Ravi is the sole shareholder and director of a Pty Ltd company. The company deals with water contamination testing. Ravi lent the company $90,000. Though the company was initially performing well the primary contractor (Department of Defence) started employing internal personnel for the samepurpose. By 2017 the company was on the verge of insolvency and being aware of the same Ravi appointed an administrator. The total valued assets of the company amounted to $95,000 and the debts of the company amounted to $210,000 including the $90,000 owed to Ravi as a secured creditor. The issue here is to determine the options available to the administrator and if Ravi is entitled to recover the money owed to him. The payment to the unsecured debtors in case Ravi does recover his money must also be determined.
As per Section 436A of the Corporations Act, 2001 provides for the appointment of an administrator in case the company is or will become insolvent. Section 436C of the Corporations Act, 2001 lays down provisions for the appointment of an Administrator by a person who may enforce a secured securities interest against the company(Hanrahan, Ramsay and Stapledon 2013).
Section 436DA (2) of the Corporations Act, 2001 mandates that the Administrator so appointed by virtue of Section 436A, 436B or 436C must make a declaration stating the relationships and the indemnities owed by or to the company(Hannigan 2015). Failure to comply with the provision to make such a declaration would be an offence under the act.
An appointed administrator also has the responsibility to hold the first creditors meeting. The purpose and time for the first meeting of creditors is defined under Section 436E(Armourand Ringe 2013). The section states that this meeting must be held within 8 days from the appointment of the administrator and the administrator must give the creditors 5 business days notice before such a meeting is held. The primary purpose of the meeting is to determine if a committee of inspection needs to be appointed and if so the composition of members of the committee. The creditors also have the power to remove the administrator if they feel the need for replacement and would have the rightto appoint an appropriate arbitrator.
Section 437A of the Corporations Act, 2001 defines the role of an administrator. By virtue of the powers conferred under this section the administrator assumes complete control over the affairs of the company(McLaughlin and McLaughlin 2013). This section gives the administrator the power to continue with the company’s transactions if possible and also has the power to dispose off a part or the entire business and has the right to dispose all related properties. When the company is under the administration process the administrator may exercise any power or right which the company would have if it were not under administration.
Section 437D of the act dictates that when a company has entered into the administration process the only person authorized to transact on behalf of the company is the administrator. The administrator can enter into contracts on behalf of the company. In case any other individual transacts on behalf of the company it would be considered a void transaction.
Once appointed an administrator has three options which it may employ to formulate a solution for the creditors. These are (Ferran and Ho 2014):
In case the Administrator opts for the approval of a deed which provides for the repayment of all debts owed to the company the debts of the company are extinguished. This deed is known as a Deed ofCompany Arrangement (DOCA). The deed also defines the repayment modes to other creditors. However, in case of such a deed the rights of a secure creditor would not be affected unless the secured creditor voted during the approval of the DOCA this follows the provisions of Section 444D (1). This position has also been reiterated inthe matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977(Harris 2017).
Thus in a case where a secured creditor has not voted for the approval of a DOCA his claims against the company would not be extinguished and thus the company would be liable to repay the debt owed to such a creditor(McKendrick 2014).
In the given set of circumstances Ravi was aware that his company would be going into liquidation and thus he appointed an Administrator. This appointment was thus by virtue of the provisions of Section 436C of the Corporations Act, 2001 as Ravi was a secured creditor who appointed the administrator. This could also be construed as an administration process invoked under Section 436A of the act as Ravi being the sole shareholder and director had initiated the proceedings on behalf of the company(Gullifer and Payne 2015).
The administrator made the necessary declaration under Section 436DA (2) that the company had assets worth $95,000 and it owed $210,000 (this debt included the $90,000 owed to Ravi as a secured creditor).
Following this situation it may be inferred that the administrator could employ any of the various options available to him to determine the company’s future. These options are(McQueen 2016):
An administration process is different from a liquidation process to the extent that in case of administration the company may still have a viable future whereas liquidation would always amount to the end of the company’s existence. In this scenario the company primarily needs to extinguish its debts and thus approving a DOCA would be the most viable situation to go about it(Bronitt 2013).
In this situation the judgment delivered in Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977 would apply and following Section 444D (1) Ravi’s right to recover his money would survive even after the DOCA has been executed (Morrissy 2016).Thus his claim against the company would be for the full amount of $90,000. Applying this to the present circumstances, the company owes a total debt of $210,000 and has assets worth $95,000 and is liable to reimburse Ravi as the only secured creditor. Thus, $90,000 from the total assets as a repayment of the amount lent to the company by Ravi. The unsecured creditors would thus have the remaining $5000 distributed amongst them as full and final settlement of their claims(Chia and Ramsay 2015). The company would thus be unable to meet its debts sufficiently.
Conclusion
The appointed administrator would have three options available to him to provide relief to the creditors. These are namely, handover of the companies affairs back to the management (the board of directors), formulation and execution of a Deed of Company Arrangements which would address all debts owed by the company or commencement of liquidation proceedings by appointment of an official liquidator as per the provisions of the act. In this scenario execution of a DOCA would be the best recourse to solve the company’s problem without negating its existence.
Ravi being the sole shareholder and secured creditor of the company would have the right to recover the entire amount given by him to the company. This follows Section 444D (1) which protects his claims from being extinguished even after the execution of a DOCA. However, this right would be extinguished if Ravi had exercised his voting rights during the approval and execution of the DOCA.
In case Ravi is successful in getting back the amount owed to him by the company then the unsecured creditors of the company would have to accept the remaining $5000 as full and final settlement of their claims. This amount would be distributed among them at a agreed upon rate.
|
Payment to Unsecured Creditors: |
|||
|
Particulars |
Amount ($) |
||
|
Unsecured Debts |
1,20,000 |
||
|
Secured Debts |
90,000 |
||
|
Total Debt |
2,10,000 |
||
|
Total Assets |
95,000 |
||
|
Less: Secured debts |
90,000 |
||
|
Unsecured creditors pay |
5,000 |
Reference list:
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Armour, J. and Ringe, W.G., 2013. European company Law 1999-2010: renaissance and crisis. Law Ukr.: Legal J., p.144.
McLaughlin, S. and McLaughlin, S., 2013. Unlocking company law.Routledge.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Harris, J., 2017. Class Warfare in Debt Restructuring: Does Australia Need Cross-Class Cram down for Creditors’ Schemes of Arrangement. U. Queensland LJ, 36, p.73.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.
McQueen, R., 2016. A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920. Routledge.
Bronitt, S.H., 2013. Policing Corruption and Corporations in Australia: Towards a New National Agenda.
Morrissy, S., 2016. Benefit corporations: A sophisticated and worthy reform. Governance Directions, 68(1), p.24.
Chia, H.X. and Ramsay, I., 2015.Section 1322 as a Response to the Complexity of the Corporations Act 2001 (Cth).
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