Discuss about the Corporate Law for Insolvency of Corporations.
A person who is capable of repaying his debts or loans on their due dates is considered as solvent under the Corporations Act 2001. Therefore, the person who is not able to repay his debts or loans on the due date is known as insolvent. According to the Australian law, corporations are considered as insolvent and individuals are considered a bankrupt. In Australia, the law of insolvency regulates the position of an organisation which is unable to pay back their debts or suffering from financial crises (Hensher, Jones and Greene 2007)
According to the Australian Securities & Investments Commission 2014, the companies which are unable to repay their debts are considered as insolvent. The process of organisations insolvency is regulated by Corporations Act 2001 (Cth). As per Wood (2007), the primary objective of this act is to maintain a balance between the benefits of debtors, creditors, and the public, in the process of insolvency. The long-term objective of an insolvent corporation is not considered by the law of insolvency. The goal of directors to restart the business of the company by reorganisation its structure is not permitted by the law of insolvency.
According to Ramsey and Sim (2010), the financial crisis faced by organisations in its day-to-day working is the primary sign of a corporation’s insolvency. The following can be considered as the sign for insolvency of a corporation:
The commission of taxation, after realising the above-mentioned financial crises of a company, issued a penalty notice against the corporation. This notice served to the directors of the organisations regarding the non-payment of company’s debts. If the corporation failed to take proper measures in 21 days, the commissioner is authorised to recover the amount of unpaid taxes from the corporation (Australia 2015).
After assessing the financial crises of a corporation, it is the duty of directors to seek professional advice from legal and financial experts to protect the solvency status of a corporation. According to Tomasic (2006), the legal professionals assist organisation by conducting a solvency review over the financial statements of the enterprise and provide alternative solutions to the directors. The Proper alert should be provided to the directors regarding the alternative available for the protection of the organisation. The alternative options include various processes such as reconstruction or internal management, reorganisation, refinancing, altering the company’s procedure or employing an external administrator for managing the process of the company.
The directors became liable towards the shareholder and creditors of the organisation if the enterprise declared as insolvent or is presumed to be insolvent in the near future. As per Wyburn (2014), the director’s duty enforces them to stop any trading activity or carrying the business of the company when it is declared insolvent. The directors should collect all the necessary information regarding the financial status of the corporation. Further, if the trading conducted by a company after being declared as insolvent is not properly recorded, then legal actions can be taken against the directors of such organisation.
There are several avenues available for an corporation to avoid the insolvency. According to Ziegel (1994), if the corporation is presumed to be declared as insolvent, the duty of directors is to avoid acquiring any new debt or loan. There are various types of internal and external restructuring, such as selling-off, recapitalisation, swapping the debts for equity, spinning-off, equity carve-outs, purchasing the leverages, paying back the debts, refinancing the business and compromising the creditor’s arrangements.
After declaring the insolvency, the parties of a corporation may decide to liquidate the company. As per Tribe (2012), the voluntary liquidation is also called creditors’ voluntary liquidation, in which the creditor or shareholder decided to liquidate the organisation. The parties appoint an independent liquidator to perform the activities of liquidation. The liquidator sells the corporation’s assets and uses such money to pay back the debts of the company. Another type of liquidation is based upon the order of the court. This liquidation is involuntary in nature and the court decides to wind up the company for the interest of its parties and public. In involuntary liquidation, the independent liquidator is appointed by the court to perform the duties of liquidation process and after completing the process a report is sent to the court regarding the actions taken by liquidation (White, Doole, Pannell and Florec 2012).
Other than winding up the company, the creditors might decide to put organisation under external management. To protect the interest and share of creditors, the directors might decide to put corporation under external administration. The creditors hire an external administrator to manage the operation of the organisation, to operate and manage the corporation’s assets. The administrator has similar powers as a director of a company, and he is expected from suing by the creditors or any third party due to his actions. Without the administrative permission or court’s approval, the creditors or any third party cannot file a lawsuit against the company. Following are few methods in which a corporation can be externally administered:
The data provided by ASIC in the last quarter of the 2016-17 financial year, as the summary study of June Quarterly Statistics of 2017 provide a growth of 28 percent in the number of corporations seeking for external administration. Till June 2016, the quarter’s total has reduced by 3.7 percent and the percentage of corporations seeking external administration for the same quarter was lower than 4 percent (Symes and Duns 2012).
There are several topical issues regarding the company’s insolvency which are analysed after declaring as insolvent. According to Fletcher (2004), a liquidator is appointed in the organisation whose task is to examine the corporation’s transactions. The liquidator evaluates the decisions taken by key managerial personnel of the corporation. The liquidator ascertains whether the decision of key managerial personals was according to the interest of the company and all the compliance were followed accordingly. The liquidator decides whether directors are liable for decisions taken by them, or they have acted in good faith of the corporation. Kinsler (1997) provided that if the directors are liable then liquidator has an opportunity to collect the remaining amount of debt from them personally. The action of the director which is against the company’s interest or breaches their duty can hold them liable for the liability and liquidator can recover damages from them.
If the actions of directors were against the interest of corporation or creditors than liquidator can recover the damages from them. Goode (2011) provided that the directors, who have intentionally breached his duties or did not take actions while other directors were breaching their duties, shall be held liable for the payment of debts. The personal property of directors can be used by the liquidator for the payment of debts. Section 180-183 provides the provisions regarding the civil liability of directors under the Corporation Act 2001 (Cth). The directors can be held liable for a sum of $200,000 based upon the directions of ASIC. If a loss suffered by a corporation which is directly related to the director’s actions, then the court can hold such director liable for the payment of such loss. The breach of directors or the noncompliance of regulations can be held them liable for criminal liabilities. Any intentional fraud, dishonesty or not performing duties under the good faith for a corporation, to gain an unfair advantage which is detrimental for the organisation can hold a director liable for criminal actions.
