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The use of formal appointments in

the restructuring of Australian

corporations

27 February 2007

Michael Quinlan Partner Allens Arthur Robinson Angela Martin Senior Associate Allens Arthur Robinson

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1. Introduction

This paper looks at the principal formal reorganisation structures for corporations in Australia available to financially troubled companies and considers the usefulness of those structures in the restructuring of Australian Corporations. The body of the paper deals with the law as it stands. The amendments which will be made to the law if the Corporations Amendment (Insolvency) Bill 2007 is enacted into law in its present form are dealt with in section 9.4 of the paper.

When a company becomes insolvent it may be placed in one of the forms of external administration whereby the directors of the company relinquish control to an insolvency practitioner who conducts the affairs of the company. There are three main forms of external administration available to such companies:

(1) voluntary administration (VA): VA is a process begun by the appointment of an administrator to a company which is in financial difficulties (but could possibly be saved), during which the administrator investigates its affairs to recommend to creditors whether it should enter into a Deed of Company Arrangement (DOCA) approved by its creditors, be wound up or revert to normal operation by its directors. A company need not be presently insolvent to enter into VA. The methods by which a company can go into a VA are set out at 2.2 below, but the most common method is for the board to resolve that in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time.

(2) receivership: receivership is usually instituted by a secured creditor appointing a receiver to enforce a security. The right to appoint is contractual so that there may be a range of triggers to permit the secured creditor to exercise its entitlements – actual insolvency, deemed insolvency under the Corporations Act 2001 (the Act) or the appointment of an external administrator to some or all of the assets of the company are some common triggers.

(3) court winding-up (or liquidations): this refers to a winding up of a company pursuant to a court order, halting its business, realising its assets, discharging its liabilities (or a percentage of them when the liabilities outweigh the assets) and dividing any surplus assets to its members.

Reorganisations can also be effected by:

1) schemes of arrangement (Schemes);

2) creditors' voluntary winding-up;

3) court-appointed receivers; or

4) provisional liquidation.

These forms of external administration are discussed in this paper.

All of these external administration procedures are governed by the provisions of the Act which is Commonwealth legislation which regulates companies throughout Australia. In addition to the Act there is other legislation which can be relevant to certain insolvencies such as the Insurance Act 1973 (the Insurance Act) and the Law Reform Miscellaneous Provisions Act 1946 (NSW).

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1.1 Back to the basics - Insolvency

In order to determine whether a company is insolvent, the test set out in s95A of the Act must be

applied. Actual insolvency is one trigger available to directors who wish to appoint a voluntary

administrator to a company (see 1.2 below).

Section 95A provides:

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and

when they become due and payable.

(2) A person who is not solvent is insolvent.

The definition of insolvency set out above is a cash flow test rather than a balance sheet test.

Cash flow is therefore the accepted test for determining solvency for the purposes of the Act.

Other tests may provide useful indicators of a company's solvency, but cannot give a conclusive

answer. In Quick v Stoland Pty Ltd1, the plaintiff creditor attempted to prove insolvency by looking

at the company's working capital and net assets. Working capital is determined by subtracting

current liabilities (liabilities due within 12 months) from current assets (assets expected to be

realised within 12 months). The net assets are determined by subtracting total liabilities from total

assets. Emmett J noted (at 623) that although those tests may be useful they were no more than

rules of thumb.

It follows that a company which has an excess of liabilities over assets in Australia may be solvent

under the Act if it has sufficient cash flow to pay its debts as and when they become due and

payable. By the same token, even if the assets of a company in Australia exceed its liabilities in

Australia, the company may still be insolvent if the nature of its assets are such that it has more

than a mere short term liquidity problem and it is unable to pay its debts as and when they become

due and payable. This can arise in particular where a company's working capital ratio is deficient,

ie the ratio of its current assets to its current liabilities does not enable its debts to be paid as they

fall due.

The essential problem with an indicator such as net assets is that, while it provides a snapshot of

the company's worth at a particular time, it does not necessarily indicate the company's ability to

trade. That can only be determined by looking at what constitutes a debt of a company and

considering when each of the company's debts will become due and payable, and which of the

company's assets can be realised in time to meet those debts to enable them to be paid when they

do become due and payable. The working capital test attempts to do this by looking only at those

debts which will become due and payable over the next year, and only those assets which can be

realised within that time. However, it too can provide at best only an indication of solvency. For

example, a company with debts payable immediately may have a surplus of working capital and yet

1 (1998) 157 ALR 615

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still be insolvent if its assets cannot be realised in time to pay its debts as and when they become

due and payable.

The test is ability to pay

The s95A definition of insolvency also involves a distinction between a company's ability to pay its

debts, and the actual payment of those debts. A company which does not intend to pay a particular

debt will still be solvent if it is able to pay that debt. Hodgson J in Standard Chartered Bank v

Antico2 put the matter this way:

The question is one of ability to pay, not fact of payment; so even if for some reason, there were

reasonable grounds to expect that the company would not in fact pay all its debts as and when they

became due, this would not, of itself, be enough. So long as there were not reasonable grounds to

expect that the company would not be able to pay its debts as and when they became due, it would

not matter that there were reasonable grounds to expect that the company would not in fact pay its

debts, because, for example, it saw it as being to its own advantage to delay payment.

Given the inconclusiveness of indicators such as net assets and working capital, directors and

liquidators are faced with a difficult task when it comes to determining whether a company is

insolvent. Although it appears that it is impossible to provide an exhaustive list of the factors which

must be considered, the Courts have provided some guidance in this matter.

Justice Emmett in Quick v Stoland3, a case dealing with insolvent trading, set out four factors which

should be taken into account in determining a company’s solvency:

• all of the company’s debts as at the time in order to determine when those debts were due and

payable;

• all of the assets of the company as at the time in order to determine the extent to which those

assets are liquid or are realisable within a time frame that would allow each of the debts to be

paid as and when they become payable;

• the company’s business as at the time in order to determine its expected net cash flow from

business by deducting from projected future sales the cash expenses which would be

necessary to generate those sales; and

• arrangements between the company and prospective lenders such as its bankers and

shareholders in order to determine whether any shortfall and liquid and realisable assets and

cash flow could be made up by borrowings which would be repayable at a later time than the

debts.

In the same case, Justice Finkelstein stated:

The inquiry whether there are reasonable grounds to expect the company will not be able to pay its

debts when due is a factual one to be decided in the light of all the circumstances of the case. It is to

2 (1995) 18 ACSR 1 at 71

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be decided as a matter of commercial reality and thus requires a consideration of the company’s

financial condition in its entirety, including its activities, assets, liabilities, cash, money that it could

procure by sale of assets or by way of loan and its ability to raise capital.

Inevitably, in proceedings such as those under the insolvent trading provisions, the question is not

whether the company is currently insolvent, but at what point in time the company became

insolvent. This raises the issue of hindsight, which is relevant in several respects. Firstly, it is clear

that the question of when the company became insolvent will in most cases inevitably be

determined with the benefit of hindsight. Thus, the plaintiff in Quick v Stoland was able to use an

expert auditor's report, prepared by Mr Martin Madden, to help prove that the defendant director's

company was insolvent at a particular point in time. Secondly, although undue weight will not be

given to the wisdom of hindsight, the question of whether there were reasonable grounds to

suspect insolvency will inevitably be determined in retrospect. In particular, a signed statement by

directors, in a set of accounts, to the effect that there were reasonable grounds to expect that the

company was solvent will be of little assistance to directors if the Court determines that, at the time

the statement was made, there were reasonable grounds to suspect insolvency. As Lehane J said

at first instance:

Where there is material before the Court capable of proving actual insolvency, and where the

material from which that conclusion might be derived was available to [the director] at the time when

the debts were incurred, it is difficult to resist the conclusion that a reasonable director, in the position

of [the director], would have had reasonable grounds to say at the time when each debt was

incurred.. I expect that the company will not be able to pay all its debts as and when they become

due. .. Little weight should, in my view, be given to, the fact that [the director] signed what appears to

be a standard form of directors' statement where he offered no evidence of the circumstances in

which he did so or the matters to which he had regard in forming the opinions stated.

4Thus, directors who fail to keep themselves abreast of the items listed by Emmett and Finkelstein

JJ risk exposure to an insolvent trading claim.

A good summary of the circumstances in which a company will be found to be insolvent is

contained in the judgment of Richardson J in Re Northbridge Properties5 which was quoted with

approval by Davison J in Re Universal Management Ltd (in liq)6:

(a) The expression ‘the ability to pay debts’ is concerned with the position of the debtor at the

time when the charge or payment is made or other specified act takes places. The concern

is with the present, but in considering the present position regard may properly be had to the

recent past – whether the debtor has in recent weeks been able to pay debts as they

become due.

3 At 622 4 Stoland Pty Ltd v Thurn (18 December 1997) Lehane J, unreported 5 unreported M 46/75 13 December 1997 6 (1981) NZCLC 95-026 at 98-246

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(b) In determining ability to meet debts as they become due, account must be taken of

outstanding debts.

(c) The words ‘as they become due’ mean, as they become legally due.

(d) The reference to payment ‘from his own money’ has not been interpreted strictly to require a

debtor to keep sufficient cash on hand at all times for that purpose. It is a matter of striking

a balance. It is not a matter simply of measuring assets against liabilities and it is not a

matter of whether if given sufficient time assets could be realised and debts paid. The

section is concerned with solvency so that there must be a substantial element of immediacy

in the ability to provide cash from non-cash assets.

(e) If, as is well established, convertibility of non-cash assets on hand may be taken into

account in determining solvency, so too, must debts becoming due while that conversion

takes place. Moreover, the words ‘as they become due’ involve consideration of a debtors

position over a period, not an instant of time.

(f) The test of solvency is an objective one.

The reference to the words ‘from his own money’ is no longer relevant as those words have been

deleted from the present legislation. What is relevant though is the requirement for the debts to

become due, meaning that they become legally due.

Whether or not a company is or is not insolvent at any given point of time for the purposes of the

Act will therefore depend upon issues including:

• cash reserves expected to be available at the time when debts become due;

• adequacy of working capital/cash flow;

• available (and reliable) sources of funding;

• the company’s ability to borrow;

• times and dates for payment;

• reliability of promises which have been made by creditors to pay;

• assets available for realisation and the value they will realise (and whether this would involve

the company in a voidable transaction or preference);

• what claims should be treated as a debt and if so when; and

• how far into the future it is necessary to look.

The critical thing about a cash flow test is that it is a test based on timing – the company needs the

money to pay its debts when they fall due not just an expectation that it will ultimately be able to

pay its debts after they have fallen due.

Equally critical is identifying what "debts" are. An important and perhaps surprising case on this

topic is the New South Wales Court of Appeal decision in Box Valley Pty Limited v Elizabeth Kidd

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and David John Kidd7 which confirms that prospective liabilities are not "debts" and consequently

there is no liability on the part of the directors for insolvent trading.

The case has implications for directors, creditors and insolvency practitioners alike since the

inability to treat prospective liabilities in such contracts as "debts" will impact on the potential

courses of action available in various insolvency processes.

David Kidd Grain Trading Pty Limited (David Kidd Grain) was incorporated on 1 February 1993

and traded in grains and other rural commodities. It entered into futures contracts for the sale of

these commodities at a specified price all on future dates. On 29 May 2001 David Kidd Grain

signed an agreement to purchase a quantity of grain from the claimant, Box Valley Pty Limited

(Box Valley). Between approximately 5 June 2001 and 15 June 2001, Box Valley delivered the

grain to David Kidd Grain and the price payable was $100,600.68.

David Kidd Grain entered into voluntary administration on 21 June 2001 as a result of its contingent

liabilities under a number of unrelated sale contracts involving grain. It subsequently went into

liquidation on 27 June 2001 upon a resolution of its creditors and a liquidator was appointed.

Box Valley received a dividend of $5,030.05 in the liquidation leaving a shortfall of $95,570.63 from

the amount owing to Box Valley at the date of the commencement of the liquidation.

Following an investigation by the liquidator into the affairs of David Kidd Grain, the liquidator

decided not to bring proceedings against the directors but under section 588R of the Act he

consented to Box Valley bringing its own proceedings against them. Box Valley subsequently

brought proceedings against Mr and Mrs Kidd as directors of David Kidd Grain under section 588M

of the Act which provides that a creditor, who has suffered loss or damage "in relation to the debt

because of the company's insolvency" can recover from a director an amount equal to the amount

of loss or damage. In order to secure recovery a director must have breached section 588G(2) or

(3) in relation to the incurring of the debt by the company. Accordingly, Box Valley needed to prove

the following principal facts to succeed in its claim, that David Kidd Grain incurred the debt to Box

Valley at a time when:

• the company was insolvent;

• there were reasonable grounds for suspecting that the company was insolvent;

• awareness of insolvency; which can alternatively be:

• actual awareness of reasonable grounds for suspecting insolvency; or

• a reasonable person would be so aware.

The directors relied upon two of the defences set out in section 588H of the Act including that there were reasonable grounds to expect that David Kidd Grain was solvent and reliance upon a competent and reliable person.

7 (2006) NSW CA 26.

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At the four day trial, the trial judge said that the main issue was whether David Kidd Grain was insolvent when it incurred its debt to Box Valley, the test for which is whether a company is liable to pay its debts as and when they fall due (section 95 of the Act). However, the question which also arose was whether a liability for damages to be incurred in the future was a debt which fell within the test for insolvency.

The trial judge rejected the expert evidence of Box Valley with little analysis on the basis that the expert had taken into account unrealised losses from trading in grain in determining the insolvency of the company and dismissed the claim.

On appeal, the Court of Appeal found that Box Valley had failed to establish that David Kidd Grain was insolvent at the time of the sale because the accountant's report was flawed and therefore could not be relied on. The exposure under the contracts at the time of the sale on credit, although unsustainable to the company, did not create a contingent liability to pay a liquidated sum. At most, it was an unliquidated sum because the market price of the commodity could have changed from the time of the sale to the expiry of the contract. This meant that the exposure under the contracts would have fluctuated when the precise amount payable was not ascertainable until expiry.

Additionally, even though it was likely that David Kidd Grain would default on the contracts at expiry, it would only be liable to a claim for damages for breach of contract. Unfortunately for Box Valley, liabilities giving rise to a claim to pay unliquidated damages are not a debt for the purposes of section 95A of the Act.

A debt would only arise when:

• default on the contracts occurred;

• the amount owing was ascertained by the counter parties purchasing on the market against the contracts entered into by David Kidd Grain; and

• notice of default and the amount owing was given to David Kidd Grain.

Box Valley is a case in which it would seem that the court was unwilling to engage in much forward looking.

Insolvency and crystal ball gazing

Although solvency and insolvency are assessed as at a particular date, the assessment is not

limited to the question of whether the company can pay its debts which are due on that date.

Section 95A makes it clear that in determining solvency on a particular date, an assessment needs

to be made of the company's ability to pay its debts "as and when they become due" – a phrase

which looks to the future.

Griffiths C J in Bank of Australia v Hall8 addressed the issue as follows:

The words "as they become due" require … that some consideration shall be given to the immediate

future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due

in, say, a month (such as the wages payable … for the month of July) by reason of an obligation

8 (1907) 4CLR 1514 at 1528.

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already existing, and which may before that day exhaust all his available resources, how can it be

said that he is "able to pay his debts as they become due", out of his own monies?

Thus, in an assessment of insolvency either on a winding-up application or with the benefit of

hindsight after a company has been placed in liquidation, a court may have regard to the

company's projected future financial position as at the date on which it is alleged that the company

is insolvent.

The question of how far into the future such an assessment may go will depend very much on the

nature of the business of the company, its assets and its liabilities and will include questions such

as the nature of the liabilities which have been incurred, the quantum of those liabilities and the

dates on which they will fall due for payment.

For most ordinary trading companies, a court is not likely to take into account liabilities which will

fall due more than some weeks or perhaps some months into the future. The courts are reluctant

to make a determination of insolvency based on the prediction of far-off future events in the life of a

company which may be commercially uncertain.

That will not always be the case though and, in the case of a company with contractual exposures

to contingent claims, the Courts may look further into the future.

The High Court has, for example, been prepared to take into account liabilities of a life insurance

company falling due as late as 7 years after the date of alleged insolvency9. Life insurance

companies, at least the one in question, have a contractual liability to pay on the happening of an

event which will inevitably happen – there is a timing uncertainty only.

Associated Dominions case – an assessment of the insolvency of an insurer

In Insurance Commissioner v Associated Dominions Assurance Society Pty Limited10 the High

Court ordered that a life insurance company be wound up and a liquidator appointed to it.

Fullagar J took the approach that an ability to pay contingent and future claims must be taken into

account along with an ability to pay present claims, in assessing the solvency of an insurer. His

Honour noted the peculiar features of an insurer's liabilities, being both substantial and often

largely contingent. He noted that the task of assessing a life insurance company's financial

position is more difficult than in the case of an ordinary commercial concern, because of these

peculiar features. He noted:

While the immediate liabilities may be quite small, those which are payable in the future upon death,

or in the case of endowment assurances upon survival, are likely to be very substantial11.

Fullagar J observed that it was therefore necessary to begin by estimating the cost of future claims

and future receipts from premiums as well as income from investments.

9 Insurance Commissioner v Associated Dominions Assurance Society Pty Limited (1953) 89CLR 78. 10 (1953) 89CLR 78.

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Fullagar J also sounded a note of caution, observing that solvency is:

not such a clear-cut question as it normally is in the case of an ordinary commercial undertaking12.

