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W12 Workbook Week 12 2019 Tri 1
Company Law (2106AFE)
Griffith University
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2106AFE Company Law Workbook No. Workshop Objective Key Law Key Reading 1 Explain the objectives of a VA 435A Know it? N) 2 Explain and apply the VA process 443D 3 Be able to interpret an Report to Creditors provided during a VA Workshop 4 Explain the rights of secured and unsecured creditors during a VA or DOCA (both a form of external administration) 9 (definition of 5 Describe the content (both mandatory and flexible), coverage, execution and termination of a DOCA and 445C, 445D and 445F 6 Describe the parties involved in a receivership, how a receiver is appointed, their powers, duties, liability and termination of receivership 7 Explain the rights of creditors during a receivership and the overlap between receivership and other forms of external administration. 9 (definition of Skinner v Jeogla Pty Ltd Workbook Contents Video: Voluntary Administration................................................................................... Diagram: The VA process........................................................................................ Administrator Appointment..................................................................................... Administrator Investigation..................................................................................... 1 First Meeting............................................................................................ Second Meeting....................................................................................... Legal Effect of Voluntary Administration................................................................ Video: Deed of Company Arrangement (DOCA)....................................................... Video Diagram: Deed of Company Arrangement.................................................. Content................................................................................................................... Coverage: Who is bound the DOCA?............................................................... Execution of a DOCA............................................................................................. Termination of a DOCA.......................................................................................... Video: Receivership................................................................................................... Video Diagrams: Receivership............................................................................... Appointment........................................................................................................... Qualifications.......................................................................................................... Effect of Appointment on company........................................................................ Powers.................................................................................................................... Duties..................................................................................................................... Liabilities................................................................................................................. Property Distribution in Receivership..................................................................... Termination............................................................................................................. Relationship between Receivership and insolvency regimes................................ Workshop exercises: to be completed in class.......................................................... Workshop exercise: for you to before and in class.................................................... 2 Diagram: The VA process Appointers: director (436A), liquidator (436B) and secured creditor (436C) Step 1: Appointment of Administrator Characteristics: Powers (437A) Liabilities (443A, B and D) Sale of Charged Property (442C) Administrator responsibilities (438A) Step 2: Investigation Director responsibilities (438B) Holding of meeting Step 3: First Creditors Meeting (436E, F) Notice of meeting Matters at meeting Holding of meeting Step 4: Second Creditors Meeting (439A, B) Notice of meeting report for meeting Step 5: DOCA Administration ends liquidation (439C) Voting 4 Administrator Appointment What is the job? Section 438A: An task is to investigate the affairs of the company and to report on whether a compromise or arrangement can be negotiated that would be acceptable to the company and its creditors. Ultimately, the fate of the company is decided its creditors who have the final say as to what should happen to the company. How are Administrators appointed? Directors: A resolution passed a majority of the directors may appoint an administrator if they believe that the company is insolvent or is likely to become insolvent at some future time (s436A(1)). In most cases, the decision to put the company into voluntary administration is the directors. liquidators: If the liquidator believes that the company is insolvent or likely to become insolvent at some future time (s 436B(1)) a secured creditor: A creditor who has a security interest over the whole or substantially the whole of the property (s 436C(1)). Why do directors put the company into VA? To achieve a better outcome for shareholders and creditors To minimise the risk of personal liability. Under section 588H(5), directors can avoid personal liability for contravening s588G, if they can establish that they took all reasonable steps to prevent the company from incurring debts when there were reasonable grounds to suspect that the co was insolvent. In determining whether the s588H(5) defence is available, s588H(6) directs the court to have regard to any action the directors took with a view to appointing an administrator. Who may be appointed as administrator? The administrator must be a registered liquidator (s 448B). The administrator who is appointed must be seen to be independent of the company, its officers, directors and auditor. A person who is connected with the company in these ways is disqualified from being appointed under s448C without leave of the court (i. permission of the court). An administrator must also act for the benefit of all creditors, not merely creditors who have appointed the person an administrator. 