Law2460 Law of Investments Slides 2011 Topic 11-12 Singapore (11,12)

7/30/2019 Law2460 Law of Investments Slides 2011 Topic 11-12 Singapore (11,12)

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CORPORATE INSOLVENCY

Weeks 11-12


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RMIT University Slide 2

CORPORATE INSOLVENCY Receivership Voluntary administration Deed of co arrangement Liquidation (winding up) Scheme of arrangement

Common Feature Independent and qualified insolvency practitioner takes over

management of the co from Directors (ie external administration).

Broad Aims Provide fair and orderly process for dealing with financial affairs ofinsolvent companies

Each regime has slightly different objectives.


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Receivership

As an alternative to possession or exercising thepower of sale directly,

a secured creditor (such as a debenture

holder) may appoint a receiver, someone elsewho will take control of the secured property,receive the income from it (sell it) and pay thesecured creditor.

Regulated by Pt 5.2 of Corporations Act


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Receiver appointed privatelyPrivately: The charge can permit the creditor to appoint a receiver for a wide

range of reasons, including non-payment of interest or capital. Where the secured property includes the companys business, the

charge will give the receiver the power to manage the business

Receiver does not take over ownership.

By a court:

Purpose is to protect creditors, eg

s 1323(1)(h) gives the court power to make an appointment where it

is under investigation by ASIC for breach of Corporations Act s 233(1)(h) If a minority shareholder successfully argue there isoppression. The court may make an order to appoint a receiver, ifthe facts show that the companys assets are put under risk by theoppressive conduct.


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Appointment of receiver Experience Receivers are usually accountants and

registered as liquidators by ASIC.

Reduces exposure to wrongful acts done to the propertyby not managing it properly (especially when they enterinto possession)

Enables income and rents to be applied to the debt,waiting for the most advantageous time for sale.

Directors remain in office, but restricted powers to dealwith secured property

Unsecured creditors do not lose their right to sue the co.


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Duties of Receivers Main duties are to secured creditor

also owe fiduciary & statutory duties to company, eg s180 care skill diligence, s 181 act in good faith in thebest interest of co, ss 182, 183 avoid making improper

use of position/information Duty to exercise powers in good faith (Expo International

Pty Ltd v Chant)

S. 420A: When selling property, take reasonable care

when selling to ensure that the true market value isobtained; or the best price reasonably obtainable if itdoesnt have a market price.


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Voluntary AdministrationAim To maximise the chances of the company continuing, or if not

possible, to achieve better returns to creditors or shareholders thanimmediate winding up. (s.435A)

Administrator

While a company is under administration, the administrator takescomplete control of co for a short time. Administrator is the onlyperson who can deal with the company property. The directors areno longer in charge.

He or she reports to creditors. Qualification: must be a registered liquidator (s.448B); must be

independent The fate of a co is decided by creditors ultimately : winding up ,ORenter into deed of arrangement; OR terminate administration.

Advantages: cheaper, quick, facilitate negotiation of compromises,arrangements, less legal court cases.


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Who initiates? In most cases, directors place the Co in voluntary administration. VA gives the company a breathing space - allows a decision to be

made as to whether the company is to be placed in liquidation or tocontinue trading.

directors can be personally liable if the company trades while it is

insolvent Any guarantee by directors of Co debts cannot be enforced duringVA (a Moratorium on all claims, with some exceptions).

No need for approval from shareholders, or creditors or court Rare: initiated by liquidator or creditor.


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Duration of Voluntary Administration 4-5 weeks normally.Voluntary Administration Procedure Appointment of administrator

Administrator convenes a creditors meeting within 8business days of appointment (creditors can vote toreplace administrator at this meeting)

Administrator investigates financial position andcircumstances of co

Administrator forms an opinion Administrator convenes another creditors meeting

approximately within 20-25 business days report tocreditors, creditors decide cos future.


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Deeds of Company Arrangement

This is one of the possible outcomes for a company thatis put into voluntary administration. (s435C(2)(a))

Voluntary administrator becomes the deed administrator,unless creditors appoint someone else. (s 444A(2))

Content Typically, Deeds of company arrangement contains:

Moratorium against debts, more time to pay

Co can continue operation its business

Compromise: agreement to accept lesser amount Order sale of assets over an agreed period of time.