Having regard to the company's contingent and prospective liabilities, Fullagar J was satisfied that

this life insurance company was insolvent. He found as follows:

I have now, I think, summarised all the factual considerations which can be regarded as having any

importance in this case. The making of a decision is a matter which must inevitably be attended with

some anxiety. The primary question of solvency is not such a clear-cut question as it normally is in

the case of an ordinary commercial undertaking. The standard accepted by actuaries is in some

degree artificial, and in some degree elastic. I cannot overlook the necessity for caution, which Mr.

Holmes so strongly pressed upon me, and which was illustrated by the examples of one or two

companies which have appeared to be in a more or less hopeless position, and which have made

spectacular recoveries. But, looking at the facts and adjudging the probabilities as best I can, I am of

opinion that this company ought to be wound up.

The central and outstanding fact in the whole case appears to me to be that the company is

insolvent. I regard this as quite clearly established. The company is insolvent not merely in a

technical sense but in a practical and commercial sense, not merely in slight degree but in very

serious and substantial degree. This does not mean that it is unable at the moment to pay its debts

as they fall due. It could, so far as the evidence goes, discharge its current liabilities tomorrow, and it

will for some time to come be able to pay its policy holders in full as and when their claims mature.

But it is highly probable--practically certain, I think, as matters stand--that it will in the not very distant

future be unable to discharge in full claims under maturing policies. When that event will occur cannot

in the nature of things, be precisely stated. I did not understand it to be suggested that it was likely to

occur before 1960 [ie 7 years after the date of the decision].

That being the position of the company, there is, in my opinion, a high degree of probability that, if it

is not placed in liquidation, policy holders whose claims mature in the near future will be paid in full at

the expense of those whose claims mature in the more distant future. Many, of course, will already

have been paid in full, and nothing can be done about that. But such a state of affairs ought not, in

my opinion, to be allowed to continue. In a winding up all policy holders will stand on an equal footing,

whether their claims are due to mature soon or late. It seems to me to be prima facie just and

equitable--just and equitable from the point of view of the policy holders generally--that a company

which finds itself in the position of this company should be wound up.

I would, of course, agree that an assessment of future prospects is a vital element in the case which

the commissioner makes. To a motion based merely on present insolvency--even a substantial

degree of insolvency--it might be possible for a company to make a number of answers. For example,

it might be said that it was a young company which had not had time to recover from heavy initial

expenditure and which, though at the moment insolvent, was rapidly building up reserves. No such

answer, however, could be made in this case, because this company has been carrying on business

for twenty-five years. Again, some satisfactory explanation of a company's present insolvency might

11 (1953) 89CLR 78 at 97-98. 12 At p110.

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be forthcoming: it might be shown to be due to misfortunes which were not likely to recur, or to errors

in management or policy which had been remedied. Again, however, no such answer is really put

forward in this case.

It should be noted that Fullagar J found that the company was insolvent in 1953 – this was not

merely a case where the company was likely to become insolvent at some future time.

Fullagar J also acknowledged that it would be possible for an insurer to lead evidence before a

court pointing to facts which would establish a reasonable prospect that the insurer's finances

would improve in the future and its reserves would increase, such that it would be able to pay

contingent and prospective liabilities as they fell due for payment. In the case before him, His

Honour found that those facts were not present. Nevertheless, Associated Dominions suggests

that courts may be prepared to make a determination that a company with contractual contingent

liabilities such as insurance claims or warranty claims may be insolvent having regard to its

contingent liabilities. However, Courts will be cautious in doing so, in view of the inherent

uncertainties involved in assessing those liabilities and the ability of the company to pay them as

they become due and payable.

Edwards case

Issues of long-term solvency were also the subject of consideration in Edwards & Ors v Attorney

General & Anor13. This was a case brought by the directors of the trustee of the Medical Research

and Compensation Foundation, MRCF (Investments) Pty Limited and of Amaca Pty Ltd (Amaca)

and Amaba Pty Ltd (Amaba). In a judgment delivered on Friday, 6 August 2004, the New South

Wales Court of Appeal said that the directors of Amaca and Amaba should continue to pay claims

in full and gave relief under section 1318 of the Act for them having done so to date and indicated

that future acts by the directors in continuing to do so could be protected by an interlocutory

application in the future. The judgment is very significant for what it has to say about assessing

solvency, about what claims constitute contingent and prospective claims, about the fact that

possible prospective claimants in tort of the type considered are not creditors capable of proving in

a scheme of arrangement, voluntary administration or liquidation and for the manner in which it

distinguishes Associated Dominions (being, as we have seen, a case involving contractual

contingent liabilities) from a case involving possible future tort claims.

The best way of setting out the Court's views on these issues is to set out some of the key

passages. Firstly, from Justice Young:

58 On current authority persons injured through exposure to asbestos manufactured or

supplied by Amaca or Amaba do not have a completed cause of action until damage is

suffered and that usually involves manifestation of the disease: Orica Ltd v CGU Insurance

Ltd [2003] NSWCA 331; 13 ANZ Insurances Cases 61-596. Indeed, some of the future

claimants could be in the more extreme category where the people concerned have not yet

13 [2004] NSWCA 272

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been exposed to the asbestos such as home renovators doing future renovations or may

even be people not yet born who might be involved in demolishing an asbestos ridden

building somewhere in 2030. No-one can currently know the identity of the future claimant.

59 This type of liability must be distinguished from the case of a contingent creditor. A

contingent creditor is a person to whom a corporation owes an existing obligation out of

which a liability on its part to pay a sum of money will arise in a future event, whether that

event be one which must happen or only an event which may happen: Community

Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455; Re International

Harvester Australia (1983) 1 ACLC 700 at 703. Again, the liabilities in this case must be

distinguished from the case of a prospective creditor, a prospective creditor being one who

is owed a sum of money not immediately payable but which will certainly become due in the

future either on some date which has already been determined, or on some date

determinable by reference to future events: Stonegate Securities Ltd v Gregory [1980] Ch

576; Commissioner of Taxation v Simionato Holdings Pty Ltd (1997) 15 ACLC 477.

60 The distinction is vital because whilst contingent or prospective creditors are taken into

account in assessing solvency, possible future claims that might crystallise are not. The

great probabilities are that if Amaca and Amaba were to go into provisional liquidation now,

then the only claims that would be paid by the liquidator would be those which have

crystallised and, after paying the doubtless heavy expenses of liquidation, there would be a

distribution of surplus funds to the shareholder MRCF which would be used for the purpose

of the alleged charitable fund. The future creditors would get nothing and this may very well

be the case even if the claim matured the day after the liquidation commenced.

65 A2. Prima facie, the Corporations Act does not seem to provide any solution for the present

case. For the reasons given liquidation is not the answer. Receivership is only a temporary

solution.

84 Perhaps the case closest to the present one, or at least closes to Associated Dominions, is

In re European Life Assurance Society (1869) LR 9 Eq 122. That was an application to wind

up a life insurance company on the just and equitable ground. The company was paying its

debts but it would appear that it was only able to pay policy holders who died out of fresh

premiums. James VC said at 128:

'…The court has nothing whatever to do with any question of future liabilities, that it

has nothing whatever to do with the question of the probability whether any

business which the company may carry on tomorrow or hereafter will be profitable

or unprofitable. That is a matter for those who may choose to be the customers of

the company and for the shareholders to consider. I have to look at the case

simply with reference to the solvency or insolvency of the company … exactly as it

stood on … 31st of December 1868 … I must take it as if all the business which the

company ever intended to do was then done, as if its business were confined to its

existing contracts, and as if it did not mean to enter into one single fresh contract or

do anything more.'

85 The only case which seems to have considered the European Life Assurance case in any

depth is the decision of Slade J in re Capital Annuities Ltd [1979] 1 WLR 170, a case of an

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insurance company which specialised solely in annuity contracts. In that case, Slade J

dismissed an application by the Policy Holders Protection Board on the basis that, while the

company's financial position was precarious, it had not been proved that the present

condition of contingent and prospective liabilities exceeded the present value of the assets.

86 There does not seem to be any case of winding up of a life insurance company that has

been reported since 1953.

87 Of course, the present case is quite different to a case of winding up a life insurance

company. In a life insurance company one knows that only the policy holders or their

assignees or dependants can be claimants, one knows they certainly all will die.

Furthermore, one can value their claims against the company at any one point in time.

Accordingly, one has a series of people who can claim in a winding up. The present case is

very different. Moreover, in the Associated Dominions case there was distinct benefit to

some people to wind the company up. In the present case, winding the company up would

be of no benefit to anyone.

88 Mr Jackman does not go so far as to suggest that there is legal insolvency in the instant

case, but says that one should apply the Associated Dominions case that there is

commercial insolvency and that people should be protected. The first part of that

proposition may be correct; the second is not.

89 Before leaving this subject I should note that in any event I am not convinced that one can

glean from the Associated Dominions case the proposition that pari passu distribution

amongst claimants is a fundamental purpose of the Corporations Act. If one is in the subset

insolvent companies or winding up then the pari passu principle is one of the basic norms.

However, when one is dealing with a wider picture, the purpose of a corporation in life, not

as much emphasis is put on what will happen if future claims overwhelm the company, but

rather on its purpose in life and its administration.

90 Although the present situation with possible claims coming up 40 years into the future is

unusual, it is not unique. There would be a number of companies currently trading which

are not insolvent in the eyes of the law, but as soon as they go into insolvent administration

at least some of their employees' entitlements will become crystallised and they will be very

much insolvent. However, until trading ceases the employees' entitlements are merely

prospective debts and so do not affect legal solvency.

91 Again, there are other situations where corporation insolvency law does not take into

account commercial reality as to a corporation's financial position. Thus, in Re Bond

Corporation Holdings Ltd (1990) 8 ACLC 153 at 161, the evidence was that the operating

revenue of the defendant company was unlikely to be as high for 1990 as it was in 1989 and

the expert accountant forecast that at some time in the future the company would not be

able to pay its debts, vide p 161. Ipp J, then a Judge of the Western Australian Supreme

Court, held that that was insufficient to wind up the company on the ground of insolvency.

92 Again, in Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 476, Sackville J said,

when dealing with an insolvency petition:

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"… the question is not whether the company will survive for the foreseeable future.

It is whether the company has discharged the burden of showing that it can pay all

of its debts as and when the become due and payable."

Accordingly, even though, as his Honour said the evidence suggests that the company's

financial position was precarious, it was not insolvent.

Chief Justice Spigelman and President Mason agreed that the directors should get section 1318(2)

relief. Chief Justice Spigelman said:

12 With respect to the directors' application under s1318(2) of the Corporations Act 2001 (Cth),

the primary issue that was raised concerns the possibility that present creditors will receive a

benefit at the expense of future creditors. The principle of equality between creditors has

been accepted as a long-standing principle in corporations law. (See, for example, the

observations in Ferrier & Knight v Civil Aviation Authority (1994) 55 FCR 28 at 42-43,

observations not affected by the judgment of the High Court on appeal.)

13 It is a material consideration when exercising the power to excuse under s1318 that the

consequences of the conduct may be to prefer one group of creditors to another group.

Nevertheless, in the present case the countervailing considerations substantially outweigh

the application of this principle.

15 … the body of future creditors may not receive any advantage from the only feasible

alternative to a continuation of the status quo. The majority of persons identified as "future

creditors" do not, on the submissions made to the Court, have a present right of action

although, on an actuarial basis, it is certain that such causes of action will emerge in the

future.

16 Mr Gleeson SC put before the Court the various submissions that had been made to the

Jackson Inquiry and adopted their analysis that the appointment of a provisional liquidator

would be such as to prevent the incurring of future liabilities, so that those presently entitled

would be protected. Mr I Jackman SC, who appeared for ASIC, accepted this conclusion.

On this basis the process of liquidation would ensure the very inequality which the written

submissions of ASIC said the Court should take into account, i.e. present creditors would

automatically be preferred to future creditors.

President Mason said:

31 I agree with the orders proposed by Young CJ in Eq and generally with his reasons.

32 In particular, I agree that there are significant points of distinction between this case and

Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR

78. This said, the presently constituted proceedings are not a proper vehicle for resolving

the question whether the two subsidiaries of the Medical Research and Compensation

Foundation are presently technically insolvent.

33 If however, that were the case or if it were otherwise appropriate for the companies to be

wound up on the just and equitable ground, this could have a disastrous impact in relation to

asbestos victims yet to be inflicted or yet to disclose any manifestation of disease. Young

CJ in Eq demonstrates why this group of claimants would be unable to prove in the

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liquidations of the subsidiaries. It would follow that those liquidations would produce very

substantial surpluses of funds. Those assets would pass to the Foundation in

circumstances that would not involve any breach on the Foundation's part of clause 4 of the

Deed of Settlement of February 2001. On my reading of that Deed, the funds would then be

wholly impressed with the charitable purpose stipulated in clause 3.1. That purpose has

nothing to do with meeting the legal claims of tort victims.

It may be that the High Court's decision in Sons of Gwalia Limited v Margaretic14 removes the requirement for statutory and negligence claimants to have an accrued cause of action in order to be classified as creditors, although the ratio of the case on this point is not entirely clear.15

In summary then, to determine solvency some forward looking is required. For contractual liabilities for liquidated sums which are certain to arise, the Courts may look well into the future. For companies with possible future tort claims according to Edwards, the Courts may not take those future possible creditors into account in assessing present solvency however the decision in Sons of Gwalia may require a reconsideration of this issue.

2. Voluntary administration

VA is by far the most common method of reorganisation in Australia, primarily because of the speed and ease by which it can be commenced.

VA is a procedure designed to salvage insolvent or near-insolvent companies so that the company can return to trading or provide a better return for creditors and shareholders. It is the only formal process in Australia with rehabilitation as one of its express goals. The objects of Part 5.3 of the Act (which deals with VAs) are set out in section 435A as follows:

The object of this part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence – results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

There are two stages to the VA process. The first is the administration phase in which the company comes under control of an insolvency practitioner who must investigate the company’s affairs and then recommend to the company’s creditors whether the company should be:

• salvaged under a DOCA;

• wound up; or

• returned to the control of those who controlled it prior to administration.

14 (2007) HCA 1. 15 See discussion at p33 below.

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The second stage, if the creditors so decide, is the period after a DOCA is entered into, which is known as ‘deed administration’.

2.1 Requirements

There are three ways in which an administrator can be appointed to a company. An administrator can be appointed by:

• the company itself at the instigation of the directors, if the board has resolved to the effect that in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time;

• a liquidator or provisional liquidator appointed to the company, if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time; or

• a chargee holding a charge over the whole, or substantially the whole of the company’s property if the charge has become and is still enforceable.

2.2 Likely to become insolvent

As the appointment of a voluntary administrator is a decision taken by the directors rather than the

court the legitimacy of the reasoning process behind the directors' decision is not a matter which is

likely to often come before the Court. Such cases as there have been have primarily dealt with

whether the directors have followed the form of section 436A ie have that passed a resolution to

the effect that:

in the opinion of the directors voting for the resolution, the company is insolvent, or is likely

to become insolvent at some future time; and

an administrator of the company should be appointed

or whether the resolution has been properly passed by properly appointed directors.

Such procedural errors have sometimes been cured by a Court and sometimes not 16. For

example, the Court did have cause to consider the legitimacy of an administrator's appointment in a

case in which moves were afoot to replace the incumbent directors for the dominant purpose of

preserving their position17. There the Court found that the administrator's appointment was

voidable and terminated a Deed of Company Arrangement which had been the result of the

administration process. It is probably sufficient for the directors to form a single opinion about

16 Re Continental Pacific Insurance Co (Australia) Ltd (unrep) NSWSC Barrett J (26/8/02) (appointment validated); Glen Morton Holdings Pty Ltd v D'Aloia (unrep) FAC per Merkel J 14/9/01 (appointment validated); Wagner & Anor v International Health Promotions & Ors (1994) 12 ACLC 986 (appointment invalid and not cured); Gordon v Allied Meridian Pty Ltd [1999] NSWSC 558 (appointment invalid and not cured); DCT v Portinex [2000] NSWSC 99 (7/6/2000) (appointment validated); Re Wood Parson Pty Ltd (in liq) (2003) 21 ACLC 111 (appointment validated); Shirlaw v Graham [2001] NSWSC 612 (10/7/01) (appointment validated); Panasystems Ltd v Voodoo Tech Pty Ltd [2003] 21 ACLC 842 (appointment validated) 17 Cadwallader v Bajco Pty Ltd NSWSC Austin J (unrep); NSWCA [2002] NSWCA 328 per Heydon, Santow JJA and Gzell J

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"actual or likely insolvency" rather than forming separate opinions as to present and future

insolvency: Kazaar v Duus18; Re Ray Davis Contracting Pty Ltd19.

Whilst the expression "likely to become insolvent at some future time" has not been considered on

many occasions by the Courts in the particular context of the requirements of the resolutions for the

appointment of a voluntary administrator, the expression "likely" appears in other legislation and

has been considered by the Courts on a number of different occasions in different contexts. For

example, Heery J's decision in Munroe Toople & Associates Pty Limited v The Institute of

Chartered Accountants (Australia)20; 21supports the view that 'likely', at least in the context of in

sections 45, 46 and 47 of the Trade Practices Act, does not require a standard of more likely than

not but rather simply a real chance or possibility. In Tillman's Butcheries Pty Limited v Australasian

Meat Industry Employees Union22 Bowen CJ said:

The word 'likely' is one which has various shades of meaning. It may mean 'probably' in the sense

'more probable than not – more than a 50% chance'. It may mean 'material risk' as seen by a

reasonable man 'such as might happen'. It may mean 'some possibility – more than a remote or bare

chance'. Or, it may mean that the conduct engaged in is apparently of such character that it would

ordinarily cause the effect specified'.

