Corporate insolvency handbook

1800 246 801 svpartners.com.au

A new and challenging world in a changing regulatory environment for business requires innovative thinking and a fresh approach to the traditional models used in business reconstruction, risk management and insolvency services.

This Handbook, one in a series of SV Partners information guides, provides practical information to a number of professions and industries involved in the insolvency arena.

Readers are provided with an overview of two options available to both companies (in distress) and creditors – liquidation and voluntary administration.

The Handbook seeks to provide an overview of what may be expected under such appointments in terms of rights and obligations of both creditors and the appointee; reporting requirements which must be met, together with details of the supervision undertaken on the administration and the accountability of the appointees.

Amongst the Appendices is a comparison of different types of corporate insolvency and voluntary administration; including advantages and disadvantages, and a flow chart which provides a pictorial view of voluntary administration.

Please contact our offices should you wish to speak with a director of the firm who specialises in insolvency and risk management, or to gain detailed information about the overview provided by this guide.

The information contained in this Handbook is intended as a general guide. It is not intended or to be taken as advice to any person. While it is believed that the information contained herein is accurate and reliable, no warranty is given as to the accuracy and completeness of any statement or opinion. No liability is accepted by SV Partners Pty Ltd, its directors and/or staff or any associated entity for any error or omission or on any other account. Further information is available on our website www.svpartners.com.au

Terry Van der Velde Managing Director

foreword


LIQUIDATIONS

Who Appoints the Liquidator?

Who Must the Liquidator Report to?

1.0 Creditors and Shareholders

1.1 The Committee

1.2 Reports to Creditors

1.3 Meeting of Creditors

1.3.1 Calling of the Meeting

1.3.2 The Meeting

1.3.3 Voting

1.3.4 Proxies

1.3.5 Who May Vote?

1.3.6 Secured Creditors

1.4 So you are not happy with the result?

1.5 General Supervision

2.0 The Australian Securities & Investments Commission

2.1 Liquidator’s Accounts

VOLUNTARY ADMINISTRATIONS

How Does the Administration Begin?

What Happens on the Appointment of an Administrator?

The Administrator’s Personal Liability

So the Creditors Accept a Deed of Company Arrangement – What Now?

Creditor Voting

Particular Reasons for a registered security holder to support an

Deed of Company Arrangement (DOCA)?

Why Should an Unsecured Creditor Support a DOCA?

CORPORATE INSOLVENCY COMPARISONS

Further Information

contents


The types of liquidations you will have contact with are:

Creditors’ voluntary liquidation;

Members’ voluntary liquidation; and

Court liquidation.

Purpose of liquidation:

1. To realise assets of the company and distribute the proceeds amongst its creditors.

2. To investigate the affairs of an insolvent company to ascertain the reason for its failure and to ensure all recoverable property is retrieved – eg preference payments and uncommercial transactions.

The liquidator has the responsibility of bringing the company’s affairs to an end, and in this process is accountable to:

a) Creditors b) Shareholders c) The Court

Creditors can be either secured or unsecured.

In this paper we concentrate mainly upon the rights of unsecured creditors.

The Courts have stated the duties of a liquidator is:

a) to investigate the affairs of a company from its foundation onwards;

b) to act impartially;

c) to act with skill and diligence;

d) to avoid placing himself in a position where his/her interest conflicts or is likely to conflict, with his/her duties.

A liquidator should get in all assets, and discharge all the liabilities, so far as the assets allow. He/she should be alert to ascertain any misfeasance by officers, former officers or promoters and, so far as the assets allow, proceed to recover any preferences or any damages for which any such persons may be liable. Where the history of the company shows a likelihood of some misfeasance, he/she should investigate, so far as the assets allow, to see whether officers or former officers have infringed the requirements of the law, at least where the liquidation will otherwise result in no payment at all to external creditors, and where the external creditors would have been paid in full if transactions which raise or assist to raise the likelihood, had not been entered into. If the assets available (pending any recovery for misfeasance etc) do not allow full compliance with the relevant duties, the liquidator should report the circumstances, with his/her opinion of the likelihood, and the reasons for his opinions, to the interested creditors and to the "Australian Securities and Investments Commission” (ASIC). Liquidators actions are governed by the powers outlined in the Corporations Act 2001.

