determine Identification of issues and statement of relevant Application and analysis. ………………….

Background information

Corporate insolvency refers to a condition in which business is no longer in a position to honour its debt commitments due to insufficiency investment capital in its cash flow. Insolvency processes that are applied bank on whether the shareholders would like to recoup the business or liquefy the firm after conforming to the ordinance of the court in regard to mandatory liquidation. Hopeless Ltd (Hopeless) has been placed in a liquidation order by the court. Theresa Care appointed as the liquidator is wondering whether it can recover the deposits made into Big Bank and with an overdraft of $ 140 000 pending.  As a liquidator, Theresa Care must take into consideration that the law provides little guidance on the content of the reports to be given to liquidators for the meeting that will shape the company’s future. The content and quality of reports to the liquidators and information thereof about the course of action is normally inadequate.

General constitutional insolvency proceedings

Two flows of general statutory insolvency schedules in Australia are governed by the Corporate Act for companies and Bankruptcy for individual persons. The law that governs the company’s conduct are mainly set out in Chapter 5 of the Corporations Act. To ensure reports to liquidators are satisfactory; a check list of matters addressed in the section 439(A) report are to be prescribed in the statement setting out the terms of proposed deed. Theresa Care must also ensure that administrators include all their reports and other information that may be expected of it in its decision making.

Though Hopeless continued to trade while being insolvent there is a modified law of Business Judgement rule. This rule relieves directors the duty not to trade while insolvent. This provides a safe anchorage from the risk of personal liability. However, in this context Hopeless continued to trade even after an insolvent case had been filed. Hence Theresa Care can personally sue the directors for violation of this rule. Yet she can not withdraw the money in the deposit made by the debtor in Big Bank. As illustrated in McClellan, in the Stake Man Pty ltd V Carroll experts observes that it this was the first time the jury applied his power under the Corporation Act 2001(Cth) to grant a director a total relief from penalty following evidence of insolvent trading.

Priority amongst employees

Employees are normally protected in the event of insolvency of a company in most of the international jurisdiction. This is because employees are usually unable or less able to manage the risk of loss they might encounter in case the firm gets insolvent. The reason behind it is that shareholders can spread their investment portfolio to hedge the risk while creditors are in a position to widen their customer base or look for security. The employee is therefore exposed to due wages, superannuation or redundancy entitlements with less ability to hedge the risk. It is therefore required to give employees first priority in clearing their wages before clearing with the liquidator. Basing on this observation Theresa Care can not withdraw the money in the bank since it has to be used to clear employees’ outstanding wages Corporations Act 2001 (Section 556) (C Th). Employees rank after secured creditors; expenses appropriately sustained by liquidator, costs related to unintentional liquidation, expenses to be indemnified to administrator, appropriately incurred debts by official managers, audit fees and liquidator fees.

Moreover, as a liquidator Theresa Care is accountable for the entity’s operation by ensuring that any project operated by the entity is effectively dealt with proceeding to the liquidation finalization. Theresa Care has a number of options when dealing with Hopeless firm; the liquidator can take steps to halt the project. Considering the chapter 5C of the Act and Schemes’ constitution the liquidator can transfer any schemes to another entity. Theresa Care has no right to blame the auditors because the Act gives the firm authority to assess the Hopeless’ operation and determining what happens with each project undertaken. Theresa Care may also have applied court’s directions if it considered breach or conflict of duties in regard to Australian Security and Investment commission (ASIC 2009).

Directors’ Duty

ASIC (2009) was given consultation paper 124 Directors’ duty to prevent insolvent trading: Guide for directors and 19 submissions in total. These were meant to enable directors to give directions to directors regarding insolvent trading prevention. The director must be highly aware about the financial dealings of the company and constantly evaluate the firms’ solvency. They should also take drastic measures in dealing with company’s ability to solve the difficulties in finance. The director must also seek advice and disclose all the information on the firms operation so as to minimize risk. Failure of which puts the company into deeper risks.

As illustrated in City of Swan V Lehman Brothers Australia Ltd (2009) FCAFC 130 and their appeal, Lehman Brothers Asia Holdings ltd (in liq) V. City of Swan (2010) HCA 11, ASIC probed for explanation from the supreme courts as to if a company’s deed arrangement (DOCA) can induce creditors to release third party from obligations. It was held by the high court that DOCAs trusses only to the extent creditors asserts relate to the company.

Similarly, in Q.B.I Corporation pty v Plantation Rise pty ltd (2010) QSC 102 a suite was brought by a creditor who was unsecured to put aside the resolution of the creditor to get into DOCA that an affirmation to be made that creditors avers were not doused off as per the execution date of DOCA and the plantation rise was to be wound up. Intervention and submissions were provided by ASIC regarding the questions of law emanating from the law applied. In the submissions ASIC put in mind the early effectuation of DOCA as opposing to the objectives and articles of part 5.3 A formulated to run damage to the whole creditors.

Her Honour Justice Wilson concurred with ASIC submissions that the directors’ efforts to evade the provisions of Sec 600A of corporation’s Act were an abuse to the Act. Therefore the resolutions were to be set aside as ordered by the court that DOCA that had earlier halted by action be set from the start.

Therefore, Theresa Care being the liquidator should look for away of dealing with the directors of Hopeless under the Act rather than looking for a way to withdraw the money deposited in the Big Bank.

Bibliography

Australia’s Corporate Insolvency Laws (2002)

Australia’s Corporations Act 2001

Australian Security Investment Commission Insolvency Update (2010)

Deed of the Company’s Arrangement,(DOCA,2009)

Parliamentary Joint Committee on Corporations and Financial Services: Improving

Australia’s corporate Insolvency Laws; Issue Paper (2003)

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