Insolvency Litigation - Debt Recovery Lawyer Melbourne

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Legislative framework:

The Corporations Act 2001 (Cth) prescribes rules and procedures governing external administrations of companies (such as Administration, DOCA’s, Liquidation, Receivership). Companies are governed by the Corporations Act 2001.

The Corporations Act 2001 is relevant in insolvency, given that the company in external administration is established and governed by the provisions of the Act. Schedule 2 of the Corporations Act 2001 – IPSC applies supported by the insolvency Practice Rules (Corporations) IPRC, or Rules), that focus solely on external administration.

Other legislation relevant includes the ASIC Act, the Personal Property Securities Act (Cth) (PPSA) and the Cross Border Insolvency Act 2008 (Cth). There are also regulations that apply pursuant to s. 1364 of the Corporations Act 2001. The Act prescribes forms for providing information and lodging with ASIC.

Most companies are registered under the Corporations Act 2001, however, there are other types of companies that are governed under other statutes, which also provide for their ext6ernal administration including banks under the Banking Act 1959 (Cth); and Aboriginal and Torres Straight Islander corporations which are registered under the Corporations (Aboriginal and Torres Straight Islander) Act 2006 (Cth).

Solvency

Companies are required by the Corporations Act to be solvent (and not insolvent), which for practical purposes essentially means that the Company must be able to pay debts as and when they fall due.

Wind up of Company

A company can be wound up in a number of ways. The most common are by way of a members voluntary liquidation (solvent liquidation) or by way of a creditor issuing up winding up proceedings, usually by a statutory demand.

Solvent Winding Up – Voluntary Liquidation

The most common reason a company is placed under administration or wound up (liquidation) is because of insolvency issues. A Company can also be wound up when solvent. A solvent winding up is usually called a voluntary liquidation, which occurs under the provisions of Part 5.5 of the Corporations Act 2001. So, the process of liquidation can also apply to a solvent company.

Common situations where a company may be wound up, when solvent, include:

Reconstruction of a group of companies;
Surplus Non-operating subsidiaries being closed if they are surplus to requirements,
Distribution of Assets to members;
Disputes and Hostile circumstances including where there is a dispute or a shareholder considers affairs of company are being conducted contrary to the interests of the members, the shareholder can apply to the Court under s. 232 of the Act for the court to order the winding up of the company under s. 233 (along with other relief).

Where the company is solvent (and creditors expect to be paid in full), then a voluntary liquidation would not typically involve creditors, and it is supervised by the members of the Company. If you would like more information about members voluntary winding up, please email us.

ASICs power to Wind Up an abandoned Company

ASIC also has the power to wind up a company under Pt 5.4C of the Corporations Act 2001. This can happen to “zombie companies”. The power to wind up an abandoned company affects employee entitlements, creditors, administrators and liquidators. The power to wind up is used when there is an abandoned company, and where no party wishes to spend funds to apply for a winding up order from the Court. In this rare and unfortunate situation for employees, ASIC has a panel of liquidators to take these appointments at a set fee rate. See further information published for ASIC winding up of abandoned companies at ASIC’s website here.

Insolvent winding up – Liquidation of an insolvent Company

If it is suspected that a company may be insolvent, then it may be decided by the relevant officers of the Company, to have the company placed into Administration (to try to work out the financial issues) or Liquidation if there is no hope to resolve the issues and the company is hopelessly insolvent. Both Administration and Liquidation are different in process, but both include appointing an independent and professional Administrator/Liquidator who will undertake the duties and processes, according to the Corporations Act 2001 to have the affairs of the company dealt with pursuant to law.

Purpose of Liquidation of an insolvent company

The purpose of liquidation is:

To avoid further creditor losses, from an insolvent company engaging in trade, (given the presumption is that companies are trading whilst solvent).
To allow for investigation of the company’s affairs, with a focus on what occurred leading up to the winding up. Investigations might include
- public examinations of officers and directors and employees (and relevant persons) involved in the company affairs.
- Insolvent trading claims can also arise against company directors.
- Breach of director duties claims can also arise against company directors.
For equitable and fair distribution of the assets of the debtor company amongst its creditors.

Disputes can arise in relation to the investigations of members and directors, particularly in relation to breaches of sections of the Corporations Act 2001.

Offences, Recoverable Transactions and Insolvent Trading against Directors/Officers of companies

During external administration, disputes may occur regarding breaches of the Corporations Act 2001 such as:

180 – Failure by company officers to exercise reasonable degree of care and diligence;
181 – failure to act in good faith;
182 – improper use of position to gain an advantage;
183 – improper use of information by use of position in company
184 – reckless or intentional dishonesty in failing to exercise duties in good faith or for a proper purpose/use of position to dishonestly gain advantage or cause detriment (this can be a criminal offence).
198G – performing / exercising functions whilst a company is under administration
206A B – contravening a court order against taking part in management of a corporation;
206A B – acting as a director or promoter or taking part in management within 5 years after conviction or imprisonment for various offences.
209(3) dishonest failure to observe requirements on making loans to directors or related companies.
254T – paying dividends, except out of profits;
286 – failure to keep proper accounting records;
312 – obstruction of an auditor;
314-7 – failure to comply with requirements for preparation of financial statements;
437D(5) – unauthorised dealing with company property during administration;
438B(4)/453F, 475(9)/ 497(4)/ 530A – 530B – failure by directors to assist, deliver records and provide information.
588G – incurring liabilities whilst insolvent
588GAB – officers duty to prevent creditor defeating disposition
588GAC – person procuring a company to make a creditor defeating disposition.
590 – failure to disclose property, concealed or removed property, concealed a debt due to the company, altered books of the company, fraudulently7 obtained credit on be4half of the company, material omission from RATA (report as to affairs) or false representation to creditors.
596 AB – entering into an agreement or transaction to avoid employee entitlements.