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WHO APPOINTS THE LIQUIDATOR?

Creditors Voluntary

The company's members appoint the liquidator by resolution at a meeting of

members.

The creditors may, by resolution at a meeting of creditors to be convened

within 11 days of the meeting of members, appoint someone else if they so

desire or feel the current liquidator has a conflict of interest.

Court Liquidation

While the Court (either the Federal or Supreme) appoints the liquidator, the

creditors are able to nominate the liquidator at the time of the hearing of the

petition for the winding up order.

Invariably the creditors’ nominee will be appointed by the Court. The

nominee must, in these circumstances, be an Official Liquidator.

Members’ Voluntary

The company's members appoint the liquidator at an extraordinary meeting

of members.

WHO MUST THE LIQUIDATOR REPORT TO?

1. To creditors and shareholders; and

2. To the Australian Securities and Investments Commission.

1 Creditors and Shareholders

The liquidator is required to report to creditors regarding the

circumstances leading up to the liquidation, the likely return to creditors

and the outcome of his/her statutory investigations.

Creditors have various voting rights during the liquidation. These can be

expressed through a nominated Committee of Inspection.

1.1 The Committee

The function of the Committee is to advise and assist the liquidators and/or

to supervise the conduct of the liquidation.

The Committee’s views must be taken into account by the liquidator but he/she does have the right to make the final decision – S479(1) and S479(4).

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The Committee does have the following powers:

General Control S479

Convene a Committee Meeting

S549 The liquidator must have regard to the Committee’s directions.

Right to replace a member S550

To approve or reject Liquidator’s remuneration.

S473

Authorise the Liquidator to enter into long-term arrangements over 3 months.

S477(1)(a)(2B)

Compromise a debt due to the company greater than $20,000.

S477(2A)

Right to direct investment of surplus funds.

The Committee would generally be elected at the first meeting of creditors.

While there is no limit on the number of committee members it would generally be 3 to 5 persons.

Formal meeting procedures as for creditors meetings apply, however the usual 14 days notice is not required.

The liquidator will become the chairperson, and must keep minutes of the meeting. These must record who is present and be filed with the Australian Securities and Investments Commission within one month of the meeting.

To be eligible to be a Committee member, creditors must be represented

a) personally; b) by an attorney; or c) by a person authorised in writing by the creditor.

Committee members are not able to obtain personal gain by virtue of the position they hold. If they do, then a creditor may apply to have the transaction set aside. The Court has the power to approve transactions before they are entered into; which if approved can go ahead.

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1.2 Reports to Creditors Creditors will almost invariably receive a written report, or a number of reports, from the liquidator. Contents of Reports a) Initial Report This is likely to be no more than a brief introduction and advise of the liquidator’s appointment, and provide an outline of the company’s asset and liability position. b) Subsequent Reports Will probably be in some detail commenting on:

• strategy of realisation of assets; • success in realisation of assets; • summary of Report as to Affairs; • statement of Receipts and Payments; • details of the basis of the liquidator’s charges; and • results of investigations.

c) Verbal reports Will be given to creditors when

• they contact the liquidator’s office direct; • at a meeting of creditors

1.3 Meeting of Creditors If required to do so by not less than 10% in value of creditors, then a liquidator must convene a meeting of creditors. The costs will be borne by the party requiring the meeting, unless either the Court or the Committee of Inspection approved the cost being an expense of the liquidation. If the liquidator decides to call a meeting then the cost will be an expense of the liquidation. Other than the 10% requirement above, there is no compulsory obligation on a liquidator to call a meeting. HOWEVER, the liquidator is likely to call a meeting to: a) report on matters of substance; b) seek creditors’ agreement to a course that the liquidator proposes to undertake; c) obtain funding; d) obtain approval of remuneration (if there is no Committee);

liquidations


e) seek information; f) obtain authority to enter into long term agreements – S477(2B); and g) compromise a debt due to the company exceeding $20,000 – S477(2A). 1.3.1 Calling of the Meeting Creditors must be given 14 days notice of the meeting which can be sent by:

• personal delivery; • prepaid post; • fax; or • DX – document exchange.