In the same case, Justice Deane said at 346:

The word 'likely' can, in some contexts mean 'probably' in a sense in which that word is commonly

used by lawyers and laymen, that is to say, more likely than not, or more than a 50% chance' … it

can also, in an appropriate context refer to a real or not remote chance or possibility regardless of

whether it is less or more than 50%. When used with the latter meaning in a phrase which is

descriptive of conduct, the word is equivalent to 'prone' , 'with a propensity' or 'liable'. …

A recent case on s 436A, McMaster v Eznut23 reviews the authorities and cites Kazaar v Duus, but

does not add to the test.

As noted above, section 436A(1) enables directors to appoint a voluntary administration when, in

the opinion of the directors voting for the resolution, the company is insolvent or is likely to become

insolvent at some future time. If the directors of a company want to appoint a voluntary

administrator to the company under Part 5.3A of the Act they need to pass a resolution that in their

opinion the company is insolvent or is likely to become insolvent at some future time.

The provision does not limit voluntary administration to situations of actual or present insolvency

and the extent to which the process can be used for presently solvent companies which satisfy the

18 (unrep) AG 3005/1998 19 (unrep) QSC 221 20 [2002] FC ASC 197 21 [2002] 122 FCR 110; ATPR 41-879 22 (1979) 42 FLR 331 at 339 23 (2006) 58 ACSR 199

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second limb of s436A(1) remains to be fully explored. The decision in Crimmins v Glenview Home

Units Pty Ltd unreported24, 25 clearly supports the view that the likelihood of insolvency occurring

many years in the future would suffice to satisfy s436A(1). If this decision is followed it seems to us

to afford directors of companies an opportunity to appoint a voluntary administrator well prior to

actual insolvency.

In Crimmins the Court made the following observations:

"There is no test prescribed in s. 436A which assists a director as to what matters are to be taken into

account in forming the opinion that a company is likely to become insolvent, nor as to who imminent

insolvency should be before a director is justified in invoking the drastic remedy of administration.

This is hardly surprising. The circumstances in which companies find themselves in difficulty and

their prospects of financial survival or extinction are infinitely various. (para 47)

It is for this reason that the only criterion for judging whether an opinion as to likely insolvency has

properly been formed for the purposes of s. 436A is whether that opinion has been formed genuinely

and in good faith: see e.g. Kazaar v Duus …

Clearly, determining whether an opinion as to likely insolvency has been genuinely formed involves

both subjective and objective elements. The subjective element requires that the Court be satisfied

that the requisite opinion is actually held by the director. The objective element requires that the

Court be satisfied that a competent director in the position of the director concerned could reasonably

have formed the opinion on the facts known to that director …

However, it must be borne in mind that forming an opinion whether insolvency is 'likely' for the

purposes of s. 436A does not involve the same test as determining whether reasonable grounds exist

for suspecting that a company is insolvent or will become insolvent for the purposes of s. 588G. The

scope for forming an opinion of likely insolvency is very broad under s. 436A. For example, a director

may legitimately form the view that insolvency is likely ten years hence because the company's

business is founded upon a particular technology which will be completely obsolete by that time and

the company's business is already dwindling at such a rate that continuing liabilities will inevitably

outstrip the company's ability to pay. Such a view would not, in itself, render the director liable under

s. 588G for a debt incurred by the company the day after that view was formed, but it may well justify

the director in immediately invoking the aid of s. 436A." (paras 49-51)

Under present law directors of a company which was not presently insolvent but had inadequate

resources to meet expected debts as they fell due for payment in the future could, in appropriate

circumstances, appoint an administrator before the debts had in fact fallen due for payment. It is

worth taking into account the fact that in Associated Dominions the High Court found that a life

insurance company which would only run out of money in 7 years time was then presently

insolvent26. So long as the directors form a genuine or bona fide view of present insolvency, or the

24 [2001] NSWSC 599 25 (unreported 17 August 2001) 26 The Edwards case suggests a different result where the future liabilities are not contractual certainties but potential future tort claims.

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likelihood of insolvency at some time in the future, it would be difficult to say how such an

appointment could be challenged on the grounds of improper purpose 27.

In Cheerine Group (International) Pty Ltd v Yeung28, the appointment of a voluntary administrator

was set aside in circumstances where there was substantial irregularity in the meeting appointing

the administrators, with the vote carried by an invalidly appointed alternate director appointed

pursuant to a power of attorney. The court also found that there was no evidence the company was

insolvent at any stage. The court confirmed that administrators "do not have to conduct an enquiry

to see whether they have been properly appointed"29.

It is important to recognise that the present section 436A(1) does not limit voluntary administration

to situations of actual or present insolvency and the extent to which the process can be used for

presently solvent companies which satisfy the second limb of section 436A(1) remains to be fully

explored. The obiter comments made in the decision in Crimmins v Glenview Home Units Pty Ltd30

support the view that the likelihood of insolvency occurring many years in the future would suffice

to satisfy section 436A(1). If this decision is followed it seems to afford directors of companies an

opportunity to appoint a voluntary administrator well prior to actual insolvency. These issues are

discussed in more detail in 9.1 below.

2.3 Procedure

When VA initially commences, the administrator, irrespective of how appointed, must lodge a notice of appointment with the Australian Securities and Investment Commission (ASIC) before the end of the next business day after appointment and the notice must be published within three business days after the appointment in a national newspaper or in the daily newspaper of each state or territory in which the company has its registered office or carries on business.

Where a chargee has appointed the administrator, the chargee is required to give written notice of the appointment to the company before the end of the next business day.

Where the company or the liquidator or the provisional liquidator of the company has made the appointment, the company or the liquidator is required to give written notice of the appointment to a chargee who holds a charge over the whole or substantially the whole of the company’s property.

A company under administration must set out in every public document and in every negotiable instrument of the company the expression “(administrator appointed)” after the company’s name where it first appears.

The first meeting of creditors must be held within five business days of the initial appointment of the administrator. At least two business days before the meeting the

27 see Taylor, T Australian Insolvency Management Practice at pp 54-560 28 [2006] NSWSC 1047 29 Deputy Commissioner of Taxation v Portinex Pty Limited (2000) 34 ACSR 391 30 [2001] NSWSC 599 (unreported 17 August 2001)

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administrator must give written notice of the meeting to as many of the company’s creditors as reasonably practicable and cause notice of the meeting to be published.

The business of the first meeting of creditors is to decide whether there should be a committee of creditors and to provide creditors with a chance to appoint someone else as administrator (if they do not want the administrator appointed by the board of directors or liquidator, provisional liquidator or chargeholder (as the case may be)).

A committee of inspection can act for creditors in consultations with the administrator about the administration and can receive and consider his or her reports but it cannot interfere with the administration by giving directions in contrast to the position in a winding-up.

The administrator must convene the second meeting of creditors within five business days of the end of the convening period. The convening period is:

(a) if the administration begins on a day that is in December, or is less than 28 days before Good Friday – the period of 28 days beginning on that day; or

(b) otherwise – the period of 21 days beginning on the day when the administration begins.

The business of the second meeting of creditors is to decide the company’s fate. The administrator will decide the creditors eligible to vote at the second meeting on the basis of the company’s records and from the evidence of liability submitted by those who are claiming to be creditors.

2.4 Effects

While a company is under administration it cannot be wound up and legal proceedings and enforcement processes cannot be started or continued unless the administrator or the court agrees. In this way, this rehabilitation procedure can be entered before the company is in liquidation.

Secured creditors cannot enforce their security except in limited circumstances. Secured creditors who have a charge over all or substantially all of the company’s property must enforce their charge within 10 days of the appointment of the administrator or they are prohibited from enforcing their security during the administration phase without the administrator’s consent or the leave of the court. Creditors with a charge over perishable property are allowed to enforce their security. Similarly, creditors who have begun enforcement prior to the commencement of the administrator are allowed to enforce their security.

Shareholders have no part to play in the administration process (unless they are also creditors which following the decision of the High Court in Sons of Gwalia needs to be carefully considered) and any transfer of shares in a company, or an alteration in the status of a member of a company that is made during the administration of the company is void unless the court otherwise orders31.

Within five business days of his or her appointment, the administrator must hold a meeting of creditors. At this meeting the creditors can vote to establish a creditors’ committee

31 If reforms enacted VA will have discretion to allow – see [x] below.

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and/or replace the voluntary administrator. Within five business days of the convening period, the administrator must hold the second meeting of creditors (the ‘decision meeting’); however, this meeting can be adjourned for up to 60 days without court approval32. The administrator must obtain court approval if a longer period is required. At the second creditors’ meeting the creditors vote on three alternative courses of action, namely that the company:

1) goes into liquidation;

2) be returned to the directors, which would normally only happen if the company is found to be solvent; or

3) enter into a DOCA. A DOCA is effectively a compromise agreement between the company and its creditors. It can in essence contain whatever agreement the creditors want it to although the court has power to set aside a DOCA if, for example, it believes it to be contrary to public policy. It can provide a very flexible mechanism for the reorganisation of corporations.

If a DOCA has been executed following the administration period and within the period prescribed by the Act, the DOCA is binding on all creditors (secured creditors who did not vote for the deed are not barred from enforcing their security), the company, its officers and members, and the administrator of the DOCA. Anyone who is bound by the DOCA cannot, without court permission:

• apply to have the company wound up;

• start legal proceedings against the company; or

• prosecute any enforcement process against the company’s property.

2.5 Involuntary voluntary administrations

Despite its name, there is scope for VA to be ‘involuntary’ on the part of the company, as an administrator can be appointed by a chargee of all, or substantially, all of the assets of the company and by a liquidator or provisional liquidator. This can give chargeholders and liquidators a useful tool to consider in a possible restructuring of a company or group. However appointed, when an administrator is appointed the administration would then proceed as discussed at 2.3 above.

2.6 Doing business in reorganisations

The powers of administrators are set out in the Act and allow for the carrying on of the business. An administrator acts as an agent of the company and is thereby able to bind the company during the administration period. A committee of creditors may be appointed during the VA. Such a committee has largely an advisory role. The creditors do not have a role in the day to day management of the company during VA but they make the critical decision at the second creditors’ meeting (see 2.3 above). Where a company is operating under a DOCA, the terms of the DOCA will govern the extent to which the deed

32 Note these dates will change slightly if the reforms are enacted – see [x] below.

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administrator can carry on the business of the company and the approvals that are required.

During the VA and DOCA administration there is no need for any court involvement and no court approval is required with some limited exceptions (eg where the VA wishes to sell a third party’s property other than in the ordinary course of business or with that party’s consent). The administrator or deed administrator may, however, seek court directions or approval as needed and creditors or any other interested person adversely affected by a DOCA can seek court intervention in certain circumstances (see 2.14 below).

Unlike liquidators (see 4.2 below), voluntary administrators do not have power to seek court relief in relation to insolvent trading, unfair preferences, uncommercial transactions or other statutory voidable transactions.

2.7 Stays of proceedings/moratoriums

When a company is under administration:

• No proceeding in a court against the company or in relation to property of the company can begin or proceed except with the administrator’s consent or the leave of the court.

• No enforcement process in relation to property of the company can begin or proceed except with leave of the court.

• A charge cannot be enforced on property of the company except with the administrator’s written consent or with the leave of the court, unless the chargee holds a charge over the whole or substantially the whole of the company’s property and enforces the charge within 10 days of the administrator’s appointment, or the chargee has commenced enforcement of the charge prior to the administrator’s appointment.

• A chargee who has security over perishable property can enforce its security.

• The owner or lessor of property that is used or occupied by, or is in the possession of the company cannot take possession or otherwise recover it, except with the administrator’s written consent or with the leave of the court.

• Suppliers of essential services (electricity, gas, water and telecommunications) cannot refuse services to a company under administration by reason only of there being a debt owing to them and they cannot make further supply conditional on payment of outstanding debt.

• An officer of the court, upon receiving written notice of the fact that the company is under administration is restricted from taking action under an execution or attachment process.

• A guarantee of a liability of the company cannot be enforced against a director of the company who is a natural person, or a spouse, de facto or relative of such a director.

• The courts may grant leave allowing the commencement or continuation of proceedings against a company under administration if the claim has a solid

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foundation and gives rise to a serious dispute. However, generally, the courts will refuse leave to proceed, so as to prevent the unnecessary hindrance to the administrator of the need to defend legal proceedings.

Importantly, there is no stay on the ability of contracting parties to exercise their rights to terminate contracts of supply or purchase of goods or service when a company is under administration. As this can be a significant impediment to successful reorganisation, reform in this area has been recommended (see 9.2 below). Many contracts give counter-parties the right to terminate on the actual insolvency or deemed insolvency of the other contracting party or on the appointment of an external administrator. For some companies the major value of the company resides in its contracts. The appointment of an administrator can see that value rapidly disappear.

2.8 Sale of assets

Once appointed, the administrator acts as the agent of the company and has broad powers to run the company. During the administration procedure, the administrator has control of the company’s business, property and affairs and may: terminate or dispose of all or part of that business; dispose of any of that property; and perform any function, and exercise any power, that a company or any of its officers could perform or exercise if the company were not under administration.

The powers of other officers are suspended, except with the administrator’s written approval and only an administrator can (with some exceptions, such as encumbered property) deal with the company’s property.

Under a DOCA, the deed administrator’s powers will depend on the terms of the DOCA; however, they are usually very broad.

Administrators and deed administrators are normally extremely reluctant to provide warranties or indemnities in contracts of sale because they are reluctant to expose themselves to personal liability should those warranties or indemnities ultimately prove to be incorrect. This can have a significant impact on the realisable value of assets. Where the main assets of a company are intangibles or intellectual property, the lack of warranties and indemnities can very dramatically impact on the ability of the company to sell those assets at all and, if they can be sold, on the realisable value.

2.9 Set-off and netting

There is no statutory right to set-off in VAs. The parties remain entitled to exercise such contractual, equitable or legal rights of set-off as are available to them in the same way as they would have been able to do prior to VA. While under a DOCA the right to set-off will be determined by reference to the terms of the DOCA; most DOCAs import the language of the Act governing set-off in respect of liquidations.

2.10 Post-filing credit

The administration phase of VA is intended to be an interim administration which generally results in either a DOCA or a winding-up occurring. During the administration phase, an administrator has power to obtain credit or take loans on behalf of the company. Unless the company has significant assets it is likely that a company in VA will have real difficulties

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in obtaining new finance. The administrator of a company under VA is liable for debts he or she incurs in the performance or exercise, or purported performance or exercise, of any of his or her functions as administrator for:

• services rendered;

• goods bought; or

• property hired, leased, used or occupied.

In exchange the administrator has an indemnity out of the company’s assets for the payment of such liabilities. This indemnity has priority over all unsecured debts and floating charges of the company.

Significantly, the taking of a loan by the company during an administration has been held not to be the rendering of a service. This means that if a company in administration borrows money, the company, but not the administrator, will be liable to repay the debt.

The Court has been prepared33 to vary this result and, for the purposes only of the administration before it, to rule that the taking of a loan was the rendering of a service. The effect of the orders made by the Court was that:

• the loan became a service under section 443A;

• in obtaining the loan from the creditors, the administrators were entitled to the indemnity under section 443D(a);

• the administrator would not be liable for any shortfall if the company's assets were not sufficient to enable the loan to be repaid; and

• the lenders were to obtain an priority for the repayment of their monies. This was to occur indirectly through the administrator's indemnity.

The Court was able to achieve this result by use of section 447A, the so-called "magic provision". Section 447A gives the Court power to make such orders as it thinks appropriate about how the relevant part of the Act is to operate in relation to a particular company.

Spyglass is an example of the potential breadth of the use of section 447A to amend Part 5.3A of the Act to suit the administration of a particular company. An important consideration for the Court was that all of the parties and most importantly the majority of creditors, agreed with the orders that were proposed. The case shows that the Court will be prepared to make orders to modify the common law interpretation of provisions of Part 5.3A of the Act, but will first wish to ensure that the interests of the creditors will be served by such a modification.

If this approach is followed in other cases it may improve the ability of a company in VA to borrow although, again, in the absence of significant assets residing in the company in VA, the administrator is unlikely to support such an application and by doing so become exposed to personal liability.

33 Mentha, in the matter of Spyglass Management Group Pty Ltd (Administrators Appointed) [2004] FCA 1469

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The court has allowed special supply agreements between customers and a company in VA to fall under section 447A.34 The agreement guaranteed supply at increased prices, and was designed to ensure short-term viability of the business as a going concern. Re Sims, like Spyglass, highlights the flexibility of section 447A to allow administrators to implement plans agreed to by stakeholders such as creditors and customers to achieve the best possible outcome.

If, following an administration, the creditors resolve to wind up the company rather than enter into a DOCA then the rules of priority payment that relate to winding-up will apply (see 2.15).

