Insolvency is considered as that situation under which liability of the company exceeds the assets of the company. Section 95A of the Corporation Act 2001 states that person is considered as solvent, if individual paid the debts and discharge all the liabilities of the company at the time when such debts and liabilities become due and payable, and person or organization is considered as insolvent if they are not solvent. In case, Sutherland v Hanson Construction Materials Pty Ltd (2009), Court stated that on the primary basis Solvency was determined through cash flows of the company. However, it must be noted that position of the balance sheet was not considered as solvency test (Corporation Act, 2001).
This essay states various aspects of insolvency and role of directors, ASIC, creditors and other stakeholders of the company in the process of insolvency. Lastly it is concluded with brief conclusion.
Signs for insolvency:
As per the regulatory guide 217 of the ASIC that is Duty to Prevent Insolvent Trading: Guide for Directors (2010), states the following signs of insolvency:
It is the duty of director to take reasonable measures in case of insolvency, and these measures are stated below:
Section 588G of the corporation Act 2001 impose duty on director of the company to prevent the insolvent trading in the company. This section is applicable on the people who are appointed as the director of the company and on those also who are not appointed as the director of the company but they acted as the director of the company. Taylormaid Marine Industries Pty Ltd v Beaurepaire & Ors is the appropriate case for understanding this fact. In this case, Court stated that section 129 of the Act states that in some particular cases person who was acting as director can be considered as director of the company.
This section states that director of the company is under obligation to prevent the organization from incurring the debt if:
In case director of the company, committed criminal offense, then director is liable to fine of up to 2,000 penalty units and imprisonment for five years (Corporation Act, 2001; AICD, n.d.).
There are number of options available to the directors if they suspect insolvency:
In Australia, voluntary administration is considered as the most common method of reorganization, and it is popular because of its speed and simplicity. In other words, voluntary administration is applied when directors or secured creditors of the company (on most of the assets of the company charge was created) appoint an external administrator, and such administrator is known as voluntary administrator.
Voluntary administrator investigate the affairs of the company for the purpose of reporting the creditors of the company, and advice the creditors whether company should enter into a deed of company arrangement, go into liquidation, and be returned to the directors. Generally, voluntary administrator appointed by the directors of the company when directors believe that company is insolvent or becomes insolvent. This can be understood through case law, Long v. Home Health Services, 43 Wn. App. 729, 734 (1986).
On the other hand, voluntary administrator can be involuntary also. When chargee of all the assets of the company, liquidator, or provisional liquidator appoints the administrator then such administrator is known as involuntary administrator.
The major difference between voluntary and involuntary interventions is stated below:
Company can choose member’s voluntary winding up for the purpose of winding up the operations of the company. As per this method members of the company can pass special resolution for winding up the company and for appointing the liquidator (ASIC, n.d.). Liquidator is appointed under section 495 of the Corporation Act 2001, and as per this section company must appoint liquidator in the general meeting. Liquidator is under obligation to wind up all the affairs of the company distribute the property for the purpose of paying all the debts of the company.
This section further states that if any vacancy occurred in the office of the liquidator because of the death, resignation, or any other purpose then it is the duty of the members to appoint the liquidator for filing the vacancy.
For the purpose of subsection 2, general meeting can be held by any contributory or if there were two or more liquidators then by those liquidators.
General meeting must be held as per the provisions of this Act or as per the constitution of the company. It can be in any such manner stated under the application submitted by the contributory or by the continuing liquidators, determined by the Court (Corporation Act, 2001).
It must be noted that liquidators are appointed for the purpose of paying out all the debts of the company, and paying dividend to the shareholders if there is any surplus asset of the company, and after all these deregister the company.
Quarterly insolvency statistics of ASIC for the last quarter of the 2016/17, stated high increase of 28% related to those companies which entered into external administration. Almost 2198 administrators are appointed as compared to 1717 administrators in the last financial year. In case of insolvency quarterly total was 3.7% lower as compared to 2016 June quarter. Percentage related to those companies which opt for EXAD for the quarter is 4 % low in related to new incorporations.
There are number of states in which % related to liquidation was rise. On national basis it rise up to 25.5 %, and it especially rise in Western Australia up to 127.9%, Victoria up to 34.7% and New South Wales up to 13.1%.
Winding up which are initiated by the directors of the company are increased up to 35.9%, and the largest increase in this category is in Victoria up to 57.8%, Queensland up to 28.6% and New South Wales up to 14.4% (ASIC, n.d.).
Corporation Act defines the solvency of the person under section 95A, and as per this Act if person paid the debts and discharge all the liabilities when such debts and liabilities become due and payable then such person is solvent, and person or organization is considered as insolvent if they are not solvent.
Insolvency law related to Australian Companies failed to consider the long term prospects of the Australian company. This law also fails to consider the competition skills, other assets, brand value, and reasons of the premature closure and liquidation of the organization.
Insolvency law does not provide any measures related to the restructuring of the organization or providing assistance to the organization, through which company regain its profitability and secure the creditor’s interest.
In other countries, insolvency law mainly focus on restructuring of the organization rather than the liquidation of the company, such as ‘Chapter 11’ (Ch. 11) provisions of the US Bankruptcy Code is considered as the most liberal Code and it mainly focus on the restructuring of the company. Australian Government can use this code as a model for determining the provisions of insolvency. There are some important provisions of this chapter which must be incorporated in insolvency law of Australia:
ASIC may deregister the company if they believe that company ceased trading and it has overdue fees and penalties. Some reasons are stated below on the basis of which ASIC can deregister the company:
After considering the above facts, it is clear that all the provisions of the insolvency mainly focus on the liquidation of the company and interest of the creditors, but they fails to consider the measures related to the restructuring of the company and interest of the stakeholders other than creditors.
However, provisions also state that company is liable to pay the cost of the liquidator, which impose extra burden on companies. This can be understood through case law Ascot Community Sports Club Incorporated (in liquidation) [2014] QSC 258. In this case, liquidator claims their Cost of $70000 and Court stated that company was liable to pay.
Conclusion:
All the provisions related to insolvency law are discussed, and also the liability of the directors under this Act. In this complete focus is on the insolvency issues and its measures through legislations and case laws.
References:
AICD. Insolvent trading. Available at: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx. Accessed on 21st August 2017.
ASIC, ( 2010). Duty to prevent insolvent trading: Guide for directors. Available at: https://download.asic.gov.au/media/1241384/rg217-29july2010.pdf. Accessed on 21st August 2017.
ASIC. Corporate insolvencies: June quarter 2017. Available at: https://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf. Accessed on 21st August 2017.
ASIC. Types of Insolvency. Available at: https://asic.gov.au/regulatory-resources/insolvency/types-of-insolvency/. Accessed on 21st August 2017.
ASIC. ASIC initiated deregistration of company. Available at: https://www.asic.gov.au/for-business/closing-your-company/deregistration/asic-initiated-deregistration-of-company/#ReasonsforDereg. Accessed on 21st August 2017.
Ascot Community Sports Club Incorporated (in liquidation) [2014] QSC 258.
Gupta, N. Insolvency laws in Australia. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/InsolvencyLaws. Accessed on 21st August 2017.
Long v. Home Health Services, 43 Wn. App. 729, 734 (1986).
Quinlan, M. (2005). Formal Reorganization in Australia. Available at: https://www.allens.com.au/pubs/pdf/insol/pap15mar05.pdf. Accessed on 21st August 2017.
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