Creditors can nominate to receive notices by electronic means if they so request. At least 7 days before the meeting, the notice of meeting must be advertised in a daily newspaper circulating in a state where business was conducted by the company at any time during the two years immediately before the meeting. 1.3.2 The Meeting Other than to: a) elect a chairperson; b) accept proofs of debt; and c) adjourn the meeting a quorum, which is comprised of a) if the number of persons entitled to vote exceeds 2 – at least 2 of those persons (personally or by proxy); b) if only one person is, or 2 are, entitled to vote – that person or those persons (personally or by proxy); Must be present before a meeting can start. The meeting must start within 30 minutes of the time nominated in the notice of meeting otherwise it is adjourned to: a) the same day, time and place the next week or b) the day the Chairperson nominates being not less than 7 days and not more than 21 days after the day of the adjourned meeting. Creditors may force an adjournment of a meeting to another day and place.

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1.3.3 Voting Resolutions will be decided on voices unless a poll is called for before the declaration of the result of the voices by: a) the Chairperson; b) 2 persons participating in the meeting; or c) by a person holding not less than 10% of total voting rights of all people entitled to vote at the meeting If a Poll is conducted a resolution is carried if the resolution is carried by a majority in number and value. The Chairperson has a casting vote. 1.3.4 Proxies A liquidator must send to the creditor with the notice of meeting a form of Proxy. Creditors can appoint any natural person over 18 years of age to act as the proxy. If the proxyholder is the liquidator, or an employee or his/her partner, the proxy cannot be used for the approval of the liquidator’s remuneration if it is to be paid out of the assets of the company (unless the remuneration is paid as if the liquidator was an unsecured creditor). A company can only participate in a meeting by appointing a proxy. The proxy given by a company should: a) be signed by a person whose role in the company clearly authorises him or her to appoint a proxy; and b) be accompanied by a copy of a resolution under S249(3). The lodgement of a proxy by facsimile is in order, so long as the original is also lodged within 72 hours after lodging the faxed copy. The convenor of the meeting can require proxies to be lodged prior to the commencement of the meeting, but not more than 48 hours before its commencement.

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1.3.5 Who May Vote? Creditors must have lodged with the Chairperson details of their debt before they can vote. The liquidator may require a formal proof of debt. In addition, the Chairperson must admit the debt for voting purposes, before the creditor can participate in the meeting. Creditors cannot vote in respect of: a) an unliquidated debt or claim; b) a contingent debt or claim; and c) a debt where the value of it has not been established unless a just estimate of its value has been made 1.3.6 Secured Creditors Can only vote for the difference between the value of their registered security and the amount actually owed. If a secured creditor votes in respect of his or her debt or claim the creditor will be taken to have surrendered its security. 1.4 So you are not happy with the result? If, as a creditor, you feel that a resolution (or the failure to pass a resolution) is a) contrary to the interests of creditors; and/or b) has prejudiced (unreasonably) creditors who voted against a resolution, then you may apply to the Court for a review of the resolution. Other Rights Available

RIGHT SECTION

Apply to Court for special consideration in view of costs indemnification of the Liquidator

S564

To inspect Liquidators’ records in respect of the estate and carrying on of business.

S531 Reg. 5.6.01 & 5.6.02

Proofs of Debt: 1. To inspect all proofs of debt; 2. To be advised of rejection within 7 days; 3. To appeal against wrong admission.

S531 Reg. 5.6.54(1) S1321

Appeal to Court if aggrieved by act, omission or decision of Liquidator.