If a DOCA is executed, the ability of the deed administrator to take loans or obtain credit on behalf of the company will depend on the terms of the DOCA. Any DOCA which gave the deed administrator power to enter into loans on behalf of the company or to obtain credit would be likely to provide that the deed administrator could repay that loan in priority to other debts and to indemnify the deed administrator from personal liability or alternatively to provide the deed administrator with a lien and indemnity over the company's assets.

The particular order of priorities is specified in the DOCA itself (or implied by the regulations unless excluded) and normally will incorporate the order of priorities that applies in relation to a company that is being wound up.

One of the proposed reforms will facilitate borrowing by insolvency practitioners by making it clear that loans during a prior administration will be afforded priority in a liquidation35.

2.11 Successful reorganisations

The creditors must resolve that the company enter into a DOCA if the company is to be reorganised by that method. A successful resolution requires a majority of the creditors voting on the resolution to vote in favour of the resolution and the value of the debts owing by the company to those creditors voting in favour to be more than half of the total value of the debts owed by the company to those creditors voting on the resolution.

If the creditors decide to enter into a DOCA, the DOCA can essentially contain whatever agreement the creditors want. The regulations of the Act set out prescribed terms of operation of that arrangement and those terms apply unless the creditors determine otherwise. The prescribed terms provide that priorities in respect of creditors are determined with reference to the priorities regime set out in the Act (see 2.15 below). A creditor who is dissatisfied with a DOCA can seek orders from the court to set it aside in certain circumstances, including, for example that the DOCA was contrary to public policy (see 2.14 below).

An example of a successful reorganisation case where the obtaining of new finance post filing resulted in a positive result for the company involved the Sydney Kings basketball team. In 2000, the Sydney Kings were sold to a consortium. Two years later, the Sydney Kings were placed into voluntary administration, following poor attendances which did not

34 Sims; Re Huon Corp Pty Ltd (admins apptd) [2006] FCA 1201 35 See section 9 below.

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cover the enormous cost of using the Superdome as a venue. However, another syndicate came in to rebuild the team, including through returning to the Sydney Entertainment Centre to lessen costs36. The Sydney Kings went on to win the Minor Premiership and Grand Final in the season following the voluntary administration, and, according to the Sydney Kings' website, have been able to continue as a team without significant financial trouble since this time37.

2.12 Expedited reorganisations

Critical to the potential success of any reorganisation is that the directors identify a need for restructuring and seek to put in place mechanisms to achieve it before it is too late – it may be too late to resuscitate a business if it is insolvent, particularly if it has failed to ensure payment of key suppliers and delivery to key customers.

Section 436A(1) enables directors to appoint a voluntary administrator when, in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time. Directors of companies generally do not recognise the need to consider restructuring alternatives until restructuring is much more difficult than it might have been with earlier intervention. This is certainly the case with many Australian directors and this has led to recommendations that the resolution which directors are required to pass to put a company into VA be changed from the present "that the company is or is likely to become insolvent at some future time" to "that the company is or may become insolvent at some future time" (see 9.1 below).

Once commenced, the VA process proceeds quickly and without the need for any court involvement in the process at all. In the first stage, the administration stage, an administrator is appointed. As soon as practicable after the administration begins, the administrator must investigate the company’s business and form an opinion about whether to recommend to creditors:

• the execution of a DOCA;

• ending the administration and returning control to directors; or

• the winding up of the company.

This opinion must be presented to the creditors at the second meeting which must be held no later than five business days after the convening period. The meeting can be adjourned without the approval of the court, but it must be held within 60 days from the day of the second meeting (as first convened) unless further court extensions are sought first.

If the creditors decide at the second meeting that the company should execute a DOCA, the administrator must prepare a document containing the terms that the creditors voted for. The document must be executed by the company and the administrator within 21 days after the end of the second creditors’ meeting.

36 http://www.sydneykings.com.au/zone/history.asp?BL=kings&Toc=44, consulted on 12 February 2007 37 http://www.sydneykings.com.au/zone/history.asp?BL=kings&Toc=44, consulted on 12 February 2007

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2.13 Unsuccessful reorganisations

In a VA, the fate of the company depends on what the creditors decide at the second meeting of the creditors (see 2.3 above).

The chairperson of the meeting is the sole judge of whether a resolution has been carried or lost and must declare the result of the vote. A declaration is conclusive evidence of the result without proof of the number or proportion of votes for or against the resolution, unless a poll is demanded.

On a poll, the creditors’ resolution is passed if a majority in number and value of those present and voting, vote in favour of the resolution. Where the majority of creditors (in number) vote one way, but the majority of creditors (in terms of value of the total claims) vote the other way (or vice versa), the administrator may caste the deciding vote.

If the creditors resolve to execute a DOCA, then the DOCA must be executed within 21 days. If the instrument is not executed within this period then the company is deemed to be in a creditors’ voluntary winding-up.

Termination of an executed DOCA can follow:

• an order of the court;

• a resolution of a creditors’ meeting; or

• an occurrence of circumstances specified in the DOCA in which case the DOCA should identify what then happens eg liquidation, deregistration or return to the directors. If the DOCA is silent on what happens on termination, control of the company will return to its directors.

On the application of the company, a creditor or other interested person, an executed DOCA may be terminated by an order of the court, if the court is satisfied that:

• there was misleading information or a material omission in statements or reports to creditors;

• there has been a material contravention of the deed by a person bound;

• effect cannot be given to the deed without injustice or undue delay;

• the deed or something done under it is:

• oppressive or unfairly prejudicial to, or unfairly discriminatory against, a creditor; or

• contrary to the interests of the creditors of the company as a whole; or

• the deed should be terminated for some other reason such as public policy.

Where a DOCA is terminated, there will be a transition to a creditors' voluntary winding-up (see 6 below) where:

• after the DOCA has been executed and the creditors later resolve that the company be wound up;

• the court orders termination of the DOCA; and

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• the DOCA itself specifies the circumstances in which the DOCA is terminated and that on termination the company will be wound up and those circumstances exist at a particular time.

2.14 Claims and appeals

During the administration phase of a VA, creditors may not vote at creditors meetings unless their claims have been admitted by the administrator or the creditors have lodged particulars of their claims with the chairperson. The administrator may call for formal proofs of debts or claims to be lodged before the meeting. Under the regulations the chairperson may admit or reject a proof of debt or claim for the purpose of voting. If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark the proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained. If the creditor has not provided the administrator with sufficient information to enable him or her to determine whether the purported creditor is or is not in fact a creditor or sufficient to enable to him or her to make a just estimate, the administrator is entitled to reject the proof for voting purposes38. An appeal to the court from a decision of the chairperson to admit or reject a proof of debt or claim for the purposes of voting may be taken within 14 days.

Where the administrator does not call for formal proof of claims and creditors lodge particulars of their claims, the chairperson can properly reject, without further investigation, any claim in respect of which the lodged particulars are inadequate.

Creditors for unliquidated or contingent debts or claims, or a debt the value of which has not been established, cannot vote unless a just estimate of the value of the debt or claim has been made.

2.15 Claims and appeals regarding DOCA

When a DOCA commences, the effect on unsecured creditors is:

• they are bound, as provided by the DOCA, so far as concerns claims arising on or before the day specified in the DOCA;

• if bound by the DOCA, they cannot apply to wind up the company or proceed with such an application made before the DOCA became binding.

Secured creditors, and owners and lessors of property are not bound by the DOCA unless:

• they voted in favour of the resolution of creditors and because of which the company executed the DOCA; or

• unless the court so orders.

A DOCA releases the company from a debt only insofar as the DOCA provides for its release and the creditor concerned is bound by the DOCA. Essentially a DOCA can only release claims of creditors being persons with a claim which would be provable in a liquidation if the company had gone into liquidation on the day administrators were appointed. A DOCA can release less but the broadest worded DOCA can at most release

38 Re Pan Pharmaceuticals Ltd (2003) 47 ACSR 139

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"all claims against the company (present or future. Certain or contingent, ascertained or sounding only in damages) being debts or claims the circumstances giving rise to which occurred before the commencement of the voluntary administrators". Whilst this is very broad there are some claims against a company which are, or may, not be released by a DOCA and this is dealt with below.

Tortious claims

In Edwards & Ors v Attorney-General & Anor [2004]39, the directors of the Medical Research and Compensation Foundation (MRCF) applied to the court for relief from liability for their authorisation of the payment of compensation for death or injury arising out of asbestos exposure.

The directors of the MRCF were aware that the potential claims against Amaca and Amaba vastly exceeded their assets, and were concerned that they could be personally liable if they continued their practice of paying current claims in full. They also were unable to obtain insurance against the risk of personal claims being made against them.

Justice Young noted that, on current authority, persons injured through exposure to asbestos manufactured or supplied by Amaca and Amaba do not have a completed cause of action until damage is suffered and that usually involves manifestation of the disease. Until then, their claims were mere expectancies. His Honour also noted that the identity of many of the future claimants was unknown. It was held that this type of liability must be distinguished from the case of a contingent or prospective creditor. As set out above, and according to the court:

A contingent creditor is a person to whom a corporation owes an existing obligation out of which a liability on its part to pay a sum of money will arise in a future event, whether that event be one which must happen or only an event which may happen.

…a prospective creditor being one who is owed a sum of money not immediately payable but which will certainly become due in the future either on some date which has already been determined or on some date to determine by reference to future events.

The court considered that this distinction was vital to the question of whether the directors should continue to pay claims or cause the MRCF to enter some form of insolvency administration. The court noted that while contingent or prospective creditors are taken into account in assessing solvency, possible future claims that might crystallise are not. It was found that if Amaca and Amaba were to have gone into provisional liquidation then the only claims that would have been paid by the liquidator would be those that had crystallised, and future claimants would not be assisted in any way.

According to this case, claimants with tortious "claims" will not be creditors of a company (and therefore will not be likely to be admitted to prove under a DOCA), unless they have a completed cause of action. The cause of action accrues at the time the damage is suffered by the Plaintiff40. The High Court's recent decision in Sons of Gwalia may have developed the law in this area (see discussion on p34 below).

39 NSWCA 272 40 Hawkins v Clayton (1988) 178 ALR 69 at 83.

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Contractual claims

In Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd41, the Court held that a claim under an existing lease for rent payable in the future is an existing right, not a mere expectancy, and was admissible to proof under s444D, and hence could be released under a DOCA. A claim to rent payable after the specified day under a lease in existence on the specified day is a claim which has arisen on or before that day. The court held:

Where at the relevant date, for the purposes of its winding up, a company has a contractual obligation under an existing lease to pay rent in the future we can see no reason to doubt that the lessor entitled to the benefit of that obligation has a claim “the circumstances giving rise to which occurred before the relevant date” (subs 553(1)); equally, if the company executes a deed of company arrangement and the lease was in existence on the day specified in the deed, it has a claim “arising" on or before the day specified in the deed.

The court considered that a right to sue for damages for a particular future breach of a covenant (for example, to keep premises in repair) is a mere expectancy and could not be the subject of proof. The court, however, was not required to decide this question.

It is clear from the Lam Soon decision that future liabilities for rent payable under a lease entered into by a company before it went into administration is a debt which (although not due to be paid before the administration commences), is incurred before the administration commenced. The landlord can therefore prove for the full amount of rent due for the full term of the lease if the company entered into a DOCA.

It is not clear whether other types of potential future claims that a landlord might have against a tenant which has gone into administration, for example, a potential claim for breach of a repairing covenant by the tenant when in administration, should be treated in the same way future liabilities to pay rent are, and be provable in the winding up of the tenant or if the tenant enters into a DOCA. If they are not to be treated in the same way, such future claims would not be provable. The Full Court in Lam Soon did not consider that a potential claim for the future breach of a repairing covenant in a lease would be provable. As there was no certainty that any such claim would ever be made by a landlord, it was nothing more than a mere expectancy and was not therefore capable of being incurred before the commencement of the administration and could not therefore be provable.

In Thiess Infraco (Swanston) Pty Ltd in the matter of National Express Group Australia (Swanston Trams) Pty Ltd v Smith42, the Federal Court held that Thiess was entitled to lodge a proof of debt for loss of profits under the DOCA for transport operator, National Express Group Australia (Swanston Trams) Pty Ltd.

As there was a breach of the agreement before the administrators' appointment, it was not necessary for Justice Finkelstein to decide what the position would have been if the breach had occurred after the administrators' appointment. His Honour referred to the Lam Soon decision and stated that, in his view, a right to sue for damages for a future breach of contract was a provable claim under a DOCA. His Honour stated that the suggestion in

41 (1996) 22 ACSR 169 42 (2004) 50 ACSR 434

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Lam Soon that such a claim was not provable was contrary to both the purpose of the Corporations Act and to existing authority. His Honour did so on the basis that the intention of the Corporations Act and the authorities was to ensure that a company going into liquidation or entering into a DOCA "is to be freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind" and therefore future claims should all be provable in the same way as liabilities to pay future rent are provable.

The Full Court of the Federal Court dismissed the appeal against Justice Finkelstein's decision. The Court did not take the opportunity to clarify the doubts raised by Justice Finkelstein in the first Thiess decision about the correctness of comments made by the Full Federal Court in Lam Soon. However, the case does confirm that where there has been a breach of an essential term of an agreement prior to the appointment of administrators which would entitle the innocent party to terminate, then unless that right to terminate has been abandoned, the innocent party will be entitled to lodge a proof of debt claiming loss of profits.

Lam Soon has been cited and considered by the Federal Court43 and the New South Wales Supreme Court44 a number of times since Thiess, without receiving the same negative treatment. Thiess has been positively cited and considered45.

The High Court's views in Sons of Gwalia about the breadth of s553 will no doubt be referred to in any future case addressing this question.

Claims under guarantees

In Helou v PD Mulligan Pty Limited46, the court held that a moratorium on enforcement proceedings under a DOCA and the Corporations Act will not prevent a creditor from enforcing its rights under a director's personal guarantee.

The court held that the DOCA did not suspend the rights of Mr Mulligan as creditor against Mr Helou as guarantor. Although the operation of the DOCA and s444E(3) of the Act prevented Mr Mulligan from exercising fully his rights as creditor in relation to the enforcement and commencement of legal proceedings against Belmore, it did not render the debt no longer due and payable. The effect of the DOCA was merely to suspend the types of enforcement proceedings that were available to creditors against Belmore. Instead, the creditors' enforcement rights are converted into a right to prove and participate in a pooled find.

This case follows the line of authority that establishes that the very purpose of obtaining a guarantee would be frustrated if a creditor was prevented by a DOCA from enforcing its rights under the guarantee against the third-party guarantor. The rules in liquidation or

43 Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220; Re Motor Group Australia Pty Ltd (2005) 54 ACSR 389 44 ACN 000 016 213 Pty Ltd v Kyle House Pty Ltd [2006] NSWSC 544; Re Bauhaus Pyrmont Pty Ltd (in liq) [2006] NSWSC 543 45 Re Motor Group Australia Pty Ltd (2005) 54 ACSR 389; HP Mercantile Pty Ltd v Australian Rural Group Ltd (In liq) [2005] NSWSC 895 46 [2003] NSWCA 92

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bankruptcy do not release or discharge a guarantor from its obligations under a guarantee and they do not render a due and payable debt no longer due and payable. Note, however, that s440J of the Act has the effect that a guarantee cannot be enforced against a director of a company until the administration ends (in this case when the DOCA was executed).

Civil Penalties

The courts are empowered, in various situations, to impose pecuniary sanctions on corporations as penalty for conduct that is contrary to the law. Generally speaking, these penalties are not provable debts. This was found to be the case in Mathers & Anor v Commonwealth of Australia47 (in relation to Trade Practices Act penalties).

Fila's administrators sought declarations under section 447D(1) of the Act as to whether any penalties imposed under the Trade Practices Act 1974 (Cth) (TPA) would be provable debts should Fila enter into a DOCA or be wound up. In support of their submission that they would be entitled to reject a proof of debt lodged by the Commonwealth about the penalties that would be payable, the administrators relied on s553B(1) of the Act, which provides that:

…penalties or fines imposed by a Court in respect of an offence against a law are not admissible to proof against insolvent companies.

According to the explanatory memorandum to s553B's predecessor, the provision is based on the operation of s82(3) of the Bankruptcy Act 1966 (Cth). The court noted that the explanatory memorandum said that, although a fine may be a claim by the community, fines are, by their nature, generally intended to be a deterrent. The explanatory memorandum also noted that it is difficult to justify 'penalising' creditors for a wrong committed by the company. The court also noted that, in Victoria v Mansfield48, the Full Court of the Federal Court held that s82(3) was framed on the premise, first, that a penalty or fine for an offence is imposed by a court to meet the public interest in punishing the offender for his or her offence; and secondly, that the interests of ordinary creditors should not be adversely affected by the criminal or quasi-criminal conduct of the debtor.

Justice Heerey concluded that a contravention of Part IV of the TPA was an 'offence against a law' within the meaning of s553B. Accordingly, his Honour ordered that any attempt by the Commonwealth to prove for such a debt may be properly refused by the administrators.

This case confirms that a pecuniary sanction imposed by a court on a corporation for breaching a provision of Part IV of the TPA is not a provable debt in the administration or winding-up of the penalised corporation, and hence could not be released by a DOCA. The paramount consideration was to avoid diminishing the funds available to the creditors.

The administrator of the DOCA needs to apply the funds coming in to those persons entitled to receive it (as specified in the DOCA) during the period of the DOCA’s operation, and in the priorities specified in the DOCA.

