Discuss About The Insolvent Trading And Notices To Creditors?
A company becomes insolvent when it becomes incapable of paying debts. The liabilities of the company become bigger than the assets of the company, which makes the company incapable to pay the debts to its creditors, further making it incompetent to fulfill the basic requirements that are indispensible for carrying on the operations of the company. Several circumstances in a company indicate the signs of insolvency. Such circumstances entail maximum borrowing of the company when the company has reached the limit of the bank overdraft and it is unable to borrow without providing personal guarantees. the suppliers of the company refuses to supply credits and the company lacks adequate assets to obtain a secured short-term loan.
Another instance that indicates the company is about to become insolvent is when the organization is unable to pay off its lenders, which further acts as a threat, and entitles the company to legal proceedings. While the company becomes insolvent, it becomes unable to make payments to its employees and workers as well. The following are the two tests, which determines the insolvency of the company:
After the company is declared as insolvent, it becomes imperative for the company to take necessary measures to deal with the situation reinstate the company to the position as it was prior to such insolvency. The directors have significant role to play when it comes to the insolvency of the company. They are required to act wisely and with diligence to deal with the situation and take measures that is in the best interest of the company and its members (Asic.gov.au. 2017). The directors are required to concentrate on the financial status of the organization for which it is important that Cash liquidity ratio is subjected to strict mentoring and placed under surveillance. The directors must not allow the company to incur any further debts and until it becomes feasible for the company to refinance, restructure or obtain equity funding for recapitalizing the company, the company may appoint either a liquidator or a voluntary administration.
Voluntary administration enables a company to resolve the future direction of the company where a responsible person is appointed who exercises control over the company with a view to prevent the company and its business. In the case FPJ Group Pty Ltd (in liq) (“Hussain’s case”) [2016] FCA 392, it was held that the person appointed shall be responsible for conducting the business operations in a way that produces better results and provides better return to the creditors of the company. A liquidator shall take control of the company to wind up the affairs of the company in a fair and orderly manner, thus ensuring benefits of the creditors (Asic.gov.au.2017).
The directors of a company are required to act in a manner that is in the best interest of the company. The Corporation Act 2001 (Cth) (CA) has stipulated several statutory provisions that must be followed by the directors of the company. In the event of non-compliance of such statutory rules, the statute penalizes the directors to the extent of exclusion of the director/directors from the board of the company. Under section, 588 G of the Corporation Act it is imperative that the directors of the company are not engaged in any form of trade that is detrimental to the company or results in insolvency of the company. The directors of the company are responsible for paying off the liabilities of the company when the company becomes insolvent.
In Carrello as liquidator of Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s case”) [2016] WASC145, the liquidator brought legal action against the directors of the company and the its parent company for engaging in insolvent trading under section 588G and 588V of the CA 2001(cth) respectively. Although the liquidator failed to establish the claim that the company failed to pay off its debts but the company was imposed with a fine of $1.06 million for being engaged in insolvent trade.
Although the company is entitled to penalties for being engaged in any insolvent trading, this, committing a breach of section 588H, the company may defend itself if it succeeds in establishing the following factors:
When the liabilities of the company are more than its assets, the company becomes unable to pay off its debts to the creditors with the assets of the company, the company winds up under such circumstances. When a company winds up, the assets of the company are sold off for the purpose of paying off its liabilities and debts and shuts down the company. A company could be wound up in two ways: Voluntary winding up and involuntary winding up of the company.
Voluntary winding up of the company takes place when the members of the company agree to shut down the company or wind it up. Involuntary winding up of the company, as the name suggests, is contrary to the voluntary procedure of winding up of the company. A voluntary winding up of the company is also known as Creditor’s voluntary liquidation and in this form of liquidation, the members and the directors of the company are allowed to select the liquidator who would sell of the assets and distribute the funds among the creditors as mentioned under the CA 2001 (Cth).
In case of involuntary winding up, a creditor may initiate the liquidation by applying before the court for the winding order. Unlike voluntary liquidation, the creditors will choose the liquidator in involuntary liquidation. A creditor may initiate voluntary liquidation of the company when a company becomes solvent whereas in case of involuntary liquidation process, it can take place even when the company is solvent. It is often observed that when the creditors initiates involuntary liquidation, the creditors becomes entitled to claim any form of misconduct that the creditors had faced or have observed within the company.
The primary issue that arises in the liquidation process is that the process is expensive to such an extent that the directors shall have to use their personal assets to complete the liquidation process. Under such circumstances, the directors are largely affected owing to the fact that they are also liable to pay of the liabilities and losses suffered by the company which may have an adverse effect on their career. If any debtor is engaged in any fraudulent trading, it is considered as punishable by law under section 1317E of the Act. The debtors are often subjected to disqualification under section 206 A of the Corporations Act 2001 (Cth).