S1321

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1.5 General Supervision The liquidator is always accountable to the Court. Creditors have the right to make a complaint to the Court (or for that matter to the Australian Securities & Investments Commission) with respect to the conduct of a liquidator in respect of his performance of duties. The Court can take whatever action it thinks fit after making proper enquiries – including an examination of the liquidator or any other person. 2 To the Australian Securities & Investments Commission When the report to the company’s affairs is received the Court liquidator must lodge a report with the Australian Securities & Investments Commission (S476) providing details of: a) share capital; b) assets and liabilities; c) cause of failure; and d) whether or not further enquiry is desirable. If it appears to the liquidator that: a) an offence has been committed; b) a misfeasance or misapplication has been committed by a person taking part in the formation, promotion, administration, management or winding up of the company; and c) unsecured creditors will get paid less than 50 cents in the dollar then the liquidator must provide a further report to the Australian Securities & Investments Commission and state whether or not he intends to make an application for examination pursuant to Section 533 of the Corporations Act 2001. The liquidator may lodge further reports specifying any other matter that he thinks appropriate to the Commission. The liquidator’s statements are protected by a limited privilege in proceedings for defamation. 2.1 Liquidator’s Accounts Half yearly, the liquidator is required to lodge with the Australian Securities & Investments Commission a statement of receipts and payments. As a creditor you are entitled to obtain a copy of that statement.

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The primary purpose of a voluntary administration is to provide a flexible procedure enabling a company time to attempt a compromise or arrangement with its creditors, which may save the company, the business and jobs while maximising the return to creditors. If the attempt fails, the legislation facilitates the winding-up of the company.

HOW DOES THE ADMINISTRATION BEGIN? Appointment by the company’s directors Appointment by the company is initiated when the director(s) of the company resolve that the company is or is likely to become insolvent (S 436A). The directors simply have to be satisfied that there is a likelihood that the company will be insolvent at some future time. Appointment by the liquidator or provisional liquidator An administrator can be appointed by a liquidator or a provisional liquidator (S 436B). The liquidator or provisional liquidator may act as the administrator provided that the Court’s approval is obtained. Appointment by the holder of a registered security over the whole, or substantially the whole, of a company’s property The holder of a registered security over “the whole, or substantially the whole, of a company’s property” may also appoint an administrator: S 436C. Bringing the administration to an end An administration will end when:

(i) a Deed of Company Arrangement is executed; or (ii) the creditors resolve that the administration should end; or (iii) the creditors resolve that the company be wound up; or (iv) the Court, on application of the company, orders that the

administration end; or (v) the time period for calling a meeting of creditors as prescribed

under the Corporations Act has not been met.

voluntary administrations


Removal of the administrator The administrator of a company may be removed by resolution of the creditors at the first meeting of creditors. This meeting must be held within eight business days after the administration begins.

WHAT HAPPENS ON THE APPOINTMENT OF AN ADMINISTRATION? The administrator takes control On appointment, control of the company and its property, business and affairs vests in the administrator. Notice of the appointment must be published on the ASIC website. Before the end of the next business day after appointment, notice must also be given to any holder of a registered security over the whole, or substantially the whole, of the company’s property: S 450A(3). Where an administrator has been appointed by the holder of a registered security over the whole, or substantially the whole, of the company’s property, the chargee must give written notice of the appointment to the company as soon as practicable but before the end of the next business day. A moratorium is put in place To give the company breathing space, as and from the commencement of the administration, a moratorium comes into effect preventing creditors from taking actions or proceedings against the company or its property during the administration without the administrator’s written consent or the Court’s leave. Subject to the exceptions mentioned below, the moratorium also binds owners or lessors of property being used, occupied by or in the possession of the company. The administrator must not dispose of such property except:

• with the written consent of the owner; or • in the ordinary course of the company’s business; or • with the leave of the court.



The moratorium also prevents a person enforcing a registered security over property of the company during the administration except with the administrator’s written consent or the court’s leave: S 440B. Exceptions to the moratorium:

(i) Creditors who hold a registered security over “the whole, or substantially the whole, of the property of a company” are in a special position - they are not bound by the moratorium if the charge is enforced in respect of all of the secured property, either before the commencement of the administration or within 13 business days of being notified of the administrator’s appointment.