If the directors are found guilty of violating the regulations or breach of his duties, the application of section 1317E is provided by the court under the section 588G of the Corporation Act 2001 (Cth). The ASIC is authorised to examine the situation of the corporation upon the declaration provided by the court. The ASIC provides information to the court to apply the monetary penalties over director or whether the actions of the director were according to the provisions of the Corporation Act 2013 (Cth) (Purslowe 2011).
The Australian Securities and Investment Commission or ASIC is authorised to regulate the aspects of the market and financial services of the corporations in Australia. The ASIC is authorised to register various accountants or liquidators to provide their services in company’s insolvency procedure. According to Baxter, Gawler and Ang (2007), various powers and tools have been provided to the ASIC regarding the examination and enforcement of ASIC act and the Corporation Act 2001 (Cth). The ASIC can initiate legal proceedings or give order for investigating corporations which contravene or did not implement the proper regulations. The Australian Restructuring Insolvency and Turnaround Association (ARITA) is a commission associated in Australia, to prove their support to the corporations who are on the verge of insolvency or restructuring, to help them maintain solvency through qualified professionals. The ARITA perform its actions according to the provisions of Australian Restructuring Insolvency and Turnaround Association, 2016 (Arnold, Ferrier and Murray 2014).
Due to globalisation, the competition between corporations has grown significantly. Many companies face insolvency due to such competition or due to the wrongful actions of directors. While corporations are on the verge of insolvency, the interest of creditors and other financiers is necessary to be protected. The directors should perform their duties carefully to pay back the debts of creditors. There are various types of external regulators’ available for the organisations in Australia. The authorities manage and support the organisations while they are facing insolvency. ASIC have authority to examine the transaction of the company, based on the direction of the court, to ascertain that directors have performed their duties properly. The ARITA provide qualifies professionals assistance to organisations to avoid insolvency. Various facilities such as reorganisation or restructuring are provided by this commission to protect insolvency of corporations in Australia. Voluntary administration procedures used by corporations while insolvency is more cost-effective than other methods, which can assist directors to provide the payment of creditors.
References
Arnold, K., Ferrier, N. and Murray, M., 2014. A quarterly round-up of the ARITA Insolvency Specialist Team’s work on law and practice issues. Australian Insolvency Journal, 26(2), p.47.
Australia, C.P.A., 2015. Small business survey program: Financial management, insolvency and fraud.
Baxter, R.A., Gawler, M. and Ang, R., 2007, December. Predictive model of insolvency risk for Australian corporations. In Proceedings of the sixth Australasian conference on Data mining and analytics-Volume 70 (pp. 21-27). Australian Computer Society, Inc..
Fletcher, I.F., 2004. UK corporate rescue: recent developments–changes to administrative receivership, administration, and company voluntary arrangements–The Insolvency Act 2000, the White Paper 2001, and the Enterprise Act 2002. European Business Organization Law Review (EBOR), 5(1), pp.119-151.
Goode, R.M., 2011. Principles of corporate insolvency law. Sweet & Maxwell.
Hensher, D.A., Jones, S. and Greene, W.H., 2007. An error component logit analysis of corporate bankruptcy and insolvency risk in Australia. Economic Record, 83(260), pp.86-103.
Kinsler, J.S., 1997. Corporate Insolvency in Australia and the United States: Uncommon Origins, Dissimilar Objectives. Int’l. Trade & Bus. L. Ann., 3, p.129.
Lewis, P.B., 2001. Trouble down under: Some thoughts on the Australian-American corporate bankruptcy divide. Utah L. Rev., p.189.
Purslowe, R., 2011. Decisions in the Twilight Zone of Insolvency-Should Directors Be Afforded a New Safe Harbour. U. Notre Dame Austl. L. Rev., 13, p.113.
Ramsay, I. and Sim, C., 2010. Personal Insolvency in Australia: An Increasingly Middle Class Phenomenon’. Federal Law Review, 38, p.283.
Sellars, M.A., 2001, February. Corporate voluntary administration in Australia. In Forum for Asian Insolvency Reform. Insolvency reform in Asia: An assessment of the recent developments and the role of judiciary. Bali, Indonesia (pp. 7-8).
Symes, C. and Duns, J., 2012. Australian insolvency law. LexisNexis Butterworths.
Tomasic, R., 2006. Insolvency Law in East Asia. Ashgate Publishing, Ltd..
Tribe, J., 2012. Discharge in bankruptcy: An historical and comparative examination of personal insolvency relief in England and Australia. Insolvency Law Journal, 20(1), pp.240-263.
Wessels, B., 2006. International insolvency law (Vol. 2). Deventer: Kluwer.
White, B., Doole, G.J., Pannell, D.J. and Florec, V., 2012. Optimal environmental policy design for mine rehabilitation and pollution with a risk of non?compliance owing to firm insolvency. Australian journal of agricultural and resource economics, 56(2), pp.280-301.
Wood, P.R., 2007. Principles of international insolvency. Sweet & Maxwell.
Wyburn, M., 2014. Debt agreements for consumers under bankruptcy law in Australia and developing international principles and standards for personal insolvency. International Insolvency Review, 23(2), pp.101-121.
Ziegel, J.S., 1994. Current developments in international and comparative corporate insolvency law. Oxford University Press.
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