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Chapter 19

Business failure

Copyright © Nelson Australia Pty Ltd 2003

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Outline

1. Cessation of business2. Bankruptcy3. Corporate external administration

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19.1

Cessation of business

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Cessation of business

• May be voluntary or involuntary• Procedures regulating involuntary cessation of

business are designed to:• protect creditors, employees and others• prevent fraud and unfair advantage

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19.2

Bankruptcy

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Bankruptcy

• Regulated by the Bankruptcy Act 1966 (Cth)• Protects insolvent traders from imprisonment

and harassment by creditors• Ensures the greatest return to creditors

through discovery and fair distribution of the bankrupt’s assets and property

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Types of bankruptcy

• An individual can become bankrupt:• voluntarily, by debtor’s petition• involuntarily, by creditor’s petition.

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Types of bankruptcy

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Distribution

• Each creditor must lodge a proof of debt.• The trustee then distributes the bankrupt’s

estate rateably among them.• Certain creditors are given priority, e.g.

employees.• Secured creditors are not prevented from

seizing security.

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Doctrine of relation back

• Bankruptcy is deemed to commence from the time of the earliest act of bankruptcy within the six months prior to presentation of the creditor’s petition.

• Thus assets disposed of within that period still form part of the bankrupt’s estate.

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Doctrine of relation back

• The trustee can also recover property disposed of by the bankrupt:• giving preference to one creditor over other

creditors while insolvent (6 months)• for less than market value (2 years)• for less than market value while insolvent (5

years)• for the purpose of preventing the property

becoming available to creditors.

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Release from bankruptcy

• The bankrupt is discharged automatically after three years, or earlier upon application.

• The bankrupt is released from liability for the debts that caused the bankruptcy.

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Part X arrangements

• Alternative to bankruptcy, avoiding its stigma• An agreement with creditors regarding

indebtedness

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Part X arrangements

• Composition – Creditors either agree to debtor paying by instalments or agree to accept an amount less than that owed.

• Deed of arrangement – Affairs of debtor are arranged with a view to payment of debts.

• Deed of assignment – Debtor assigns all divisible property to a trustee for the benefit of the creditors in return for immediate release from debts.

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19.3

Corporate external administration

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Receivership

• Receiver – Appointed by court or by creditor to take control of specific corporate property and sell it in order to repay the creditor.

• Receiver and manager – Appointed to take control of all corporate assets.

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Powers of the receiver

• Enter into possession and take control of property

• Lease, let, hire or dispose of property• Borrow money on security of property• Convert property to money• Execute any document and bring or defend

legal proceedings in name of company• Apply to wind up the company

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Voluntary administration

• Alternative to winding up• Intended to be:

• quicker• less complicated• less expensive• more likely to result in a better return for

creditors• more likely to result in the company

continuing to exist

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Administrator

• Appointed to determine whether:• administration should end and company be

allowed to continue as is, or• deed of arrangement should be executed,

or• company should be wound up

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Administrator

• May be appointed by:• directors who believe company is insolvent• liquidator• creditor with charge over whole company

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Administration process

• During administration, the company is protected from actions by all creditors, including secured creditors (other than one with a charge over all or substantially all of the company’s assets).

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Administration process

• Within five days of appointment, the administrator must call meeting of creditors to decide whether to appoint a committee of creditors and to confirm his or her appointment as administrator.

• Within 21 days of commencement, a second meeting must be called at which the administrator advises as to best course of action.

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Deed of company arrangement

• Sets out how company will deal with its debts while continuing to trade, whether by delay, acceptance of a lesser amount or conversion of debt into equity

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Liquidation

• Process by which a company’s assets are distributed to creditors and shareholders, and company’s existence comes to an end

• May be:• voluntary• compulsory

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Voluntary winding up

• Commenced by special resolution by company• If company is solvent, resolution by members

is sufficient.• If company is not solvent, resolution must be

passed by creditors.

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Compulsory liquidation

• An application to the court for compulsory liquidation may be made by:• the company• a creditor• a shareholder• a liquidator• ASIC• APRA.

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Compulsory liquidation

• The grounds for applying to the court include:• company has passed a special resolution• company did not commence business within

one year of registration• company has no members• directors have acted oppressively or unfairly

discriminatory towards members• ASIC or APRA recommend winding up• court is of the opinion that it is just and

equitable that company be wound up.

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Insolvency

• The most common ground for winding up • Means that the corporation cannot pay its

debts as they fall due

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Voidable transactions

• The liquidator has the power to avoid certain transactions, including:• insolvent transactions (unfair preference or

uncommercial transaction) (6 months)• insolvent and uncommercial transactions

(2 years)• insolvent transactions with a related entity

(4 years)• insolvent transactions intended to interfere

with the rights of creditors (10 years)• unfair loans.

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Insolvent trading

• A director is personally liable for debts incurred by the company if there are reasonable grounds for suspecting that the company is insolvent and it continues to trade.