The Law of Insolvency in Australia Samples †MyAssignmenthelp.com

Question: Discuss about the Law of Insolvency in Australia. Answer: A solvent person has been defined under the provisions of the Corporations Act 2001 as a person who is capable of paying all the debts on due date. Therefore, a person who is unable to pay his debts on due date is said to be insolvent. In Australia, insolvency is used in context of companies while the bankruptcy is used for individuals. Thelaw of insolvency in Australia regulates the status of companies which are on the verge of insolvency and are incapable of paying their debts or are under monetary suffering. A company is said to have become insolvent when it has become incapable of paying its debts when its payment becomes due (Australian Securities Investments Commission, 2014). The insolvency of companies is regulated by the Corporations Act 2001 (Cth). The chief objective of thelaw of insolvency is to maintain equilibrium between the interests of borrowers, creditors and public during insolvency. The law of insolvency of Australia does not considers long-term visions of an insolvent company nor does it permits return of such company into the business upon aid or through reorganization of the structure of the company (Gupta, (n.d.)). The most important sign that shows that a company is at the verge of getting insolvent is the financial suffering that a company is going through. These signs may be indicated from constant losses, degrading liquidity, payment due to creditors, no new business plans, unfinished accounts or mismanaged core accounting methods, growing liabilities, difficulties in selling of stocks and in collection of debts, unpaid creditors, summons and warrants being issued to the company, bouncing of cheques, overdraft limits being crossed, default in payment of loans or interests by the company, difficulty in getting finance, difficulty in raising funds from stakeholders, non- payment of taxes and other liabilities, growing number of complaints and queries from suppliers, etc. (Australian Securities Investment Commission, 2016). Upon getting information regarding such distress that a company is going through, the Commissioner of Taxation of Australia issues a penalty notice to the director of the c ompany for the non- paid and non- reported Pay As You Go cover-up of the company or a Superannuation Guarantee Charge sum. The company, if fails to take required measures, by seeking guidance of a professional, in a period of twenty- one days, the Commissioner is empowered to take an action for recovery against the company for a sum equal to the tax due. If the director suspects that there is financial suffering in the company, he should take guidance from accounting and legal professionals as soon as possible so as to withhold the existence of the company. An insolvency lawyer may help out in conducting a solvency review of the company and provide alternatives available to the company. The director is required to be alert regarding the alternatives available so as to make proper conclusions for the company. The alternatives that are available like refinancing, reorganizing the structure of the company, altering the activities of the company or employing an external administrator for the company (Australian Securities Investments Commission, 2014). If a company has been declared insolvent or is at the verge of getting insolvent the directors of the company become responsible towards the creditors as well as towards the shareholders of the company. It is the duty of the director to ensure that if the company has been declared insolvent, it shall not trade or carry on its business. The directors shall also keep himself informed about the financial status of the company. Further where an action has been taken against the directors for insolvent trading, it is the general presumption that the company has undergone insolvent trading if it has failed in maintaining proper financial accounts for the said period (Australian Securities Investments Commission, 2014). In case where a company is presumed to become insolvent the most important duty of the director is to not incur any debts (Australian Securities Investments Commission, 2014). Different avenues are available to the company to recapitalize it instead of putting the company under liquidation. They are restructuring which includes selling-off, spinning- off, equity carve- outs, leverage buy- outs, recapitalization, debt for equity swaps, prepacks and forbearance and creditor compromise arrangements, refinancing, and equity funding (OFlynn, n.d.). Further a company may also be put for external administration by the creditors instead of winding up the company. There are various ways by which a company may be externally administered so as to protect and increase the worth for creditors. Under these processes an independent external administrator is appointed for the purpose of managing the company and its assets. The administrator so appointed will have all the powers of a director of such company and has privilege of not being sued by the creditors or any third party. The creditors or any third party have no right to sue the company without the permissions of the administrator so appointed or without the sanction of the court (OFlynn, n.d.). The ways in which a company may be externally administered are: Receivership Under this type of external administration an independent receiver or a controller is appointed either by a secured creditor of the company or by the court for the purpose of administering the assets and the business of the company. The authority of the directors thereby gets limited during the period of for which a receiver has been appointed for the company. The receivership gets terminated when the creditors receive their due payment or when all the assets are realised or upon the order of the court (OFlynn, n.d.). Voluntary Administration Under this type of external administration a competent insolvency auditor is appointed to manage and investigate the financial transactions of the company, to make reports and recommendations to the creditors of the company, and to convene and proceed meetings of the creditors of the company. The auditor also assists the administrator in his work. By the end of the voluntary administration the creditors of the company have to decide what future direction is to be taken for the company. The future directions for the company may be: That the company be given back to the directors to continue their business; or That the company shall opt for deed of company arrangement; or That the company shall be put for liquidation (OFlynn, n.d.). Deed of Company Arrangement Under deed of company arrangement a deed of compromise is made between the creditors and the company under the administration of an independent external administrator. The purpose of the arrangement is to create a fund out of the assets of the company or by way of third party contribution for the purpose of settling the claims of the creditors of the company in final and after that the authority of the company is given back to its directors for them to carry on their business (OFlynn, n.d.). In cases of insolvency of a company the parties may intervene for the liquidation of the company. The voluntary liquidation of the company which is called creditors voluntary liquidation which is initiated by the officers and the stakeholders of the company. A liquidator is appointed for the purpose who manage the selling of assets of the company and pays off the creditors from the proceeds thereof. Another type of