(ii) A secured creditor holding a registered security over the company’s property who has begun to enforce that registered security prior to the commencement of the administration: S 441B.

(iii) A secured creditor who holds a registered security over “perishable property” or an owner or lessor of such property.

(iv) Owners or lessors of property used, occupied by or in the possession of the company who have enforced a right to take possession of the property prior to the administrator’s appointment.

Directors’ guarantees are unenforceable A guarantee given by a director or a relative of a director cannot be enforced during the administration except with the Court’s leave. That protection ends if the company goes into liquidation and will usually end if a Deed of Company Arrangement is entered into.



THE ADMINISTRATOR'S PERSONAL LIABILITY Personal Liability The administrator is personally liable for debts of the company incurred in the performance of the administrator’s functions and powers, for services rendered, goods bought and property hired, leased, used or occupied by the company; but is entitled to a right of indemnity out of the company’s property for that liability: SS 443A and 443B. The administrator will therefore need to be satisfied that the company has sufficient free assets out of which to meet the statutory indemnity and/or has an agreement with the principal creditors to the effect that the administrator’s liabilities will be met. The administrator is not taken to have adopted existing agreements. Suppliers of essential services (electricity, gas, water or a telecommunication service) are specifically prohibited from insisting on the payment of arrears as a condition of further supply: S 600F. Where the company entered into an agreement prior to the administration, to use the property of which someone else is the owner or lessor, the administrator has five business days within which to decide whether or not to continue to use the property. Unless the administrator gives a notice to the owner or lessor of the property within five business days after the beginning of the administration the administrator will be personally liable for amounts due under the agreement while he uses or keeps possession of the property or goods. Indemnity The administrator is entitled to an indemnity out of the company’s property for remuneration and personal liabilities incurred during the administration. The indemnity has priority over debts of the company secured by a circulating security over property, unless the registered security holder has either commenced enforcement of or actually enforced the registered security before the administration began.



SO THE CREDITORS ACCEPT A DEED OF COMPANY ARRANGEMENT – WHAT NOW? If the creditors resolve that the company should execute a Deed of Company Arrangement, then the administrator of the company will become the administrator of the deed unless the creditors resolve otherwise: S444A. The deed must be executed by the company within 15 business days after the creditors’ meeting to decide the company’s future. The administrator must execute it before or as soon as practicable after the company executes it. All pre-deed creditors are bound by the deed irrespective of whether they voted in favour of the deed S 444D. The administrator of a Deed of Company Arrangement (as opposed to the administrator of a company) is not made personally liable by the Corporations Act for debts incurred by the company during the operation of the Deed of Company Arrangement. The position of secured creditors and owners or lessors of property under a Deed of Company Arrangement. The moratorium on the enforcement of rights is lifted once the Deed of Company Arrangement is executed; but the Court has a power, on the application of the deed administrator, to restrain a registered security holder from realising its security or otherwise dealing with the security, or to restrain an owner or lessor from repossessing property, except as the Court permits. The moratorium may however, remain in place where a registered security holder votes for a deed, the terms of which restrict the registered security holder from taking action to enforce the charge.



CREDITOR VOTING

• The administrator or his/her nominee must chair the meeting; • Creditors may participate in meetings by telephone where

telephone facilities are available and the chairperson considers it appropriate;

• A resolution put to the vote of a meeting must be decided by majority on the voices unless a poll is demanded by the chairperson, by two or more creditors present and entitled to vote at the meeting, by a person present in person, by proxy or by attorney and representing not less than 10 per cent of the total voting rights of all the persons entitled to vote at the meeting;

• Where a poll is taken, a resolution is carried if:

a) a majority in number of the creditors vote in favour; and b) the value of the debts owed by the corporation to those voting in

favour of the resolution is more than half the total debts owed to all the creditors participating in the poll.

If a vote results in a deadlock, the chairperson may resolve the deadlock by exercising a casting vote.