As discussed above that while the company becomes insolvent it may resort to voluntary administration, which is evident from several polls that have been conducted in the country. The polls indicate that there has been an incline in the insolvency rate of the Australian companies. It further reveals that most of the companies that have become insolvent have resorted to voluntary administration, which is evident from the statistical data of April 2017. The data reveals that an average of 5% increase in the insolvency of the companies who have appointed voluntary administrators. The secured creditors including banks are reported to have appointed an average of 1355 workers in April 2017, which has increased within a decade. The statistical data has been obtained from the official report of Australian Investment and the Security Commission (AISC).
There had been various issues, which leads to insolvency of a company in Australia amongst which the most common reason for such insolvency is inadequate cash flow in the company accounts as stipulated by the ASIC. The inadequate cash flow disables the company to fulfill the demands and requirements of the creditors, which further results in winding up of the company. A company is required to consider the early warnings that indicate that the company may become subjected to insolvency if not checked on the right time (Brown 2016). A company indicates signs of insolvency if the organization lacks proper management skills which results in irrational and poor ways of dealing with the business operations of the company.
Any reasonable person would not act in the way such company acts with respect to the poor management of the company business. Any company that lacks proper managing arrangements, it is evident that it would suffer significant loss. However, in Australia, most of the companies end up in court because of the fact that most of the companies are found to be engaged in the insolvent trade practices. It is evident from the Queensland Nickel company that assets worth more than 200 million were frozen because the company had been engaged in some insolvent trade practices ((Asic.gov.au. 2017).
The Australian Investment and the Security Commission (ASIC), that governs the financial transactions of companies in Australia, is responsible for monitoring that every company is maintaining transparent business operations. The ASIC is also accountable for managing the flow of capital in the business organizations and monitor whether any corporation has been engaged in any conduct that is contrary to the statutory provisions of the CA Act 2001(Cth). Any company that is found to be in breach of the statutory provisions shall be subjected to the stipulated penalty. The ASIC plays the role of a regulator between the market or society and any company that is about to become insolvent or has already become insolvent.
The authority governs the corporations in enhancing and improving the internal operations of the organization by stipulating necessary statutory provisions, which enable the company, learn about insolvency and the measures to reinstate its position as it was before becoming insolvent. It further provides provisions that stipulate the procedures to repay the creditors while the company becomes insolvent. The ASIC also provides guidance to the other corporations thus, enabling them to accelerate their progress and improve their competence, This further leads to improve the capability of the company to become self-reliant and prevents itself from engaging into any insolvent trading activities.
Conclusion
Administration refers to the collective corporate rescue procedures that are implemented for the benefit of all the creditors where the assets of the company are safeguarded by taking a reasonable and effective creditor action. Receivership is the process where the holder of a floating charge against the company appoints a receiver or a manger that is responsible for selling off the assets of the company to pay off the secured debt. As discussed above, liquidation is the winding up of the company by selling off its assets and paying the creditors.
Reference List
Asic.gov.au. (2017). Insolvency for directors | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/ [Accessed 18 Sep. 2017].
Asic.gov.au. (2017). Winding up a solvent company | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/for-business/closing-your-company/deregistration/winding-up-a-solvent-company/ [Accessed 18 Sep. 2017].
Australia, C.P.A., 2015. Small business survey program: Financial management, insolvency and fraud.
Blakeley and Australian Music Pty Ltd v Yamaha Music Australia Pty Ltd (“Blakeley’s Case”) [2016] VSC 231.
Brown, A., 2015. ASIC: From little things, big things grow-lodging and publishing. Australian Insolvency Journal, 27(1), p.42.
Brown, A., 2016. ASIC: Better communication, insolvent trading and notices to creditors. Australian Restructuring Insolvency & Turnaround Association Journal, 28(1), p.42.
Carrello as liquidator of Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s case”) [2016] WASC145
Coggins, J., Teng, B. and Rameezdeen, R., 2016. Construction insolvency in Australia: reining in the beast. Construction Economics and Building, 16(3), pp.38-56.
Corporation Act 2001 (Cth)
Elks, S. and Elks, S. (2017). Clive faces ‘massive mega trial’. [online] Theaustralian.com.au. Available at: https://www.theaustralian.com.au/news/nation/clive-palmer-faces-court-set-for-one-massive-mega-trial/news-story/52d0666f855e0d54151da588928cab31 [Accessed 18 Sep. 2017].
Harnahan, P., Ramsey, I. and Stapledon, G. (2017). COMMERCIAL APPLICATION OF COMPANY LAW. 18th ed. Oxford University Press.
Hussain v CSR Building Projects Limited; in the matter of FPJ Group Pty Ltd (in liq) (“Hussain’s case”) [2016] FCA 392.
Innes, K., 2016. Australian insolvency law: Cases and materials [Book Review]. Ethos: Official Publication of the Law Society of the Australian Capital Territory, (240), p.61.
Osborne, M., 2016. Bankruptcy administration in Australia. Australian Restructuring Insolvency & Turnaround Association Journal, 28(2), p.22.
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