the company appoint a solicitor to assist in performing the duties 13 sell or otherwise dispose of, all or any part of the property of the company (s477(2)(c)). Note that any disposal without the authority is void (s do all acts and execute in the name and on behalf of the company all deeds, receipts and other documents and do all such other things as are necessary for winding up the affairs of the company and distributing its property (s477(2)(m)). Can the powers be limited? Yes. The Court can: limit the power exercised liquidators on application a creditor, shareholder or ASIC (section 477(c) for compulsory winding section 511 for voluntary winding and if a liquidator has not performed their role appropriately then the court may replace them under IPS (Corporations) Div 90. Liquidators may also be removed the creditors at any time and without any particular reason: IPS (Corporations) A court, ASIC or the creditors have the power to appoint a liquidator to review the conduct of the liquidation: IPS(Corporations) . Can the liquidator seek the guidance in exercising power? Yes. The liquidator may apply to the court for directions in relation to any particular matter arising under the winding up IPS (Corporations) (orders to determine any question in relation to an external administration), (who may apply for court orders). Duties of the Liquidator Liquidator falls within the definition of in section 9. Therefore, a liquidator must comply with the statutory duties under sections 180 to 183. Whilst liquidators have the power to do all necessary things to wind up the company, they must exercise a reasonable degree of care and diligence, act in good faith and not improperly use their position or company information. In terms of specific duties, the liquidator must: Act independently in the conduct of the winding up Seek directions from the Court if any difficulties arise in the winding up Be familiar with the affairs of the company 14 On application the liquidator, the Court may issue a warrant for the arrest of a person who is connected to the winding up and is about to leave Australia (section 486B) Liquidation Voidable transactions The purpose of liquidation is to identify the assets, convert the assets into cash and distribute the proceeds to the appropriate persons under s556 CA. The assets will not include any assets held on trust the company, nor property in possession of the company but not owned it. Note that employees are preferential creditors, whereas the ATO is not. Claims persons in their capacity as shareholders sit below unsecured creditors in order of distribution (s 563A). Certain transactions between an insolvent company and other persons can have the effect of reducing the amount available for distribution when the company is wound up. Division 2 of Pt 5 enables liquidators to these transactions. In this course, our focus is on two types of transactions: unfair preferences (s588FA) and uncommercial transactions (s588FB). Liquidators generally must address five issues in respect of unfair preferences and uncommercial transactions when they take action against a party: 1. 2. 3. 4. 5. Is the transaction an unfair preference uncommercial transaction? Is the transaction an transaction? Is the transaction a transaction? Is there a defence? What are the remedies? Diagram: Voidable transactions 16 Unfair Preference Uncommercial transaction Issue: Is the dealing an uncommercial transaction unfair preference? Unfair preference (s 588FA): Company payment to creditor Payment of unsecured debt If wound up, creditor would have received less than payment Multiple transactions (s 588FA(3)) Uncommercial transaction (s 588FB): Objective test: o Benefits detriments to company o Benefits to other transacting party o Other relevant matter Cases: Re Pacific Hardware McDonald and Anor v Hanselmann Issue: Is the dealing an insolvent transaction? (section 588FC) Cash flow test Presumptions of insolvency (s 588E(3),(4) if relevant ) Insolvency indicators Issue: Is the dealing a voidable transaction? (section 588FE) Time Limit Relation Back Day: (ss 91 513A, B or C refer workbook) 588FF(1)(a): Pay money back to company Issue: Do the defences under section 588FG apply? Issue: What are the remedies? (section 588FF) 588FF(1)(b): Transfer of company property 588FF(1)(c): Amount benefits received Type of transaction Related entity (s 9) 588FF(1)(d): Transfer of equivalent property 17 Insolvent transaction Before a liquidator can avoid a transaction as an unfair preference or uncommercial transaction, the liquidator must establish that it was also an (with the limited exception of sections 588FE(2A) and (2B)). A transaction is an insolvent transaction under s588FC if it is either an unfair preference or an uncommercial transaction The transaction is entered into at a time when the company is or The company becomes insolvent because of entering into the transaction. You need to apply the insolvency tests here cash flow test, insolvency indicators and the presumptions of insolvency (e. section 588E(3) and (4)). Voidable transaction Whether an insolvent transaction will be a voidable transaction depends on when it was entered into before the winding up. The liquidator can only attack a transaction within the time limits set out in s588FE. The important date for the purposes of establishing the time limits is the relation back day. The relation back day (see section 91) is: For a compulsory liquidation: the date the application for winding up is filed (sections 91 513A) unless: o There was another administration in place at the time (e. VA or DOCA) the relation back day is the day on which the VA began (i. the appointment of the administrator) (s o A voluntary liquidation was already in progress the relation back day is the day calculated according to s 513B below. For a voluntary liquidation: The date of the resolution to wind up the company (513B), unless: o There was an administration in place at the time. If an administration was in place immediately prior to the voluntary or compulsory liquidation (e. VA or DOCA), then the general rule is that the relation back day is the day on which the administration began (s 513C). 19 What are the time limits? Unfair Preferences Type of transaction Time Limit Transaction not with a related entity 6 months ending on the relation back day or the period between the relation back day and the date of the order for winding up (s 588FE(2)) Transaction is with a related entity 4 years ending on the relation back day (s 588FE(4)) Transaction for the purpose of defeating, interfering or delaying creditors 10 years ending on the relation back day (s 588FE(5)) Uncommercial Transaction Type of transaction Time Limit Transaction not with a related entity 2 years ending on the relation back day (s 588FE(3)) Transaction is with a related entity 4 years ending on the relation back day (s 588FE(4)) Transaction for the purpose of defeating, interfering or delaying creditors 10 years ending on the relation back day (s 588FE(5)) What is a related entity? A is defined in section 9. A related entity (being the entity that benefited from the unfair transaction) must be: a promoter of the company or a relative, or de facto spouse, of such a a relative of a spouse, or of a de facto spouse, of such a a director or member of the company or a related body corporate (see s50) or a relative, or de facto spouse, of such a director or a relative of a spouse, or of a de facto spouse, of such a director or a body corporate which has the same director as the 20
W11 Workbook Week 11 10052019
Course: Company Law (2106AFE)
University: Griffith University
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