intervention takes place by the court which is involuntary in nature. In this type of intervention the liquidation procedure is started by the creditor of the company. A liquidator is appointed by the court for the purpose of liquidation. According to the summary analysis of June Quarterly Statistics of 2017 made by ASIC the last quarter of 2016-17 financial year indicates a raise of 28% in the companies that are seeking external administration. The total for the quarter was reduced by 3.7% since June 2016 and the percentage of companies which are seeking external administration for the quarter in relation to new incorporations is less than 4% (Australian Securities Investments Commission, 2017). Upon the declaration of a company as insolvent, the liquidator appointed thereafter investigates the transactions of the company. For the purpose of investigation the liquidator has to examine all the officers of the company and whether they have acted in compliance of their duty to act in good faith or not so as to decide whether they may be held liable for those acts which took place during the normal operation of the business. This may give an opportunity to the liquidator for financial recovery. If the liquidator finds any breach of duty on the part of the director, the former may bring action against such director for recovering damages occurred to the company (Swaab Attorneys, 2009). If the liquidator finds any breach of a commonlaw duty on the part of the director, the former may recover the damage from the directors property or the liquidator may also have right to get informed about the profits. Such director who commits a breach of a duty to take due care and act diligently will be liable for any loss occurring to the company by his act. Any breach of a duty by a director under Sections 180- 183 of the Corporation Act 2001 (Cth) will attract civil penalty upto a sum of $200,000 upon an application of ASIC. In case of any loss to the company due to the breach of duty by the director, the Court may order such director to pay compensation to the company. Further a criminal liability may also be imposed on a director for breach of above mentioned provisions where such breach has been caused or an information has been received or used recklessly or intentionally or dishonestly or by not exercising the authority in good faith for the interest of the company or for personal gain or so as to cause detriment to the company (Swaab Attorneys, 2009). The director may be liable under the provisions of Corporation Act 2001 (Cth) when the company has incurred debt at the time when the company was insolvent or became insolvent after incurring such debt or there were probabilities of company getting insolvent on incurring such debt and a prudent man in similar circumstances would have knowledge about the insolvency of the company. In case of breach of this provision by the director of the company, he is liable for civil penalty which will be applied by Australian Securities and Investments Commission on the director along with compensation for the creditors. Also criminal proceedings may be initiated against the director where it is found that, in addition to the conditions applicable in case of civil penalty, the director of the company while incurring the debt knew the fact that the company was insolvent or is likely to become insolvent upon incurring such debts and the director dishonestly incurred the debt (Corporation Act 2001 (C th) s 588G; Swaab Attorneys, 2009). Section 588G of the Corporation Act 2001 (Cth) attracts the application of Section 1317E of the said Act whereby if the court thinks that the director has violated the above mentioned provision the Court shall declare that the said provision has been contravened (under item number 6) by the director. Upon declaration being made by the Court the Australian Securities and Investments Commission will get authority to look for order of pecuniary penalty (Corporations Act 2001, (Cth) s 1317G or may disqualify the order (Corporations Act 2001 (Cth) s 206C). Australian Securities Investments Commissions regulates the organisational, market and financial services in Australia. The ASIC is empowered to register accountants and liquidators for the purpose of liquidation of a company which is about to become insolvent. Further the ASIC has also power to order a company which is at the verge of insolvency or has already became insolvent to wind up. The commission has been provided with a number of tools for the purpose of investigation and enforcement under the ASIC Act and the Corporations Act 2001 (Cth). The said commission has powers to initiate investigation proceedings in case of contravention of any provisions of either of the above said Acts. The Australian Restructuring Insolvency and Turnaround Association (ARITA) is another organization of Australia that provides support in cases of restructuring, insolvency and turnaround through qualified professionals (Australian Restructuring Insolvency and Turnaround Association, 2016). It can be concluded that Australia has a wide variety of official external regulatory procedures for corporations. It has been observed that what importance does each area holds for the purpose of restructuring and smooth functioning of a business organization which is about to become insolvent. Only voluntary administration is designed so as to facilitate reorganization and restructuring of the insolvent companies in Australia. Voluntary administration is a supple procedure which is cost effective. References: Australian Restructuring Insolvency and Turnaround Association, 2016, Australian Restructuring Insolvency and Turnaround Association. Available from: https://www.arita.com.au/iMIS_Prod/. [17 September 2017]. Australian Securities Investments Commission, 2014, Directors- what are my duties as a director? Available from: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/. [17 September 2017]. Australian Securities Investments Commission, 2014, Directors- what happens if company insolvent, Available from: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-happens-if-company-insolvent/. [18 September 2017]. Australian Securities Investments Commission, 2014, Directors- what to do if company in financial difficulty, Available from: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-to-do-if-company-in-financial-difficulty/. [17 September 2017]. Australian Securities Investments Commission, 2014, Insolvency, Available from: https://asic.gov.au/regulatory-resources/insolvency/. [17 September 2017]. Australian Securities Investments Commission, 2016, Directors- Is my company in financial difficulty? Available from: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-is-my-company-in-financial-difficulty/. [17 September 2017]. Australian Securities Investments Commission, 2017, Corporate insolvencies: June quarter 2017, Available from: https://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf. [18 September 2017]. Corporation Act 2001 (Cth). Gupta, N. n.d., Insolvency laws in Australia. Parliament of Australia. Available from: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/InsolvencyLaws. [17 September 2017]. OFlynn, K. (n.d.), Restructuring and insolvency, Clayton UTZ. Available from: https://www.claytonutz.com/ArticleDocuments/501/25_RestructuringInsolvency.pdf.aspx?Embed=Y. [18 September 2017]. Swaab Attorneys, 2009, Australia: An introduction to insolvency law- part one, Mondaq, Available from: https://www.mondaq.com/australia/x/79816/Insolvency+Bankruptcy/An+Introduction+To+Insolvency+Law+Part+One. [18 September 2017].