Chapter 18 Administration of Companies in Financial Difficulties www.learnnowbiz.com Corporate Governance

Insolvency Insolvency is when a company becomes unable to pay its debts as and when they become due. Debts may be paid to secured or unsecured creditors. A secured creditor has protection for his debt. When a company becomes insolvent it will enter administration

Insolvency www.learnnowbiz.com Corporate Governance

Receivership In a receivership, a receiver is appointed to take control of all the company’s assets. Generally the receiver will have the power to manage the company’s business and is sometimes known as a receiver and manager. Qualifications A registered liquidator may be appointed a receiver. www.learnnowbiz.com Corporate Governance

Appointment A receiver may be appointed by: The court. An example of this is when the court considers the assets have been put at risk by oppressive conduct. A secured creditor where the charge instrument gives the creditor the power to appoint a receiver and they wish to enforce this charge. www.learnnowbiz.com Corporate Governance

Power The receiver’s power is derived from: The instrument of charge or the court order. S420 give the receiver wide powers to do all things necessary or convient to achieve the objectives of receivership. www.learnnowbiz.com Corporate Governance

Duties General Law The receiver has duties under contract and tort law and under fiduciary principles. Statutory Law The receiver is an officer within the S9 definition and must comply with directors’ duties to: Act with care and diligence Act in good faith in the interests of the company Avoid making improper use of the position www.learnnowbiz.com Corporate Governance

Voluntary Administration Voluntary administration is when directors of an insolvent company appoint an external administrator to investigate the company’s affairs, report to creditors and create recommendations as to the future viability of the company. A company is under administration until one of these three events occurs: Winding up of the company begins Control of the company returns to the board of directors A deed of company arrangement is executed www.learnnowbiz.com Corporate Governance

Appointment www.learnnowbiz.com Corporate Governance

Powers Under S437B, the administrator is treated as an agent of the company, with wide powers to control business, property and affairs of the company. Outsiders dealing with the administrator enjoy the usual protective assumptions under S128 and S129: S4427. Administrators cannot sell company property unless: The asset is sold in ordinary business with a floating charge. The chargee consents. Court permission is received. www.learnnowbiz.com Corporate Governance

Responsibilities to Investigate the Business As soon as practicable, an administrator should investiagte the business, property, affairs and finances of a company, so as to best decide how to act. Protection of Property Winding up can only be upon decision of creditors in the second creditors’ meeting Secured creditors cannot enforce their security unless permission of the administrator or court is granted Owners and lessors of property used by the company are restricted from recovering property unless administrator or court permission exists Initiation and continuation of legal proceedings against the company are restricted unless permission is granted Initiation and continuation of the enforcement processes are restricted unless permission is granted Members cannot transfer shares unless permission is granted www.learnnowbiz.com Corporate Governance

Deed of Company Arrangement Phase If in the second creditors’ meeting a decision is made for a deed of company arrangement, the administrator must prepare an instrument setting out the terms of the deed and execute it within 15 days. This is binding on: All creditors The company The administrator Parties bound by the deed cannot Start legal proceedings against the company Initiate enforcement processes against the company Apply for winding up www.learnnowbiz.com Corporate Governance

Deed of Company Arrangement www.learnnowbiz.com Corporate Governance

Winding Up Also known as liquidation, it involves a liquidator selling off the company’s assets, repaying debts and distributing excess. Four types: Members voluntary winding up (solvent) Creditors voluntary winding up (insolvent) Compulsory winding up in insolvency Compulsory winding up on other grounds www.learnnowbiz.com Corporate Governance

Statutory Demands A creditor can issue a statutory demand for payment of any debt that is over $2000 and due. A company that cannot comply within 21 days is assumed to be insolvent. The two main grounds for having a statutory demand set aside are: That it contains a major defect That there is a genuine dispute about the existence of debt www.learnnowbiz.com Corporate Governance

Challenging a Statutory Demand A company must apply to the court to challenge a statutory demand within 21 days. www.learnnowbiz.com Corporate Governance

Just and Equitable Ground for Winding Up Situations leading to a court order for winding up: Deadlock is causing the company to be unable to operate effectively as members are equally divided. Fraud or misconduct. www.learnnowbiz.com Corporate Governance

Qualifications A registered liquidator may act in voluntary winding up. An official liquidator may act in a compulsory winding up. www.learnnowbiz.com Corporate Governance

Functions Liquidators functions are to: Take possession of the company’s assets Sell or otherwise dispose of the company’s assets either individually or as a business To calculate debts payable by the company To distribute proceeds from realised assets To distribute surplus funds, if any To deregister the company www.learnnowbiz.com Corporate Governance

Powers A liquidator’s powers include: Carrying on the business to the extent that is necessary Bringing or defending legal proceedings Making calls on partly paid shares Obtaining certain information about the company www.learnnowbiz.com Corporate Governance

Order of Priority In general, funds will be distributed as follows: Secured creditors Expenses of winding up Employee entitlement Unsecured creditors Members www.learnnowbiz.com Corporate Governance

Duties A liquidator has a fiduciary relationship to the company similar to an agent or director. The liquidator is an officer under S180-S183. www.learnnowbiz.com Corporate Governance