5 administrator will seek approval of their fees at both the first and second meetings (see below). Administrator Investigation What are administrators required to do? Section 438A: As soon as practicable after appointment, the administrator must investigate the business, property, affairs and financial circumstances of the company. On the basis of this investigation the administrator must form an opinion as to which future course of action would be in the interests. The alternatives are: 1. Should the company enter into a DOCA? 2. Should the administration end? 3. Should the company be wound up? What are directors required to do? As soon as practicable after the administration begins, all directors of the company must hand over books in their possession which relate to the company. The directors must also give the administrator a statement about the business, property, affairs and financial circumstances within 5 business days after the administration begins (s438B(2)). Directors must also provide general assistance to the administrator when required (s438B(3)). First Meeting What are the notice requirements? Section 436E CA: The administrator must: Convene the first meeting within 8 business days of appointment of the administrator At least 5 business days before the meeting, provide written notice of the meeting to as many of the creditors as reasonably practicable and publishing that notice in a National newspaper or each in which the company has a registered office or carries on business 7 What happens at the meeting? The creditors are to consider two matters: Appoint a committee of creditors and if so, its composition (s436E(1)). The functions of a committee of creditors are (a) to consult with the administrator about matters relating to the and (b) to receive and consider reports the administrator (s436F(1)). Remove the administrator from office and appoint someone else as administrator of the company (s436E(4) and IPSC Second Meeting What are the notice requirements? The administrator must then convene a meeting of the creditors within the convening period (s439A(1)). The convening period determines when the administrator has to provide notice and call the meeting. Holding the meeting The administrator must hold a meeting of creditors within 5 business days before or after the end of the convening period (s439A(2)). Convening period 25 business days: if the day after the administration begins is 25 business days: if the appointment takes place less then 25 business days from Good 20 business days: all other cases. The convening period may be extended on application to the Court within the convening period (s439A(6)). Notice of meeting IPRC (2) : The administrator must at least 5 business days before the meeting, provide written notice of the meeting to as many of the creditors as reasonably practicable and publishing that notice in a National newspaper or each in which the company has a registered office or carries on business. 8 c) that the company be wound up. The winding up becomes a voluntary winding up of the company (s 446A). Voting at the meeting A resolution can be passed on a show of hands or a poll, which can be demanded 2 creditors present and entitled to vote at the meeting or a creditor that holds more than of the votes from those entitled to vote at the meeting. On a show of hands, a resolution is passed the majority of those present who indicate agreement. On a demand for a poll, a resolution is passed : o More than half the number of creditors who are voting (in person or proxy) vote in AND o Those creditors in favour of the resolution are owed more than half of the total debt owed to creditors at the meeting (as demonstrated the Proof of Debt forms) Note: The chairperson has a casting vote if both requirements are not satisfied on a demand for a poll. Legal Effect of Voluntary Administration Winding Up During an administration (including DOCA and VA), the company cannot be wound up voluntarily (section 440A) except if the creditors resolve to wind up at the second meeting, the company breaches the rules dealing with DOCA or the creditors terminate the DOCA and resolve to wind up the company (section 446A). Legal action Section 440D: During the administration of a company, court proceedings cannot be commenced and current court proceedings are stayed, unless the consent of the administrator or the Court is obtained. For example, unsecured creditors could not take action against the company for an amount owing. 10 Property Owners Lessors Section 440B (see Item 3 in the table to section 440B): Property lessors or owners cannot recover property that is in possession of the company during the VA, unless the administrator provides written consent or the Court grants leave. Secured Creditors Secured creditors cannot enforce a security interest during administration: s440B. The idea behind this rule is to preserve the business. There are exceptions: If leave of court or written consent of administrator is obtained If the security interest is over the whole or substantially the whole of the assets and the creditor acts within the i. 13 business days after notice of appointment of administrator received holder of the security interest: s441A and s9 If the secured creditor started action to enforce the security interest before the administration: s441B If the security interest is over perishable property: s 441C Video: Deed of Company Arrangement (DOCA) A DOCA is one of the possible outcomes for a company that is put into VA. Creditors who supplied goods and services to a company prior to its VA may favour a DOCA if this results in the company continuing as a customer. Creditors may also vote in favour of a DOCA if they perceive that the company can trade its way out of financial trouble with more competent management provided the deed administrator. The VA administrator will also be the DOCA administrator unless the creditors, resolution passed at the 2nd meeting, appoint another administrator (s Most DOCAs will have the same administrator because the VA administrator is familiar (and paid to be familiar) with the business. The company is often then left to the directors to control. In this video I discuss the content, coverage, execution and termination of a DOCA with reference to the diagram that follows. Video: Deed of Company Arrangement 11 Content The DOCA must contain certain information, including (section the name of the deed administrator the property that will be used to pay creditors the debts covered the deed and the extent to which those debts are released the order in which the available funds will be paid to creditors (employees are still to receive priority in a DOCA unless the employees agree otherwise or the Court orders) the nature and duration of any suspension of rights against the company the