47 [2004] FCA 217 48 (2003) 199 ALR 395

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The DOCA will set out the procedure for receiving proof from creditors, admitting creditors to rank for repayment and paying dividends. The actual procedures may be similar to the position in winding-up (see below), but the provisions of the DOCA itself will determine the procedures.

The DOCA may incorporate a provision so that a person who advances funds to the company to enable it to meet its employee entitlements will assume the position of those employees, to the extent that their entitlements were met, with respect to the priority of payment of debts owed by the company. Unless the DOCA includes such a provision, the equivalent provision which would apply in a winding-up (section 560 of the Act) will not be implied.

The proposed legislative reforms require that a DOCA must adhere to the priority requirements of the Act unless a majority in value and number of creditors affected by any proposed changes to those requirements agree to such changes. This is discussed in more detail at 9 below.

Shareholders' Claims

The High Court's decision in Sons of Gwalia Limited v Margaretic49 poses new challenges for liquidators and administrators

In the part of the case which has been widely reported, the High Court held that a shareholder with a claim under a statute against a company for misleading or deceptive conduct, or for a failure to comply with its continuous disclosure obligations (each a shareholder claim), could prove in the administration or liquidation of that company in respect of the damages for which the company was liable, and that this applied whether the shareholder acquired the shares by subscription or purchase. This applied even though his loss did not crystallise before the administration.

The case may make restructuring harder simply because there is now have a potentially greater pool of interested voting creditors.

Has Sons of Gwalia expanded the class of provable claims?

A less reported but perhaps even more important element of the Sons of Gwalia case, than the shareholder/creditor issue is what it says about s553(1) of the Act.

In a liquidation and administration, and in most deeds of company arrangement, claims that are admissible to proof for voting or distribution purposes must fit within the terms of s553(1) of the Act. In relation to administrations and deeds of company arrangement, this means that to have an admissible proof, creditors need to show that they have one or more:

debts payable by [and/or] claims against, the company (present, future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the [date the company went into administration]

49 (2007) HCA 1

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Precisely what is meant by the phrase 'circumstances giving rise to which occurred before the' date of administration is a question that, prior to Sons of Gwalia, had not been considered by a superior court. It was relevant to the High Court's decision because, although Mr Margaretic had purchased his shares before the company went into administration, he had not sold his shares before that date and crystallised his loss, not before the administrators were appointed, but on their appointment.

The issue is an important one because there are several circumstances in which there is present uncertainty in the law about whether certain claims are or are not provable.

Justice Hayne recognised both this issue and the lack of previous authority. While Justice Hayne clearly favours a broad interpretation being given to s553(1), his judgment (which is approved by the remainder of the majority) only expressly deals with Mr Margaretic's position in relation to which he concludes at [176]:

that, although the agreed facts demonstrate that the appointment of administrators reduced the value of Mr Margaretic's shares to zero, his claim is one the circumstances giving rise to which occurred before the administrators' appointment. Had the facts upon which Mr Margaretic now relies been known then, they would have been known to the whole market, not just him, and he would have had the same claim he now makes. His knowledge of the relevant facts bears only upon whether he makes a claim; his knowledge of those facts does not bear upon whether he has a claim. His claim is of a kind that is within s 553 of the 2001 Act.

In making this finding the High Court, without dealing with the question in terms, essentially concluded that it was not necessary for Mr Margaretic's loss to have crystallised in order for him to have a provable claim. In other words, it was not necessary for his cause of action against the company to have accrued in order for him to have a provable claim.

If this is what the judgment stands for, it appears to be contrary to the view of the New South Wales Court of Appeal in Edwards v Attorney General50. As noted in 2.15 above, in Edwards, the New South Wales Court of Appeal found that possible future tort claims by persons who had been exposed to asbestos, but were not ill before the commencement of a liquidation, were not provable in a winding-up. As they did not have a completed cause of action at that point in time, they were held not to be contingent creditors. The High Court did not consider Edwards in its decision in Sons of Gwalia.

As the High Court dealt in terms only with the particular circumstances of Mr Margaretic's claim, the judgment does not resolve the question of whether for example:

• the existence of a pre-appointment contract is sufficient to make all post-appointment breaches of that contract provable;

• the exposure of people to toxic or dangerous products before the commencement of an administration is sufficient for them to have a provable claim even though they do not suffer any injury or illness until after the commencement of the administration;

50 (2004) 60 NSWLR 667. For the English position, see T & N Limited and Others [2006] EWHC 1447 (Ch) and http://www.aar.com.au/pubs/insol/foinsaug06.htm .

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• penalties, fines and remediation orders imposed by statutory authorities post-appointment are provable if they relate to pre-appointment conduct;

• cost orders made by a court or tribunal exercising judicial discretion post-appointment are provable if they relate to pre-appointment conduct;

• post-appointment warranty claims made on pre-appointment warranties are provable.51

No doubt Justice Hayne's statements in this case will be closely scrutinised by future claimants and the courts that have to grapple with these complex issues.

2.16 Priority claims

The manner and method of distribution of funds under a DOCA will be governed by the provisions of the instrument itself and, under the Act, the DOCA is required to specify the order in which proceeds are to be distributed among creditors bound by the DOCA.

Unless the DOCA provides otherwise, the prescribed provisions contained in the Regulations apply and they provide that the administrator of the DOCA must distribute the funds in the order of priority specified in a winding-up (see 4 below).

2.17 Distributions

If, at the second meeting (see 2.2 above), the creditors elect to wind up the company then the order and distribution of payment will be according to the statutory order of payment applying in a liquidation (see 4 below).

If the creditors elect to execute a DOCA, it is the terms of the DOCA that the creditors agreed to that will determine the order and payment of distributions. The order of priority prescribed by the Act is often adopted in provisions of a DOCA for ordering priorities between unsecured creditors who have claims against the company that has executed the DOCA.

2.18 Ability to Pool in a VA

Creditors may approve a pooling arrangement by which all assets of a group of companies can be transferred into a single fund.

For example, in Humphris in the matter of ACN 004 987 866 Pty Ltd52, administrators were appointed to five companies in the Hilton's Stores group. The business of the group was sold and the administrators sought the court's approval to execute, at the same time as uniform DOCAs, deeds of assignment and novation under which all of the group's remaining assets and liabilities would be transferred to a single fund against which all creditors could claim.

51 See Re Motor Group Australia Pty Ltd (administrators appointed) (2005) 54 ACSR 389, summarised at page 68 of our Annual Review of Insolvency and Restructuring Law 2005, available at http://www.aar.com.au/pubs/pdf/arir/2005/arirmain.pdf. 52 [2003] FCA 849

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The pooling proposal was made because the group's books and records did not enable the administrators to identify the assets and liabilities of each group entity. The administrators estimated that the cost of reconstructing the accounts of each entity would be such that, if this work was carried out, it was unlikely that there would be a return to creditors. In addition, the administrators submitted that the pooling proposal would result in a more equitable treatment of creditors.

Creditors approved the proposal unanimously (on a show of hands and on the voices) at the reconvened second meeting of creditors. However, this was on the basis that if creditors voted in favour of the pooling proposal, an application would be made to the court for orders approving the arrangement.

The administrators applied for a direction under section 447D that it was proper for them to give effect to the pooling arrangement. Justice Goldberg considered various authorities and concluded that, while there is no specific provision in the CA that authorises the pooling of assets of group companies in liquidation or administration, the power to enter into a DOCA under Part 5.3A is sufficiently broad to enable this to occur.

Justice Goldberg also noted that where the affairs of a number of companies in a group are intermingled or inextricably mixed together so that it could be said that creditors have been dealing with the group, it is appropriate that, in a liquidation or administration context, the assets or liabilities of the companies in the group be pooled.

In this case, Justice Goldberg was satisfied that the directions sought by the administrators should be given. However, he noted that it is preferable to advise creditors that some creditors will be advantaged and others disadvantaged by the pooling process. This omission was not of significance in this case, as the costs to be incurred in reconstructing the group's books and records all but eliminated the likelihood of such advantage or disadvantage occurring.

This case demonstrates that in an administration context, pooling arrangements may be approved by creditors if they are provided with all relevant information, including details of the advantages and disadvantages of entering into the proposal, compared with creditors proving in the winding-up of each company.

In In the matter of Ansett Australia Limited (ACN 004 209 410)53, the administrators of Ansett Australia Ltd (AAL) and associated companies forming the Ansett Group sought directions in relation to various options for pooling the Ansett Group's assets. One of the arguments put forward by the administrators was that as trustees of the Westsky and Pelican Trusts (over cash and assets of AAL's associated companies), they should be able to distribute these trust assets to AAL, thus effectively pooling these assets.

Goldberg J noted that the Federal Court has jurisdiction in relation to giving directions to trustees as to how they may discharge their obligations. The administrators were seeking directions that they could put and vote in favour of a resolution to transfer the trust funds entirely to AAL. However, in the circumstances, it was likely that this transfer would not benefit all of the relevant beneficiaries – in effect, as stated by Goldberg J:

53 (2006) 24 ACLC 386

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[T]he administrators [were] asking the court to give them a direction that they may act contrary to the interests of the beneficiaries of whose trusts they [were] trustees.

His Honour found that the court could not direct the trustees to act contrary to the beneficiaries' interests by effectively pooling the Ansett Group's assets. However, it is important to note that this argument did not succeed as a result of the facts of the case, rather than because this method of pooling is unacceptable generally speaking. Goldberg J did not find that trustees would never be permitted to vote to distribute trust assets in a way that would effectively pool the assets of a group of companies in administration.

The proposed reforms to the law relating to pooling under the draft Corporations Amendment (Insolvency) Bill 2007 are discussed at 9.4.

2.19 Conclusion of VA

The administration phase of the VA procedure concludes after the second meeting of the creditors. If, at the second meeting, the creditors resolve to:

• enter a DOCA, then the administration phase does not end until the company executes the DOCA;

• end the administration, then the control of the company reverts back to the directors of the company at the time the administration ends;

• wind up the company, then there is an immediate transition from administration to a creditors’ voluntary winding-up.

An administration will also end where:

• The creditors resolve at the second meeting to execute a DOCA, but the company does not comply with its statutory obligation to execute the DOCA within the prescribed time, in which case there is an immediate transition to a creditors’ voluntary winding-up.

• The convening period for the creditors’ second meeting ends without the meeting being convened and without an application being made to the court. In this case, the control of the company reverts back to those who were controlling the company prior to the appointment of the administrator.

2.20 Conclusion of a DOCA

Administration under a DOCA will end if:

• the company goes into liquidation; or

• the DOCA is terminated without the company going into liquidation.

A DOCA can be terminated by:

• an order of the court;

• a resolution of a creditors’ meeting; or

• the occurrence of circumstances specified in the DOCA.

When a DOCA is terminated, the DOCA should provide for what then happens, eg liquidation, deregistration or return to the directors. If the DOCA is silent, the company will

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be returned to the management of the persons who managed it when the administrator was appointed, free from monitoring by the administrator of the DOCA.

2.21 How useful is VA for reorganisation?

As a process which can be voluntarily commenced by a company's directors and lead to a tailor made solution comprised by a DOCA voted on by the company's creditors, VA is by far the most flexible option for formal reorganisation in Australia. As it can take place without the need for any court intervention, it can be done in a cost effective way.

There are features of the process which do make successful reorganisation more difficult to achieve, some of which are a result of the legislation which introduced VAs and some of which are the result of a failure to utilise the process early enough. The fact that the process does not prevent the exercise of contractual rights of termination and does not facilitate the granting of new credit to companies in VA can make restructuring difficult.

The requirements for creditors meetings to be held in short time frames can also make the procedure difficult to manage in large corporate collapses.

The process is easy to begin, comparatively inexpensive and incredibly flexible54 as it does not require any Court involvement at all and can result in the creditors deciding to liquidate the company, return it to its directors or enter into a binding DOCA with the company. Essentially a DOCA can incorporate effectively whatever agreement the creditors want. It then binds all unsecured creditors whether or not they vote for it.

It is the great flexibility of the process which is its greatest asset as a turnaround mechanism: if the legislation does not permit a course of action the Court can because the legislation includes what is known as the "magic provision" in section 447A. This permits a Court to make such orders as it think appropriate as to how the legislation should operate in relation to a particular company. That is an incredibly broad power for a Court and it has been used to make the legislation work. The full boundaries - if there are any - on the Court essentially exercising what is really legislative power remain to be fully explored.

It is easy for the directors to appoint a voluntary administrator in Australia - all they need to do is form the opinion that the company is at that time insolvent (that is unable to pay its debts as and when they fall due) or that it is likely to become insolvent at some future time and pass a resolution, In my view that is a reasonably easy test to satisfy although what "likely to become insolvent" means has not been the subject of a crystal clear judgment yet. The position considered in Crimmins v Glenview Homes suggests that a manufacturer of technology which would become insolvent in say ten years time leading to insolvency then, could opt for voluntary administration today on the basis that the company was likely to become insolvent in 10 years. If the directors bona fide form the view that the company is insolvent or likely to become so at some future time it would be difficult to subsequently challenge it.

Generally, because the administrator's remuneration and certain expenses have a priority from the assets of the company over all but fixed charge assets, the administrator will

54 It has for example been used successfully for a multi-jurisdictional insurance company to achieve results akin to a scheme of arrangements without the process issues involved in schemes: AFG Insurances Pty Ltd

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either fund ongoing operations from cash flow or, where he or she is unsure if the business is viable, from cash flow and by realising assets.

One of the comparative weaknesses of the voluntary administration procedure historically has been that the legislation does not provide for a special funding mechanism for companies in administration. External funding can be difficult to attract because a new funder does not have priority over charged or ROT assets. The present legislation also does not restrain the operation of 'ipso facto' clauses to crystallise debt, however, a recent report into Australian corporate insolvency laws recommended that courts have power to consider whether, in a particular situation, contracts should be kept on-foot.

It is still more common for the administrator to either attempt to quickly sell the business or close down operations.

Obtaining external funding can be difficult and really a company in administration presents very similar funding difficulties to any company which is in financial difficulties.

Where a company has valuable assets which are not already subject to security the company through its administrator acting as the company's agent can borrow on those assets and grant a charge to a secured lender. This is not common presumably because Administrators would not want to risk giving a lender a better propriety position than their statutory lien and indemnity. It is possible for the Court to make orders using the "magic provision" to put a new lender in the same priority position as the administrator and to limit the administrator's liability for the loan to the Company's assets subject to his lien. This happened in the Spyglass case. The Ion administration provides a recent example of such an order where in addition the Court treated the assets of a Group of companies effectively as one pool of assets from which the administrator and through him the lender would be indemnified.

Alternatively, without the need for a Court order, the administrator could incur debts which fall within his or her statutory lien and indemnity over the company's assets and take a personal loan from a financier secured by contract against the administrator's statutory priority for expenses and remuneration, An administrator is very unlikely to do this unless he or she is certain that the company's assets which are not subject to a pre-existing fixed charge will be sufficient to satisfy that person borrowing. Unless the company's assets are valuable a leader is not likely to lend with rights of recovery limited to the administrator's rights of indemnity from the company's assets.

As an administration at the creditors option can end in a liquidation, return of the company to it directors or in a binding agreement between the company and its creditors called a deed of company arrangement. If creditors approve a DOCA provision can be made for priority payments to funders. Where there is a pre-existing secured creditor, that secured creditor would need to approve the deed for it to be binding on it. Practically though, it is uncommon for a secured creditor to approve a DOCA - at least one that interferes with its rights.

Whether it is in the secured creditors interests to fund operations, or at least, asset realisation depends on how realisable the security is. It also depends on whether the company has assets greater than its secured debt at the time it goes into VA. For a mine site, fisheries or clothing venture and many other businesses the real value might be in the

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ongoing viability of the business and the potential to sell the business as a going concern. Administrators like receivers are not usually acquisitive although there may be circumstances where that may be appropriate (KordaMentha as receivers acquired a salmon farm to get economies of scale in the Tassal receivership), they are really there to maintain the business for sale or, at least preserve assets for creditors. If there are projects to pursue, these are normally best pursued outside of the administration, via a separate sale or reconstruction model.

The great benefit of the voluntary administration and DOCA process is that (subject to the issues mentioned in 2.15 above) it enables companies to be cleansed of their unsecured liabilities and in itself this can make them a much more attractive funding proposition as ongoing businesses.

The ability to raise funds has been an issue for Australian administrators. However, where (as in Pasminco, Spyglass and Ion) there are valuable unsecured assets there is no reason why a funder would not be prepared to lend and the courts have shown a willingness to assist. Some would say that it would not be appropriate to give companies in administration an advantage in terms of their ability to borrow over companies which have acted prudently and are themselves in the market: for funds to borrow. In a relatively small economy like Australia's any legislative restrictions on the ability of existing secured creditors to enforce particularly if those restrictions favoured new lenders over old could be considered as potentially providing a disincentive to lenders which might not be in the best interests of the economy as a whole. The proposed legislative reforms (discussed at 9 below) extend the administrators' right of indemnity to cover personal liability incurred in the performance of their duties.

In Australia secured creditors can only act if they have a charge over all or substantially all of the company's property and act before or during the first 10 days of the administration or such further period as allowed by the administrator. Trade and other creditors are prevented from enforcing claims against the company or directors and spouses during the administration period which is usually 28 days. These are very tight timeframes when dealing with large companies but it is possible to extend these periods.