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Deed of Company Arrangement

Effect

Unsecured creditors: not permitted to wind up co, or suefor debt (s 444E)

Secured creditors: bound by deed only if voted in favour

(s 444D(2))Why vote for a deed of company administration?

cost benefit analysis

possible that directors will contribute from their own

personal resources, to avoid legal action (eg forinsolvent trading, breach of directors duty)

creditors who are suppliers may wish to keep co as acustomer.


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Liquidation (Winding Up)

co becomes de-registered and ceases to exist as a legal entity. Liquidator: Collect assets, liquidates them, distributes to creditors

Two types of liquidation:

1. Compulsory winding up: creditors force co to liquidate by obtaining acourt order. Court appoints liquidator.

2. Voluntary winding up: initiated by creditors or by shareholders.

Aims of Winding Up:

Purpose of providing for a fair distribution of a debtors assetsbetween all their creditors Interest of wider of business community Investigation of reasons for insolvency.


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Compulsory Liquidation Corporations Act Pt 5.4 , ss459A-459T. Usually unsecured creditors apply to court, but other parties can

also apply to wind up in insolvency: creditors, company, acontributory, director, and ASIC

File an application to wind up;

Hearing of application within 6 months; At hearing, applicant must prove co is insolvent. Several waysof proving this: Most common way of proving insolvency:

s.459E: the Court presumes a company is insolvent if it failsto comply with a statutory demandfor debt(s) of at least$2,000 within 21 days after service of the demand;

After service of statutory demand, the company has 21 dayswithin which to apply to the court to set aside the demand onthe basis that there is a genuine disputeas to the existenceor amount of the debt. (s.459G)

Court may set aside the demand, vary the amount OR makesorder to wind up company
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459g.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459g.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459e.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s459e.html


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Winding up on other grounds A person may apply to the Court that a company be

wound up on grounds other thanthat the company isinsolvent. For example, where the affairs of the companyare being conducted contrary to the interests of the

members as a whole or the directors have acted in theirown interests ; the court considers it just and equitableto wind up the company. ( s 461, Tivoli).

A disposition of property by the company after the

commencement of the winding up is usually void.
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s461.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s461.html


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Members voluntary winding up

= Liquidation of a solvent company

Directors must declare in writing thatcompany will be able to pay its debts in fullwithin 12 months (s 494)

Member pass a special resolution to windup company voluntarily (s 491)

Members appoint a liquidator (495(1))


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Creditors voluntary winding up

No need for court orders

Possible methods:

1. transition from voluntary administration tovoluntary winding up. Vote by creditors.

2. Passing a special resolution at a general

meeting of members. Creditors have thefinal say in appointing liquidator.


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Powers of a liquidator

liquidator takes complete control of the co.Directors lose their powers.

Liquidator can carry on business of co forbeneficial disposal and winding up

Liquidator realizes the assets and

distributes the proceeds among creditors Liquidator can bring or defend legal

proceedings in the name of the co


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Effect of winding up shareholders lose the right to transfer shares, cannot

pass resolutions secured creditors unaffected Unsecured creditors lose right to sue co for debt, must

lodge proof of debt with liquidator, entitled to adistribution only after secured creditors have been paidin full.

Pari Passu rule if insufficient funds to pay unsecuredcreditors in full, they are paid equal proportion.

BUT there are some unsecured creditors who havepriority (s 556), eg ATO, employees. Creditors paid first, surplus goes to members.
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s556.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s556.html


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Recovery of voidable transactions

Recovery of Pre-Liquidation Transactions-- Voidabletransactions ( s.588FE)

Insolvent transaction which is an unfair preference Insolvent transaction which is an uncommercial

transaction Insolvent transaction where a related entity of thecompany is a party

Insolvent transaction where the companys purpose wasor included the purposes of defeating, delaying, or

interfering with, the rights of any or all of its creditors ona winding up Unreasonable director-related transaction Unfair loan
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588fe.htmlhttp://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588fe.html


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Scheme of Arrangement ss 410-415

Similar to deed of arrangement, without voluntaryadministration

Need court approval.

Less popular than voluntary administrationSubordinated debt - s 563C

An agreement by a creditor that a specified debt thecompany owes the creditor, or a specified part of such a

debt, will not be paid until other specified debts that thecompany owes are repaid to a specified extent.

Such an agreement is enforceable.

Law2460 Law of Investments Slides 2011 Topic 11-12 Singapore (11,12)

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