conditions (if any) for the deed to come into continue operation the circumstances in which the deed terminates Examples The content of the DOCA is flexible, and could include: a moratorium on the debt for a set period ie company given additional time to pay a composition creditors (e. 20c for each dollar of a reconstruction where there is a debt or the orderly sale of all property over an agreed period of time Coverage: Who is bound the DOCA? The Deed binds all unsecured creditors (s in respect of all claims arising on or before the day (being not later than the day the administration began) covered the Deed. While the DOCA is in effect, a creditor cannot apply to have the company wound up nor proceed with an application However secured creditors are not bound the DOCA unless the secured creditor had voted in favour of the DOCA or the Court orders that the secured creditor is bound the DOCA (s 13 Execution of a DOCA The company must execute the DOCA within 15 business days after the end of the 2nd meeting of creditors or such further time as the Court allows (s The administrator must also execute the DOCA before, or as soon as practicable after, the company executes it (s Termination of a DOCA A DOCA can be terminated under section 445C: According to its terms resolution at a creditors meeting according to section court order where creditors (or in some cases others) apply to the court for orders to set aside the deed (there are various grounds in sections 445D, E and G not covered in this course) Video: Receivership Receivership is a form of administration that involves the appointment of a to take possession of the secured property, sell it and, out of the proceeds, repay the secured debt owed the company. Receivership is an effective means where a secured creditor can enforce rights in relation to the debt without having to go to court. The video below provides a summary of the key players and elements of receivership, with reference to the diagrams on the next three pages. Video: Receivership Receiver: A person who takes possession,but does not manage the property in the sense of carrying on trade or business. Receiver and Manager: This is a receiver who has the power to manage the business. A person is assumed to be a receiver and manager unless the Court or the instrument of appointment limits this power (refer ss 90 and 420 CA). Controller: The receiver is also referred to as a in CA. Section 9 provides that a controller is a receiver or receiver or manager of property. Further, a is a receiver and manager. Note: An excellent summary of receivership is available through ASIC Information Sheet 0054 Receivership: A Guide for Creditors (click here) 14 Receivers Duties: Liability: Statutory duties (s 9 officer) Report to ASIC (ss 421A and 422) Duty of care to all creditors in selling secured assets (s 420A Skinner v Jeogla Pty Ltd) Debts incurred the receiver during the receivership (s 419) Rent for lease entered into the company prior to the appointment if not discontinued within 7 days (s 419A) Distribution of Proceeds: Receivership costs and expenses paid company, but if insufficient assets, from the sale proceeds of the secured Repayment of debt to secured Surplus (if any) to the company or external administrator Termination: General rule: Objective of the receivership is achieved (e. Riviera Boats) 16 ABC LEARNING CENTRES RECEIVERSHIP Banks appointed McGrath Nicol Receivers (1042 reduced to 801 centres following agreement) secured creditor of ABC Learning Centres Court 241 centres appointed ABC 2 Receivers PPB Corporate Recovery million funding preferential creditor Agreement Commonwealth government 17 assets for which that person may be liable to account in such a claim. Privately appointed receiver Security Interest The appointment of a receiver is made under a and circulating security interest (known as fixed and floating charges respectively before the Personal Property Securities Act 2009 (Cth), which became operative in 2012). A security interest is over particular assets of the company (e. land, plant and equipment) whereas a circulating security interest is over assets of in the course of normal trading operations (e. debtors, inventory) The agreement The right to appoint a receiver must be part of an agreement between the company and the credit provider at the time the credit was provided. The borrowing company agrees to allow the credit provider to appoint a person (the receiver) to take over the secured assets in the event of the borrower committing a specified in the agreement. The default event could be anything, including: The company ceases to carry on business The company operates at a loss for two consecutive financial years A person files an application for a compulsory winding up in insolvency The directors place the company into voluntary administration The idea is that the receiver will deal with the assets (sell them or run the business) in order to gain sufficient funds for the credit provider to be repaid. Qualifications Section 418(1): A receiver must be a registered liquidator and not connected to the corporation being an: officer, auditor or mortgagee of the officer of a related body corporate or officer of mortgagee of the 19 officer or promoter of the corporation or a related body corporate within the previous 12 months Effect of Appointment on company The company continues to exist as a separate legal entity and remains the legal owner of its property. Receivership also does not displace the board. The directors must remain in office, must still perform their duties according to the CA, but their ability to deal with the secured property is severely restricted. If a receiver and manager is appointed to take control of the company, then the management powers cease while the RM is in control. Powers Where do the powers come from? The agreement between the company and and To the extent those powers are not inconsistent with the agreement, the powers in s 420 CA. What are the statutory powers? Section 420(1) and (2) CA: To enter into possession and take control of property To lease, let or hire or dispose of property of corporation To borrow money on security of property To convert property into To carry on any business of corporation To do all things necessary convenient to be done to attain the objectives of appointment Priority Debts What happens if a RM has power to sell the business as a going concern (e. way of a circulating security interest over the assets) but one of the assets 20
W12 Workbook Week 12 2019 Tri 1
Course: Company Law (2106AFE)
University: Griffith University
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