Dealing with secured creditors first. It is fairly common for administrators during the 10 day decision making period to agree in advance that they will permit secured lenders to enforce their securities even after that 10 day period. Whilst these agreements may not be enforceable that has not been tested and they do give secured lenders comfort and in practice most are content not to enforce. Administrators are licensed professionals so secured lenders normally how who they feel comfortable with as administrator.

Turning to the unsecured creditors. Those stays apply from the date the administrator is appointed until the second creditors or decision making meeting which usually occurs within 28 days. That meeting can however be adjourned by the creditors without the need for any Court application or approval for up to 60 days. This actually makes the time periods quite manageable in many administrations. A longer period than what would effectively be about 88 days from go to woe could only be achieved by the making of a Court application. Like all Court applications the likelihood of obtaining an extension and its duration will vary according to the evidence and explanations of the need for more time

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which can be assembled, on the skills of the Counsel seeking the time and the attitude of the particular judge to such applications. To greater or lesser degrees most of the judges have shown reasonable commercial understanding of the need for appropriate extensions. In Pan the extension was for 75 days, in Ansett, the extension period was 2 months, in Henry Walker Eltin it was 3 months, while in Pasminco, the extension period was 9 months. So it is our view the system works well in this regard.

It is important to note that the proposed legislative reforms, discussed at 9 below, slightly increase the period so the above may now be largely historical.

If the company ends up in a DOCA or liquidation stays restricting the commencement of legal proceedings will operate.

Because an administrator is personally liable for goods or services he or she orders unless the company has significant assets the administrator is not going to be overly keen on performing contracts where that would require ongoing purchases of raw materials, supplies etc. Most contracts contain clauses that preclude assignment without consent. Many contracts also contain 'ipso facto' clauses permitting termination on a defined insolvency event. At the moment the legislation does not interfere with such contractual rights and no one has yet tried to use the magic provision to ask a Court to do so. There may be constitutional impediments to S447A being used in this way as the Constitution prohibits the Commonwealth from acquiring property without just compensation.

There are however legislative restraints on owners or lessors of property, where that property is used or occupied by or in the possession of the company. Administrators can sell other people's property during the administration in the ordinary course of business and, generally speaking, lessors and owners cannot take possession or otherwise recover their property during the administration except with the administrator's consent or leave of the Court (although a Court is usually very administrator-friendly in such applications). In addition, as the administrator acts as agent of the company a counter party may be left with an unsecured claim against an insolvent company if the administrator acting as the company's agent chooses to breach the contract. These factors do give administrators some leverage in dealing with counter parties and extracting their consents. Convincing them that the proposed sale is their best opportunity of getting paid or having a continuing customer is usually the best way of getting their consent through.

3. Receivership

There are a number of categories of receiverships. A common purpose is to appoint an independent person, known as a receiver or receiver/manager, to collect or make safe income or assets or both, usually for the purpose of realisation or at least protection, so as to benefit a particular party, or parties, or protect his or her (their) contractual rights.

The mode of receivership which is most akin to a rehabilitation procedure is that of a court receivership (discussed at 7 below), that is, a receiver may be appointed by the Court during the course of a protracted litigation to settle a dispute between parties or to protect the "public interest".

Alternatively, a privately appointed receiver's role is accurately described as being concerned with the interests of the appointee. A privately appointed receiver's role is not to rehabilitate the

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company or to act in the best interests of the company (subject to some exceptions which are discussed below). We have however, included a discussion of privately appointed receivers so as to depict the broader picture of the Australian rehabilitation processes. This is due to the fact that in Australia a private receiver can be appointed at the same time as a "rehabilitator" such as a voluntary administrator. Indeed, as discussed at 3.8 below, a substantial secured creditor may make a dual appointment of a receiver and voluntary administrator.

3.1 Role of a privately appointed receiver

The role and duties of a privately appointed receiver arise primarily under contract law, although their powers and duties are regulated to some extent by Part 5.2 of the Act.

A receiver and manager's primary role is to gather in, manage and realise the assets charged with a view to liquidating the secured creditor's debt55.

Although he/she is required to act in good faith to serve the purposes for which he was appointed56 and to take all reasonable care to sell company property for not less than its market value or otherwise for the best price that is reasonably obtainable57, the receiver's primary duty is to take such steps as are required to ensure that the secured creditor who appointed him or her is repaid and then to cease to act as receiver as soon as that objective has been achieved.

3.2 Procedure

The process of initiating a receivership will depend upon the rights available to parties who might seek the appointment and, arising from those rights, the types of receiverships possible. At its simplest, a receivership may be initiated by the private documentary appointment of a receiver pursuant to powers contained in an earlier contract between the company and a supplier/lender.

A private appointment will be effective unless there are grounds for questioning its validity and it is successfully challenged.

Where the company is insolvent, the administration of company property by a receiver will obviously be of interest to creditors since they are the dominant financial parties while members are likely to receive nothing. But while, depending upon the nature of the receivership, the receiver may attempt to protect their interests, his or her prime responsibility will seldom be to ordinary unsecured creditors. Such creditors must therefore give consideration to the appointment of a liquidator or some other insolvency administrator who may better look after their interests.

3.3 Doing business in receivership

The Act sets out a broad range of powers which a receiver may exercise, being powers additional to any powers contained in the secured creditor's charge under which he is

55 Gosling v Gaskell [1897] AC 575 56 Expo International Pty Limited v Chant [1979] 2 NSWLR 820 at 834 57 s420A

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appointed. These powers can however be limited by the terms of the charge58, although most modern charges are drafted with a view to maximising the powers of a receiver and contain a provision that the receiver can exercise any power, over the property which is subject to the charge, that the Act permits a receiver to exercise.

The powers which the Act confers on a receiver include:

• to enter into possession and take control of property of the company in accordance with the terms of the charge;

• to carry on any business of the company;

• to dispose of property of the company;

• to engage or discharge employees;

• to bring or defend any proceedings in the name of the company; and

• to make or defend an application for the winding up of the company.

(s420 of the Act).

Depending upon the nature of the receivership, it may include:

• carrying on the corporate business;

• winding up the affairs of a business;

• a distribution of corporate property to a particular person, or among particular persons;

• especially where the receiver has the power to continue business, an examination of trading performance and financial position.

Like VA, receivership of itself does not bring into operation the various recovery possibilities made available by corporate legislation to liquidators, eg insolvent trading, voidable preferences and other transactions (see 4.2 below).

A power to appoint a receiver conferred pursuant to a charge must be exercised honestly and for ends that the chargor and chargee mutually intended, usually being the realisation of the security and the repayment of the secured debt. An appointment for an ulterior motive can be challenged on the grounds of bad faith59.

Receivers are not directed to exercise their discretions in any particular way. While creditors exercising powers as mortgagees are, at general law, obliged to act "in good faith without any intention of dealing unfairly" and therefore receivers are correspondingly liable to mortgagor companies, receivers are only liable if they exceed or abuse or wrongfully fail to use their powers. In this way, their role can be compared to that of a fiduciary as they are obliged not to:

• overreach their permitted functions;

58 s420(2) 59 See Shamji v Johnson Matthey Bankers Ltd [1986] FTLR 329; Pollnow v Garden Mews St Leonards Ltd (1984) 9 ACLR 82 at 86

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• unjustly enrich themselves; and

• act for an impermissible purpose.

As discussed in more detail below, the extensive powers of a receiver to realise property of a corporation are generally preserved under the Act where a voluntary administrator or a liquidator is also appointed, save for circumstances where a voluntary administrator is appointed and the secured creditor's charge is over some part of, but not substantially the whole of the property of the company.

3.4 Remedies including sale of assets

The different ways to enforce a charge can be placed into two categories:

• remedies that are available to the creditor pursuant to the deed of charge; and

• remedies that are available to the creditor pursuant to the Act.

The method of enforcement will depend upon the individual circumstances.

Remedies that are available to the creditor pursuant to the deed of charge:

The charge document itself will set out the creditor's remedies which should include:

(a) the power to enter into possession of the secured property (which brings with it the entitlement to receive any cash flow from the property – for example, rents on mortgaged land, or dividends on mortgaged shares) and sell them or foreclose. Foreclosure means that the creditor becomes the outright owner of the goods free of the debtor's right of redemption;

(b) the power to appoint a receiver (more specifically the power to appoint a receiver out of court: that is, without having to seek an order from the court to do so); and

(c) a power of sale out of court (that is, again, the right to sell the property without having to seek a court order to do so).

Generally speaking (that is, in the absence of any statutory provisions to the contrary), it is possible to confer all these powers by agreement between the creditor and the customer in a charge document.

Remedies that are available to the creditor pursuant to the Act:

As well as the ability to appoint a receiver pursuant to a deed of charge, if the creditor has a charge over all, or substantially all of the assets of the debtor, it also has the option of appointing an administrator or a dual appointment of an administrator and a receiver.

3.5 Post-appointment credit

A receiver who has the power to carry on business will consider the benefits and possibilities of carrying on business when compared with a strategy of realising the company's assets. He or she may carry on business to complete work-in-progress or to be in a position to offer the business for sale as a going concern. He or she will be able to employ any or all of the company's previous management, and as provided by Section 420(d) of the Act:

"to borrow money on the security of the property of the corporation."

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He or she has no obligation to carry on business, but if it is in the interest of the debenture-holder or mortgagee, he or she may choose to do so. If it is not in their interests, he or she commits no breach of duty to the company by refusing to do so, even though such discontinuance may be detrimental to the company. However, when it is certain that the secured creditor will be paid in full and that the risks of carrying on will be borne by unsecured creditors, wider responsibilities come into play.

If a receiver enters into a loan to carry on the business, or otherwise, such a borrowing would be subject to the same limitations as discussed in relation to VAs at 2.10 above.

The main difference, however, is that a receiver does not have recourse to the "magic provision" of section 447A (see 2.10 above) which gives the court power to make such orders as it thinks appropriate about how the part of the Act relevant to VAs is to operate in relation to a particular company.

3.6 Distribution of assets

Subject to his/her obligation to pay from the realisation of property subject to a floating charge certain priority debts60, a privately appointed receiver is under no obligation to distribute any of the funds obtained from realising the assets of the company to any of the unsecured creditors, even if those funds exceed the amount due to the secured creditor. There are no provisions in the Act which empowers a private receiver to call for or deal with proofs of debt, however, a deed of charge usually specifies the order in which proceeds of enforcement will be applied. This applies to both proceeds of selling the secured property, and proceeds derived while the chargee or receiver is in possession of them (eg rents received under leases of mortgaged real property). In addition, mandatory orders of application of proceeds may be applicable in some instances, for example, in Victoria, Transfer of Land Act 1958 (Vic), section 77(3), which deals with Torrens land, contains a mandatory order of application of proceeds, which will override the relevant clause in a deed of charge. These considerations will change depending upon the nature of the asset charged.

3.7 Agency

While the Act does not contain a provision that a receiver will be taken as acting as the agent of the company (unlike administrators who, by section 437B of the Act are expressly taken to be acting as the company's agent when exercising a power as administrator), most modern charges contain a provision to the effect that the secured creditor and the company agree that, despite being appointed by the secured creditor, the receiver is to act as the agent of the borrower company. The charge usually goes on to provide that the company is solely responsible for anything done or not done by the receiver and for the receiver's remuneration and costs.

3.8 Substantial secured creditor who acts during the decision period

As to a secured creditor who has a charge over the whole or substantially the whole of the property of the company, (a substantial secured creditor), where such a substantial

60 See s433

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secured creditor who enforces its charge and appoints a receiver and manager before or during the 10 business day period after notice of the appointment of the voluntary administrator is given to it under section 450A(3) of the Act, the receiver and manager can continue in possession of, can manage and can realise that property for the benefit of the substantial secured creditor. In that situation, the receiver's powers and functions over the property of the company takes precedence over the administrator's powers and functions over the property of the company61.

Thus the exercise by a substantial secured creditor of its right to appoint a receiver and manager will generally deny an administrator any effective continuing role in the affairs of the company, other than reporting to unsecured creditors on how the actions of the receiver and manager appointed by the substantial secured creditor affect their position and holding the meetings of creditors required under Part 5.3A.

3.9 Conduct of litigation in the name of the company

Modern company charges usually gives receivers the power to conduct litigation in the name of and as agents of the company. Subject to any restrictions in the charge, section 420(2)(k) of the Act also grants a receiver power to bring any proceedings in the name of and on behalf of the company. Upon the making of the winding up order, receivers can use either of these powers to continue the conduct of litigation in the name of the company, but no longer as agents of the company62.

Indeed a receiver or a secured creditor can even resume control of litigation where the liquidator assumed control of that litigation upon the initial retirement of the receiver.

3.10 Restrictions imposed by conveyancing legislation on the right to appoint a receiver

Various conveyancing and real property legislation of the Australian States govern the exercise of powers in relation to real property.

3.11 Cessation of receivership

The deed of charge will usually provide for the circumstances of the receiver's resignation. Any receiver, whether appointed privately or by the court, must, within seven days after his or her appointment ceases as receiver, file notice of cessation with the Commission (Form 505). Additionally, he or she must cause a notice to be placed in the Gazette within 21 days of ceasing to act (section 427 of the Act).

In the case of a receiver who remains in control of property of a company in circumstances where the objectives for which he was appointed have already been achieved, the Act empowers a liquidator who has been appointed to the company to apply to the court for an order that the receiver give up such control63. In deciding whether to order the removal of

61 s441A(3) and s441A(4) 62 Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 63 s434B

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the receiver from control of property of a company, the court must have regard to the interests of the company, the secured creditor and the other creditors64.

3.12 Successful reorganisations and bringing it to an end

The person appointing a receiver, being the court or otherwise, may terminate a receiver's appointment either because the appointment's objective has been fulfilled or the company has reached other arrangements satisfactory to those persons who sought the appointment of the receiver.

A receiver may resign having completed his or her duties. A court-appointed receiver can only be "discharged'' by its order.

As a matter of practice, before a receivership is terminated the receiver will usually attempt to:

• inform the company of the termination;

• obtain accounts from and pay all persons who have extended credit to the receiver during the receivership administration;

• notify suppliers, lenders and customers that the receivership is to terminate where the company's business is to continue;

• set aside moneys sufficient to discharge any outstanding liabilities or, at worst, obtain an indemnity in respect of such outstandings;

• distribute assets in the manner required by law; and

• ensure that all statutory filing requirements are fulfilled.

If there are surplus assets available after repaying the secured creditor, notify subsequent chargeholders or unsecured creditors. If necessary to protect the assets, the receiver may present in the company's name a petition for winding up the company, but normally this would be left to unsecured creditors.

The company's books and records should be returned to the custody of the directors or made available to the liquidator, except for the receiver's personal records which will be retained by him or her.

3.13 Expedited reorganisations

Where urgency is required, receivership, administration or provisional liquidation can offer a relatively speedy appointment to gain breathing space until further information can be gathered. As directors face civil and potentially criminal exposure for incurring debts when the company is insolvent in situations of insolvency the directors should be keen to appoint an external administrator quickly to avoid personal liability for debts incurred after appointment. Where a contractual right exists to appoint a receiver and a person with that right is particularly concerned for his or her own position, he or she may wish to initiate a receivership immediately rather than to allow the directors to select and/or appoint their own voluntary administrator or allow the situation to deteriorate further. Unlike a VA, there

64 s434B(3)

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are no specific statutory time periods which apply to receivers to prompt an expedited process, however, the personal liability of receivers for goods and services (and through contractual indemnities the liability of the appointer for the receiver's debts) provide a strong incentive for receivers to endeavour to achieve a repayment of their appointor's debt in whole or in part as quickly as possible.

3.14 Unsuccessful reorganisations

The receiver may be removed by the court for misconduct, or because the receiver is redundant.

Where there are no assets available and directors do not propose any action in relation to the company, the receiver may notify ASIC so that the company may be struck off the register (sections 572 to 574 of the Act).

3.15 How useful is receivership for restructuring?

Receivership is not a process designed to facilitate restructuring but rather it is designed to facilitate the recovery by a secured creditor of its debt (in the case of private appointments) or to maintain the status quo (normally in the case of Court appointments). Like a voluntary administrator, a receiver can be appointed without the need for court intervention where the right to appoint receivers arises as a matter of contract. Receivership can be a process which results in restructuring by, for example, the receiver selling a profitable business out of an unprofitable corporate shell. There are also occasions where the secured lender is willing to fund the receiver to turn an unprofitable or less profitable business into a more profitable business, even in at least one instance funding the acquisition of competitive businesses to secure economies of scale. Whilst reorganisation can occur in a privately appointed receivership, that is not its aim and so when it occurs that result will be more of a subsidiary benefit to the goal of ensuring the repayment of the secured debt.

For example, Tassal Limited involved a receivership of Australia's largest salmon producer with annual sales of A$90 million. Whilst in receivership, Tassal Limited acquired competitor Nortas as part of their restructuring and rationalisation plan. After Tassal Limited was financially stabilised by receivers KordaMentha, the acquisition further improved the company's position in the aquaculture industry, making it a more attractive proposition for potential buyers.

Receiver's obligations when selling company property

Under section 420A of the Act, receivers must, when selling a corporation's property, take all reasonable care to sell the property for not less than the market value (if the property has a market value), or otherwise the best price reasonably obtainable in the circumstances. This imposes a higher burden on receivers than previously existed. However, there are indications that the courts will take into account the assets of the corporation which are available to cover the costs associated with the sale in determining whether the receiver has complied with his or her obligations under section 420A.