• Where the outcome is determined by the exercise of the chairperson’s casting vote, any creditor may apply to the court for a review of the outcome and appropriate order.

• Registered security holders may vote at creditors’ meetings during the voluntary administration in respect of their debts without forfeiting their security.

• If a creditor believes that the outcome of a meeting has been influenced by the votes of creditors who are associated entities of the company the creditor may apply to the court for an appropriate order, including orders setting aside the resolution and reconvening the meeting.



PARTICULAR REASONS FOR A REGISTERED SECURITY HOLDER TO SUPPORT A DEED OF COMPANY ARRANGEMENT (DOCA)? Where there is a doubt as to whether enforcement of the security would realise sufficient sums to repay the secured debt, putting together a Deed of Company arrangement with the co-operation of the directors and the other creditors may result in a better outcome for the secured creditor. However, the circulating asset element of the registered security may be depleted during the administration as the administrator has an indemnity for remuneration and debts incurred during the administration which rank in priority to the company’s unsecured debts and debts secured by a circulating asset.

(i) The registered security holder may want the affairs of the and the directors of the company to be investigated. The administrator has investigative powers that are not available to a Receiver & Manager.

(ii) There may be an advantage in an administrator running a business to overcome potential problems with parties such as a landlord who has rental arrears, lessors of property who want to take possession, retention of title creditors etc.

(iii) The assets covered by the security may be such that it makes no difference to a registered security holder whether they are recovered by a Receiver & Manager or Voluntary Administrator.

(iv) If the registered security holder is satisfied with the capabilities and integrity of the person to be appointed administrator, the registered security holder may be prepared to allow the administration to proceed.

(v) Transactions between the company and the registered security holder could be liable to challenge pursuant to the voidable transaction provisions of the Corporations Act if the company was to go into liquidation. The administrator does not have the power to challenge voidable transactions. It may therefore sometimes be in the registered security holder’s interests to keep the company out of liquidation.

(vi) The registered security holder may prefer to allow the company to appoint an administrator to avoid unwanted publicity.

(vii) The registered security holder may decide to allow an administrator to be appointed where there are ongoing problems with assets which could bring liability on the registered security holder or the Receiver & Manager.



WHY SHOULD AN UNSECURED CREDITOR SUPPORT A DOCA?

• An administration leading to the execution of a Deed of Company Arrangement may enable a higher level of dividends to be paid to unsecured creditors in comparison to the alternatives.

• A DOCA could have taxation advantages over a liquidation. For

example, any tax losses of the company may be able to be preserved and used, which may ultimately result in a higher return to creditors.

• The administrator of a company or of a deed of company

arrangement does not have the power to challenge voidable transactions. So if a creditor has received a preferential payment, it may choose to support a Deed of Company Arrangement.

• An administrator has the benefit of the statutory moratorium and is

able to carry on the company’s business in an orderly manner whilst formulating a DOCA. In many cases this can protect the company’s assets and their value and therefore produce a better result for unsecured creditors.




QUEENSLAND Terry van der Velde 07 3310 2007 [email protected] Managing Director

David Stimpson 07 3310 2002 [email protected] Executive Director

Terry Rose 07 3310 2099 [email protected] Director

Jason Cronan 07 5479 6199 [email protected] Director

Anne Meagher 07 3310 2076 [email protected] Director

NEW SOUTH WALES Stephen Hathway 02 8986 8905 [email protected] Executive Director

Joe Atkinson 02 8986 8922 [email protected] Director

Daniel Quinn 02 4023 0847 [email protected] Director

Darren Vardy 02 9531 8365 [email protected] Director

Ian Purchas 02 8986 8977 [email protected] Director

Ross Mottershead 02 9531 8365 [email protected] Director

VICTORIA Michael Carrafa 03 9669 1111 [email protected] Executive Director

Richard Cauchi 03 9669 1127 [email protected] Director

David Lofthouse 03 9669 1129 [email protected] Director

Peter Gountzos 03 9669 1188 [email protected] Director

further information

Law

Corporate insolvency handbook