Recoverable Transactions in a liquidation

After investigating the affairs of the company, a liquidator may act and seek to recover money for the benefit of creditors, including investigating and litigating transactions such as:

Preference Claims / Defence to Preference claims

Preferences are payments made by the insolvent company, to one creditor, whilst not paying others, during a relation back period (being the period the company is factually, insolvent). Which effectively, if left to be so, means that one creditor has been preferred over and above the other creditors in the liquidation if the preference is not recovered. The principle is that all creditors ought to rank equally, and receive only a dividend out of the pool of funds left over in the liquidation. Where there is evidence that a creditor has received a preference, a liquidator might bring court action to recover the payment from the creditor. If found to be so, the payment is voidable as against a liquidator will be ordered to be paid back to the liquidator. However, there can be disputes because there are defences available to creditors to avoid paying back an alleged preference claim to a liquidator. We regularly assist creditors defending preference claims by liquidators. Likewise, we can also assist liquidators to claim preferential payments from creditors.

Creditor Defeating Dispositions

Where company assets have been transferred for less than market value, and that disposition has prevented or hindered or significantly delays creditors access to company’s assets in liquidation, the disposition may be voidable by a liquidator. Disputes arise in relation to creditor defeating dispositions.

How are administrators and liquidators paid? Liquidators remuneration:

Liquidators and Administrators are entitled to be paid, and will seek payment, for the work they perform in the administration or liquidation of a company.

An external administrator is entitled to be paid and reimbursed for reasonable (and approved) remuneration for the work they perform. Also, for any internal disbursements (stationery, photocopying, phone costs) and out of pocket costs (legal costs, valuation costs, postage etc) incurred in performing their role, (these latter costs do not need approval).

Usually, administrators / liquidators are paid first before creditors will receive any dividend. Remuneration and internal disbursements must be approved in accordance with the Corporations Act and Insolvency Practice Rules (Corporations) before it can be paid.

Do creditors have a right to question the liquidator’s fees/disbursements?

Creditors certainly do have a right to question the remuneration and the rates to be charged by the liquidator. They also have a right to question the external administrator about the fee calculation method used and how the calculation was made. The external administrator must justify why the chosen fee calculation method is appropriate for the administration. Disputes sometimes arise in relation to the fees/costs charged by liquidators and that they are not reasonable.

Remuneration is usually approved at a meeting of creditors (or committee of inspection), where questions can be asked. Fees are then approved by a vote of the creditors. Fees may also be approved, without a meeting of creditors. In either case, a report must be provided to creditors about the remuneration claimed which is called a “Remuneration Approval Report”.

No creditor approval is needed for one off amounts below a statutory threshold, presently $5,000 (indexed).

Otherwise, the remuneration is approved by a committee of inspection or creditors.

What do I do if I think the remuneration is unreasonable?

To check if the fees are reasonable, consider at least the following:

the method used to calculate remuneration (hourly rates, fixed fees, etc)
- the major tasks that have been performed, or are likely to be performed, for the remuneration
- the remuneration/estimated remuneration (as applicable) for each of the major tasks
- the size and complexity (or otherwise) of the administration
- the amount of remuneration (if any) that has previously been approved
- if the remuneration is calculated, in whole or in part, on a time basis:
  - the period over which the work was, or is likely to be performed
  - if the remuneration is for work that has already been carried out, the time spent by each level of staff on each of the major tasks
  - if the remuneration is for work that is yet to be carried out, whether the remuneration is capped.

External administrators should take to make sure they fulfil their responsibilities to creditors when asking creditors to approve remuneration, including when those creditors are acting in their capacity as committee members. For example, external administrators ought to be complying with the ARITA code. The Code is available on the ARITA website at www.arita.com.au.

What do you do if the liquidators fees are unreasonable?

A creditor has some options if the liquidators fees are unreasonable including:

A creditor may apply to the Court, to seek a review of the remuneration at Court;
Creditors jointly may assert their power to appoint, by resolution, a reviewing liquidator to review any remuneration approved within the six months and any disbursements incurred in the 12 months before the reviewing liquidator’s appointment. The cost of a reviewing liquidator is paid from the assets of the external administration.
An individual creditor may also appoint a reviewing liquidator with the external administrator’s consent. An individual creditor seeking the appointment of a reviewing liquidator must pay the cost of the reviewing liquidator.

Complaint against an external administrator (liquidator/administrator)

If your complaint has not been dealt with by the liquidator/administrator themselves, then you could raise your concerns by lodging a complaint with ARITA, or ASIC. ARITA only governs their members.

I’ve been served with a Creditors Statutory Demand.

Another way for a company to be wound up is if a creditor issues a statutory demand, that is not complied with and then court proceedings are then issued for the company to be wound up and placed into the hands of the Liquidator.

Commonly, statutory demands are set aside where there is a genuine dispute about the debt, and there is usually a costs order made in favour of the debtor (against the creditor issuing the demand). We assist with litigation including:

Winding up a company;
Defended wind ups;
Application to set aside a statutory demand that has been incorrectly issued and a genuine dispute exists;

Statutory demands are not always the smartest debt collection method, and should be issued with care.