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For example, in Florgale Uniforms Pty Ltd (rec and mgr apptd) (in liq) and Ors v Orders and Anor65, the Court found that a receiver was not necessarily bound to find out and obtain the market value of the property where the relevant goods had one, if the associated costs and risks were such that they would make going through the process unreasonable. In this case, the receiver assessed that given the size of the expected loss in the budget period, which would erode the bank's security, the operations of Florgale should cease, the profitable work in progress should be completed, stock should be offered to customers at the best obtainable price provided it was above the auction realisation price, and all unsold stock and plant equipment should be sold at auction. The directors of Florgale disagreed with the sale by auction, arguing that the best manner of sale for the special-purpose stock goods (industry uniforms) was to approach the existing customer base and sell at a discount. However, this would have required Florgale to continue trading for a longer period, and incur associated costs. The auction did not meet anticipated goals or raise sufficient funds to avoid the enforcement of personal guarantees of the directors, who then contended that the receiver had breached section 420A in selling the stock by auction.

On the facts, the Court held that while a private sale of the clothing may have produced a better sale, the associated costs were far greater, making any gain from the sale redundant – as such, the plaintiffs had failed to establish a breach of the receiver's section 420A duty to take reasonable care to obtain market value or the best price reasonably obtainable in the circumstances.

This is a practical and helpful decision for receivers, and may reduce the anxiety associated with section 420A, particularly in circumstances where the cost of obtaining market value and of trading a business on whilst that occurs are not commercial.

Injunctions to restrain receivers

The general principle has been expressed to be that a receiver can repudiate a pre-receivership contract if the repudiation "will not adversely effect the realisation of assets or seriously affect the trading prospects of the company" 66

However, that general proposition may not be the case in circumstances where the contract contains what is referred to as a negative stipulation.

A negative stipulation is a clause which expressly prevents the company from taking some step. A common example of a "negative stipulation" are exclusive distribution agreements where a company has agreed not to sell its product other than to the specific distributor named in the contract. In cases where there is such a negative covenant, the other party to the contract may have a "prior equity" which a court may intervene to protect – most commonly by granting an injunction restraining the company from taking the action which would contravene the negative covenant.

In Re Diesels and Components Pty Ltd (Receivers & Managers Appointed)67, it was held that a customs agent's contractual lien over a company's goods with the effect that the

65 [2004] VSC 65 66 Airlines Airspares Ltd v Handley Page Ltd (1970) CH 193 67 (1985) 3 ACLC 555

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receiver could not get possession of the goods without first discharging the company's debt to the customs agent.

Schering Pty Ltd v Forrest Pharmaceutical Co Pty Ltd & Ors68 was a case in which a receiver was found to be bound by an express negative stipulation contained in a contract which prohibited the company (which was a supplier) from using any other distributor. The negative stipulation in that case was a clause which provided that the company would not market its goods except as provided for in the agreement. The agreement provided that the goods would be marketed through a nominated distributor.

The then Chief Judge in Equity in New South Wales, Helsham CJ, found that damages in that situation would not be an adequate remedy because, unless restrained, the receiver would continue to breach the contract and that damages would sound only against the company which did not have any capacity to pay. The right to seek injunctive relief to restrain a breach of that contract constituted a "prior equity".

In Cater – King Pty Ltd v Westpac Banking Corporation & Ors69 the point was made that a receiver was not "entitled" to repudiate any contract but that if some contracts were breached the result is merely a liability to pay damages, however, other contracts, if breached, give rise to a claim for equitable relief which prevent the Company (and the receiver) from repudiating the contract.

Professor O'Donovan is quoted as saying:

A receiver and manager appointed pursuant to a mortgage debenture creating a floating charge takes possession of the assets charged subject to all prior equities. It is this fundamental principle…which determines what unprofitable or onerous pre-receivership contracts he can repudiate. The prior equity which prevailed over the debenture holder's equitable assignment in Schering Pty. Ltd v Forrest Pharmaceutical was the right to an injunction to restrain a breach of negative stipulation in a Franchise Agreement; in Re Diesel and Components Pty Ltd it was a contractual lean70

It is worth noting, however, that Professor O'Donovan compared the equities not from the date the charge was granted, but rather from the time of the appointment of the receiver. Such that a contract entered into prior to the appointment of a receiver would take precedence over a floating charge which pre-dated it. However, what is not mentioned by Professor O'Donovan and does not appear to be considered by the authorities, is the situation in which the secured creditor has a fixed charge over proprietary rights which predate contractual arrangements which were later entered into. In those cases, there must be an argument that the fixed charge represents an equitable interest which pre-dates the contractual arrangement containing the negative stipulation.

Schering v Forrest appears to be uncontradicted authority for the proposition that the receiver can be restrained from breaching pre-receivership contracts where those contracts contain an "exclusive dealing" covenant. It does so on the basis that exclusive dealing

68 [1982] 1 NSWLR 286 69 (1989) 7 ACLC 993 70 Insolvency Law and Practice Seminar, Brisbane, 21 September 1990

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terms in contracts are characterisable as negative stipulations, breaches of which can be restrained in equity by an injunction.

Having said that, the case law and commentary do not seem to take into account the equitable interest created in the secured creditor's favour by the debenture document itself meaning that the third parties' right to an injunction may well post-date the mortgagor's equitable interests in the assets under the charge. The cases also do not appear to have dealt with what the position would be in situations where the secured creditor had a fixed charge over contracts of the Company which a receiver later elected to repudiate.

Another difficulty with the decision in Schering is that MacPherson J granted an injunction on the basis that damages would not be an adequate remedy because the company would be insolvent. There may be an argument, which does not appear to have been raised in the Schering decision that there are circumstances in which damages would be an appropriate remedy and the fact that the company may not necessarily have the capacity to meet those damages is beside the point.

4. Court winding up

4.1 Requirements

A compulsory winding-up in insolvency is a winding-up of an insolvent company that begins with a court order. A company is insolvent when it is unable to pay all its debts as and when they become due and payable. Any one of the following may apply to the court for a company to be wound up in insolvency:

• the company;

• a creditor;

• a contributory;

• a director;

• a liquidator or provisional liquidator of the company;

• the ASIC; or

• a prescribed agency.

A court will make an order to commence winding-up of a company if it is proved that the company is insolvent.

Most commonly, insolvency is proven by failure to comply with a statutory demand which may be served on a company by a creditor owed at least A$2000. A company is presumed insolvent if it fails to comply with a statutory demand within 21 days of service unless within that period it has commenced proceedings to have the demand set aside or it has paid or compromised the claim. The most common basis on which such demands are set aside in that there is a genuine dispute about the debt or that the debtor has a counterclaim against the creditor sufficient to reduce its indebtedness to the creditor to less than A$2,000.

The court also has the power to wind up a company on grounds other than insolvency. These grounds include where:

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• the company has not commenced business within one year from its incorporation or has suspended its business for a whole year;

• the company has no members;

• the directors have acted in the affairs of the company in their own interests rather than the interests of the members as a whole, or in any other manner that appears to be unfair or unjust to other members; or

• the court is of the opinion that it is just and equitable that the company be wound up.

A court liquidation may be used because:

• a voluntary liquidation while available to any corporation, might, because of large or opposed membership, be too slow or too cumbersome as an alternative to court liquidation; and

• schemes of arrangement and DOCAs require the voting sanction of creditors and their voting preference may need to be sought before proposing such administrations.

4.2 Procedure

Once appointed, the liquidator must lodge a notice of appointment with the ASIC and the Commission of Taxation.

A company that is being wound up must set out in every public document and in every negotiable instrument of the company the expression “(in liquidation)” after the company’s name where it first appears.

The liquidator has a duty to act impartially and a duty to identify the creditors of the company. The liquidator has a duty to inquire whether a claim is being pressed. The duty is not merely to advertise but to write to creditors whose existence is known to the liquidator. Otherwise, the liquidator may be personally liable to meet the claims of those creditors. However, if after sending them notice the creditors do not prove, the liquidator is under no duty to make them prove.

The general body of creditors may elect a committee of inspection. A committee of inspection is a group of creditors and contributories or their attorneys under power elected by the general body of creditors and contributories to approve action by the liquidator. It is a useful option where there are many creditors and contributories and it is inconvenient to summon frequent general meetings to approve action by the liquidator.

Any creditor or contributory may request the liquidator to convene separate meetings of creditors and contributories for the purpose of determining whether they desire the appointment of a committee of inspection and, if so, who are to be its members. If the determinations of the meetings differ, the difference is decided by the court.

The court also has the power to direct meetings of creditors and contributories to be convened so that the court can ascertain the wishes of the creditors and contributories.

Members of a committee have a fiduciary character. Generally, they are not entitled to any benefits for acting in the committee; however, where in exceptional circumstances they

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provide special services to the court, the court has the power to give leave to award remuneration to the members of the committee.

The liquidator has the power to bring a wide range of proceedings in the name of, and on behalf of the company including specific statutory rights of recovery such as insolvent trading and voidable transactions including unfair loans, unfair preference, uncommercial transactions, improper director benefits and related party transactions. In the course of controlling a liquidator’s exercise of power, the court may make an order authorising another person, such as a creditor or contributory, to sue in the company’s name upon giving the liquidator and the company an indemnity.

A liquidator may assign the proceeds of an action for recovery or sell a bare right of action to another party. The ability of a company’s external administrator to do this represents an exception to the general law doctrine against maintenance and champerty.

4.3 Effects

A compulsory liquidation essentially has the same effect on the company, shareholders and creditors as a voluntary liquidation.

4.4 Sale of assets

In the process of winding up, a liquidator’s broad powers are subject to consents where:

• a liquidator compromises a debt owed to the company where that amount is greater than A$20,00071; or

• a liquidator enters into an agreement on the company’s behalf if the term of that agreement or the obligations of a party under that agreement extend for more than three months after the agreement is entered into.

For the liquidator to enter into an agreement exceeding those thresholds he or she requires consent in the form of either:

• approval of the court;

• approval of the committee of inspection; or

• a resolution of the creditors in favour of the action.

4.5 Set-off and netting

The Act specifically provides for a set-off or netting of debts and credits arising from mutual dealings, mutual credits or mutual debts between the insolvent company and a creditor. The effect of this section is that it is only the balance that remains a provable debt against the company (or is owed to the company depending on the result of the netting).

The right to set-off is specifically excluded, however, if at the time of giving credit to the company, or receiving credit, the creditor had notice of the fact that the company was insolvent. For example the appointment of a liquidator would prevent the creditor from

71 This may increase to A$100,000 following the proposed legislative reforms.

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setting off mutual debts or mutual credits arising under mutual dealings entered into after knowledge of such appointment.

4.6 Post-filing credit

As described in 4.9 below, there is a statutory order of payment of unsecured creditors and the Act requires that certain unsecured debts and claims must be paid in priority to all other unsecured debts and claims. These debts and claims are, in general, only provable if the circumstances that gave rise to the debt occurred before the commencement of the winding-up. It is possible, however, that a debt incurred by a company may still be payable in a winding-up if the expense was entered into with the authority of the liquidator.

In the statutory order of payment of unsecured creditors, first priority of repayment is afforded to expenses, other than ‘deferred expenses’. If the liquidator took out a loan or obtained credit that liability would form part of that highest level of priority.

If a debt is incurred by the company after the commencement of the liquidation and is not authorised by the liquidator, it is unlikely to be provable and would not rank for priority repayment.

4.7 Stays of proceedings/moratoriums

When a company is being wound up:

• individual claimants lose the right to litigate their claims in court and instead must lodge a proof of debt with the liquidator. In order to achieve this, a stay is imposed to prevent the assets of the company being wasted by litigation.

• the leave of the court must be obtained in order to bring or continue proceedings against a company, or in relation to the property of the company.

• factors which the courts will take into account when considering whether to grant leave include the potential disruption to the orderly liquidation of the company, the extent to which other creditors of the company may be prejudiced by the grant of leave and the seriousness of any question to be tried.

• enforcement processes in relation to the property of the company cannot be begun or continued against a company.

• an applicant, seeking leave to obtain a remedy against a company that is being wound up, must prove to the court that there is some good reason why its claim against the company should be pursued by a court action rather than by lodging a proof of debt with the liquidator.

• a secured creditor does not require the leave of the court to deal with the property charged.

On liquidation, unsecured creditors have no rights to specific items of the company’s assets; they have a right to have a fund of assets protected and properly administered.

4.8 Claims and appeals

A creditor proves its debt by submitting a ‘proof of debt’ to the liquidator. A debt or claim must have arisen from circumstances occurring before the day on which the winding-up is

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taken to have begun. After the liquidator receives a proof the liquidator must admit it or reject it wholly, or in part, or require further evidence supporting it. The liquidator’s duty when examining a proof is to require some satisfactory evidence that the debt on which the proof is based is a real debt. In some cases of real doubt the liquidator may be able to obtain directions from the court. If the creditor is unhappy with the liquidator’s subsequent decision, the question can be determined in an appeal to the court by the creditor.

A liquidator who rejects a claim wholly, or in part, is to state in writing to the creditor the ground of objection. If the liquidator rejects the proof of debt, the creditor may appeal to the court. If the liquidator admits it, a creditor or contributory can appeal to the court, as can a receiver enforcing a charge (where the debt which has been admitted has priority over the secured creditor the receiver represents). Any time limit is dictated by the rules of the court before which the appeal will be heard.

Section 560 of the Act allows persons who advance funds to the company for the purposes of the company meeting its employee entitlement obligations to step into the shoes of the employees to the extent that their entitlements were meant, for the purposes of priority of payment of their claim.

4.9 Priority claims

In general, the starting point under the Act is that, unless otherwise provided, all unsecured debts proved in a winding-up rank equally and, if the property of the company is insufficient to meet them in full then they are to be paid rateably. There is, however, where a company is being wound up, a statutory order of priority in which the funds are distributed. The order is as follows:

(a) secured creditors under fixed charges; then

(b) expenses of the winding-up (including the liquidator’s and any prior receiver or voluntary administrator or deed administrator’s remuneration); then

(c) unpaid wages, unpaid superannuation contributions, and other employee entitlement (persons who advance funds to pay those claims have the priorities for those payments which the employees otherwise enjoy); then

(d) secured creditors under a floating charge; then

(e) unsecured creditors; then finally

(f) shareholders.

Although under common law the Crown is entitled to priority for its debts, the Act specifically applies the provisions in respect of insolvency to the Crown and, as such, the inherent right to Crown priority is avoided. There are specific provisions in relation to insolvent insurance companies and in relation to insurance and reinsurance recoveries.

4.10 Distributions

After collecting the assets and the time fixed for the proving of claims has expired, the liquidator can distribute to creditors. Depending upon the complexity and size of the company, liquidation can last for several years and the liquidator may make several payments over that time. In an insolvent company there is a prescribed order of payment

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of debts as described in part 4.9 above. Even in a company which appears to be solvent, a liquidator should follow the statutory order.

4.11 Pooling

Under the current law, in certain circumstances liquidators may pool the assets of a group of companies in administration, settling the debts between companies in the group and avoiding excessive accounting expenses in consolidating financial records.

There are five procedural possibilities for giving effect to a pooling of assets by liquidators:

1. a scheme of arrangement between each company and its creditors under Pt 5.1;

2. a compromise under s477(1)(c) of the Act which is made applicable to voluntary winding up by s506(1)(b);

3. an arrangement under s510 between a company in the course of winding up and its creditors;

4. resort to the extensive jurisdiction created by s447A, where applicable; and

5. a deed of company arrangement under Div 10 of Pt 5.3A where Pt 5.3A administration is in progress.

Courts have found72 that s477(1)(c) cannot bind any creditor who has not actively assented to the proposed compromise, and that s511 could only be of relevance in an application to pool assets if the creditors had given their unanimous assent to the pooling.

The case of Re Black Stump Enterprises Pty Ltd73considered the circumstances in which the court will make orders pooling the assets of corporate groups and, in particular, the nature of creditor approval necessary for a court to consider making such orders.

The plaintiffs were the liquidators of the Black Stump group of companies. Having concluded that the group's books and records did not enable them to accurately identify the assets and liabilities of each company, the liquidators notified the creditors of each company that they intended to seek orders of the court to pool the assets of the companies for the purposes of the liquidations.

The plaintiffs made their application pursuant to ss447A, 506(1)(b) and 511(1) and (2). Justice Barrett found that a liquidator could resort to the s477(1)(c) power, via s506(1)(b), without any approval or other order of the court, although s477(1)(c) can not bind any creditor who has not actively assented to the proposed compromise. His Honour further found that s511 could only be of relevance in an application to pool assets if the creditors had given their unanimous assent to the pooling.

In this case, the most that the creditors were asked to do was to inform the liquidators in writing should they oppose the intention to pool the nine companies' assets and liabilities. Justice Barrett found that this was an insufficient basis on which to imply unanimous

72 Tayeh; Re Black Stump Enterprises Ltd [2005] NSWSC 475; Re Blackstump Enterprises Ltd [2005] NSWCA 480; Re Blackstump Enterprises Ltd (No 2) [2006] NSWCA 60; Whittingham, Re; Hunter Valley Gravel Supplies Ltd (2006) 59 ACSR 559 73 [2005] NSWCA 480

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creditor consent and concluded that without such consent, in the terms of s511(1)(a), there was no question arising in the winding up of any of the nine companies, a positive determination of the court, which would cause the creditors' legal rights to be varied. He therefore dismissed the liquidators' application.

On appeal, Justice Barrett's decision was upheld. Chief Justice Young in Equity explicitly confirmed that the court has no power to order the pooling of assets in the liquidation of a group of companies, no matter how commercially expedient such an action may appear to be. It is not sufficient for a liquidator to apply for a pooling of assets based solely on a lack of creditor objection. Informed unanimous creditor consent is required if no formal compromise or arrangement has been reached with creditors.

The draft Corporations Amendment (Insolvency) Bill 2007 provides a method for pooling during liquidation which differs from the method during voluntary administration in that a pooling decision may be made either by the liquidator with the unanimous consent of eligible unsecured creditors, or by the liquidator approaching the court for a pooling order without the creditors' consent.

Of course, only those companies in a group which have entered administration or liquidation may be pooled.

4.12 Conclusion of winding-up

In the case of winding-up, the final step to be taken in the process is the deregistration of the company. The steps for deregistration are governed by the Act and once deregistered the company ceases to exist and the liquidator’s role comes to an end.

4.13 How useful are liquidations for restructuring?

Liquidation is a process designed to facilitate the distribution of the assets of an insolvent company to its creditors. Like receivership, it is not a process designed to facilitate restructuring. In some liquidations the liquidator may be successful in identifying some profitable business of the company which can be sold and continue in operation. However, the aim of liquidation is not rehabilitation and like receivership if this goal is achieved it is a subsidiary benefit to the goal of realising the company's assets for the benefit of its creditors.

5. Schemes of arrangement (Schemes)

5.1 Voluntary Schemes

Following the introduction of VA, Schemes are now rarely used in Australia in situations of insolvency because they are governed by technical rules and involve at least two court applications. A VA is less expensive and quicker to commence than Schemes and for this reason, Schemes are not a procedure which is recommended for smaller private companies nor are Schemes now normally used for a rehabilitation where there are solvency issues.

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In brief, there are two different types of schemes: members’ schemes and creditors’ Schemes. Before either type of scheme can be implemented it must be approved by the court, the ASIC and the creditors.

A creditors’ Scheme is a binding agreement between the creditors and the company whereby the company’s obligations to the creditors are deferred, rearranged or extinguished. This type of arrangement might be preferable where there are a large number of creditors and individual arrangements with creditors are not feasible. A scheme will bind all creditors, even those who oppose it.

Members’ Schemes will inevitably involve some restructuring of the company and their rights and obligations as members. The Scheme will be binding on dissenting members.

5.2 Involuntary Schemes

A Scheme may be proposed by the company, the liquidator of a company, or a creditor or member. In practice, the company will usually be cooperatively involved and is required to prepare an explanatory document.

5.3 Procedure

Before the court will order a meeting of creditors or members to be convened to consider the proposed scheme, an applicant must secure or prepare various items of preparatory documentation and might also contact major creditors and members to convene an informal meeting to ascertain their interest prior to approaching the court. Once the documents proposed to be sent to creditors have been prepared and other prerequisites have been completed, the applicant applies to the court for an order authorising the convening of meetings.

Having secured court approval to the convening of a meeting or meetings, the required documents must be posted to creditors and, where relevant, members.

Voting majorities of creditors or members must approve the scheme. The format for meetings is not uniform, but it must permit the interests of all of the various classes of creditors and members to be fairly discussed and separately voted on.

Once the Scheme meeting has been held, if the requisite voting majority is obtained, the applicant then returns to the court to seek approval of the scheme. The Scheme does not come into operation until the court approves it and a copy of the court order is filed with the ASIC.

A committee of inspection or management may be provided for by the Scheme either as a mandatory measure or, if desired, by participating creditors or the scheme administrator. The committee is intended to represent the general body of creditors, and, where relevant, members. The powers of the committee will be specified in the Scheme document. The scheme may require the administrator to follow the committee’s instructions or generally in relation to any particular matter.

5.4 Doing business in reorganisations and post-filing credit

The Scheme administrator’s powers will stem from the formal scheme of arrangement document which, following sanction by the court, will effectively act as a court-sanctioned

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contract between the company and its creditors. Therefore, whether the administrator has, for example, the power to sell assets, and is so, what assets this includes, will depend upon the terms of the Scheme. This is also the case with financial restructuring of the company's finances or its equity base or to contracts and work-in-progress. In this way, the Scheme may give the administrator power to carry on business or it may:

• leave the conduct of business to existing company management;

• envisage discontinuation of the existing business; or

• transfer control of the business to a new purchaser.

There are no statutory restraints to carrying on business under a Scheme. As to whether business is to be carried on at all or under the supervision of the Scheme administrator, or otherwise, one must refer to the scheme itself.

5.5 Setting off

Where, before the commencement of Scheme, a creditor also owes money to the company, the creditor will normally be entitled to set off amounts owing against the debt payable to the company. As with a DOCA, the right to set-off will be determined by reference to the terms of the deed.

5.6 Successful reorganisations

For creditors to adopt a Scheme, a majority of the creditors, or a majority in each class of creditors (where applicable), must vote in favour of the resolution and the total value of the debts of those voting in favour must be at least 75 per cent of the total debts owed by the company to all creditors voting, or 75 per cent of the debts owed by the company to the class of creditors voting.

A Scheme only takes affect upon a court order, made following the passage of the necessary resolution(s).

5.7 Expedited reorganisations

The Act does not set guidelines for a Scheme; it provides the machinery for a Scheme to be agreed to, which is at the discretionary sanction of the court. Unlike VA, a Scheme cannot be initiated quickly as it requires the scrutiny of the ASIC, the court, and the convening of formal meetings.

5.8 Unsuccessful reorganisations

In order to propose a Scheme, the person proposing the scheme must:

• supply certain information to the ASIC and the court;

• with the court’s permission, convene a meeting of creditors and, where relevant, members;

• secure a requisite majority vote in favour of the scheme from the meeting or meetings (see 2.3); and

• reapply to the court for final sanction.

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The proposed Scheme may be defeated at any of these stages, and if this occurs, the control of the company reverts to the directors.

The effect of a failed Scheme depends on what has actually been provided for in the scheme itself. The Scheme may provide for liquidation should it fail to meet its objectives. Even where it does not specifically provide for that contingency, a liquidation may take place, depending on the company’s circumstances.

5.9 Priority claims

The manner and method of distribution of funds under a Scheme will be governed by the provisions of the scheme itself. A scheme must attempt to treat participating unsecured creditors equally, subject to the exceptions normally provided for in a winding-up. If it does otherwise, the court, the ASIC or the creditors concerned may object to the Scheme.

5.10 Conclusion of Scheme

The termination of a Scheme should be provided for in the document itself.

On termination of a Scheme, the company reverts to the control of the directors, however, the Scheme may provide for a liquidation should it fail to meet its objectives, and even when the Scheme has not provided for that contingency, a winding-up may take place.

5.11 How useful are schemes for reorganisation?

Schemes can certainly be an effective method of formal reorganisation. For financially troubled companies though, a VA is much easier to commence and because of the fact that no court application is mandatory, can be a cheaper and a more effective method of achieving similar goals to a Scheme. Unlike a Scheme, all creditors of a company in VA vote so that there is no need to identify individual classes of creditors or to achieve majorities in different clauses.

6. Creditors voluntary winding up

6.1 Commencement

A voluntary winding-up may be commenced by the company’s members or creditors.

A voluntary winding-up may be undertaken by a resolution of the members in general meeting if the company is solvent. The directors are required to make a written declaration of the company’s solvency before sending out the notice of meeting.

A creditors’ voluntary winding-up is similar to a members’ voluntary winding-up, except that the directors have not made a solvency declaration and the company is insolvent. Creditors’ voluntary winding-up occurs infrequently, other than as a result of the creditors voting in favour of liquidation at the second creditors’ or decision-making meeting in a VA (see 2.2 above).

6.2 Effects

The liquidator assumes control of the company and proceedings against the company cannot be continued or begun except with the leave of the court. The powers of the

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directors are suspended; they do not lose office but they can only act with the written approval of the liquidator or the approval of the court.

An order for winding up a company operates in favour of all of the creditors and contributories of the company. A secured creditor does not require leave of the court to deal with the property charged. Unsecured creditors have no rights to specific items of the company’s assets other than pursuant to retention of title or other rights if applicable.

Transfers of shares after the date of the order are void as against the company unless the court orders otherwise. There can be no change in the status of a member unless the court orders otherwise. Members who hold partly-paid shares will be called upon the pay the unpaid part.

6.3 How useful are creditors voluntary winding up for reorganisation?

Like court appointed liquidation, voluntary winding up is a process designed to achieve the selling up and distribution of a company's assets. It is not a tool designed for or to be proffered for reorganisation other than the deregistration of non-operating companies.

7. Court-appointed receivers

7.1 When will the court appoint a receiver?

A receiver may be appointed by the court as an equitable remedy whenever it is just and convenient to do so. A receiver can be sought by any party to a cause or matter involving the court's jurisdiction. In practice, applicants are usually mortgagees or debenture-holders, but the appointment could be sought in unusual circumstances by ordinary creditors and even by the company itself. For example, a receiver may be appointed by the court:

• during the course of a protracted litigation to settle a dispute between parties or to protect the "public interest"

• under the Act where ASIC is conducting an investigation and it is necessary to freeze the assets of companies or ASIC may apply to the court for an order appointing a receiver of the property owned by or held by a securities industry dealer.

• at the request of a liquidator or provisional liquidator, to an officer's or related entities property in circumstances where the officer or related entity may otherwise avoid liability to the company.

The distinction between a privately appointed receiver and a court appointed receiver was summed up in the case of Duffy v Super Centre Development Corp Ltd74:

There is some contrast to be borne in mind between the function of a privately appointed receiver and the function of a court appointed receiver, and I use the word `receiver' as a compendious word encompassing a receiver and manager. To some extent, the privately appointed receiver, particularly in current commercial

74 (1967) 1 NSWR 382, per Street J at 383 to 384

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practice, makes an effort to restore the financial prosperity of the company whose affairs he has been appointed to administer by a debenture holder. A court appointed receiver does not fill the same position. He is not what might be described as a company doctor, but rather his function is that of company caretaker

7.2 Procedure

Persons may seek a court-appointed receiver where there are difficulties in appointing a receiver by another mode, or where they have no power to appoint a receiver except by application to the court

The actual procedure for securing a court order will depend upon the circumstances in which the order is sought. In a court appointment, the court will always exercise a discretion as to whether a receiver should be appointed.

The requirements for notification by the receiver and by the person appointing him or her are the same as for a receiver appointed from powers arising out of a document (see part 3 above).

7.3 Successful reorganisations and bringing it to an end

The way a receivership ends and the way in which this effects a reorganisation is discussed at 3.11 above.

The appointment of a receiver does not prevent creditors or the company itself from seeking to initiate liquidation, administration, provisional liquidation, proposing a scheme of arrangement, or even appointing a receiver under a mortgage deed with prior rights. In this way other reorganisation processes can be taken advantage of so as to rehabilitate the company, however, whether this ultimately benefits the rehabilitation is dependent upon the parties that seek the alternate process (for example secured creditors may enforce their security thereby making rehabilitation difficult or impossible).

7.4 Expedited reorganisations

The appointment of a receiver pursuant to a court order is usually associated with a requirement to furnish security. The Supreme Court Rules in all States provide that a person shall not be appointed receiver ``pursuant to a direction of the court until he has filed an instrument of security''75. The court may, inter alia:

• order that the appointment of the receiver take effect immediately but that he or she is not to receive any property until he or she provides security76 ;

• make the appointment but direct the receiver not to provide security or take possession for a fixed period of time77;

• waive security if deemed not to be required;

75 NSW Pt 29, r 2(2); Vic O 50 r 16; Qld O 54 r 13; SA O 50 r 14(1); WA O 51 r 3(1); Tas O 57 r 2; ACT O 52 r 17 76 Re Pountain (1888) 37 ChD 609 at 610 77 Re Crompton & Co Ltd (1914) 1 Ch 954

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• appoint a person without security — this is often done in New South Wales when an official liquidator is appointed as receiver.

The receivership will commence as specified in the court order, or when security is provided.

7.5 How useful are court appointed receiverships for reorganisation?

A court appointed receiver has a limited role which is reflected in the limitations to his/her powers, for example, a court-appointed receiver often has no power of sale, except with the permission of the court. In addition, the fact that a moratorium does not exist when a court appoints a receiver means that while the court appointed receiver may be working towards resolving protracted litigation to settle a dispute between parties or to protect the "public interest", a creditor of all or substantially all of the company's assets may step in destroy any hope of rehabilitation. Court appointed receivers are not normally appointed to arrange or facilitate a restructuring. A court could give a court appointed receiver power to act in that way (in a similar way to the power afforded to the provisional liquidator in UMP (see 8.7 below)) but this is not the normal role of a court appointed receiver.

8. Provisional liquidation

The procedure known as ''provisional liquidation'' exists to allow interim control over the affairs of a corporation after an application to wind up the corporation has been filed, but before the hearing of the winding up application has taken place or has been concluded.

A provisional liquidator may also be appointed after a winding up order has been made, but where there is an appeal against the order and the decision on the appeal has not yet been made. Such appeals are rare, and the appointment of a provisional liquidator during the course of such an appeal even rarer.

The procedure of provisional liquidation exists to protect the interest of financial participants in a corporation until such time as an application for winding up is determined.

A provisional liquidation may be forced on a corporation against the wishes of its management or ownership. This facility is particularly helpful to creditors and to oppressed minorities. Creditors seek the appointment of a provisional liquidator in situations where it would be unwise to leave company affairs under the control of directors or shareholders who might effect a dissipation of corporate assets before a winding up application is heard.

In practice, provisional liquidation is not normally used for the rehabilitation of a company, rather, a provisional liquidator usually has a short "caretaker" role. An exception to this is the case of Re United Medical Protection & Ors78 which is discussed at 8.5 below which provides a, to date, rare example of how provisional liquidation has been used to rehabilitate a company.

78 [2003] NSWSC 1031

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8.1 Procedure

To initiate a provisional liquidation there must have been previously (even if immediately previously) a winding up application filed with the court. An application to appoint a provisional liquidator is filed with the court usually by a creditor or the company itself. The court then exercises its discretion as to whether a provisional liquidator is to be appointed. The exercise of this discretion is premised on demonstrating to the court that the appointment is necessary to prevent dissipation of assets or to preserve the position of creditors or contributories until the decision as to the winding up order is made. It has this discretionary power whether the application for the provisional liquidator or the application for a winding up order is opposed by the company or not.

The application to appoint the provisional liquidator does not need to be made by the applicant for winding up, although in most cases they will be the same person. The court will normally grant an order for the appointment of a provisional liquidator where that order is, or may be, in the interests of the dominant financial parties concerned. Where the company is insolvent, creditors are the dominant financial parties as members are to receive nothing in the event of a liquidation.

8.2 Effect and moratorium

A company entering into provisional liquidation continues its legal existence, but with certain restrictions, some flowing from the application to wind up itself and some flowing from the appointment of the provisional liquidator.

The company is described as being in provisional liquidation or as having a provisional liquidator appointed.

Directors' powers cease on the appointment of a provisional liquidator, and the company's control is clearly entrusted to him or her. While a provisional liquidator of a company is acting, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company except:

(a) as a provisional liquidator of the company; or

(b) as an administrator appointed for purposes of an administration of the company beginning after the provisional liquidator was appointed; or

(c) with the provisional liquidator's written approval; or

(d) with the approval of the court.

Where a provisional liquidator is acting, a person cannot begin or proceed with:

• a proceeding in a court against the company or in relation to the property of the company; or

• enforcement process in relation to such property;

except with the leave of the court and in accordance with such terms (if any) as the court imposes.

The moratorium or suspension of officers' powers affects a secured creditor's right to realise or otherwise deal with his or her security.

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Leave might be given to continue with or commence proceedings in areas where the judicial forum is the most convenient way to settle the claim.

The effect of an appointment of a provisional liquidator on other forms of administrations would be as follows:

(a) Receivership: a provisional liquidator may coexist with a receiver, whether the receiver be appointed before or after the provisional liquidator. Where the receiver was acting previously, his corporate agency is revoked, but this is unlikely to interfere with his power to hold and dispose of corporate assets charged to his client. It does, however, eliminate the receiver's right of indemnification, as an agent, from the company should the assets charged to his client be used up.

(b) VA: not compatible with provisional liquidation, but the provisional liquidator may initiate a VA.

(c) Schemes: not compatible with liquidation, but a provisional liquidation may precede it or follow it and coexist temporarily until the winding up order has been considered.

The making of a winding up order terminates provisional liquidation. The court liquidator may or may not be the same person as the provisional liquidator.

8.1 Distribution of property

Except in unusual circumstances, there will be no distribution of corporate property during the course of the provisional liquidation. However, a provisional liquidator may need to seek court permission to wind up some of a corporation's affairs if it is in the interests of financial participants to do so. The provisional liquidator may also take the opportunity during his interim control period to investigate the affairs of the company in order to inform the court of the company's position at the relevant hearing.

8.2 Voluntary provisional liquidation

Provisional liquidation is not necessarily involuntary. A corporation may seek its own provisional liquidation as an interim alternative to a subsequent administration. This will particularly be the case where there is some urgency to freeze the company's position vis-à-vis its creditors or other financial contributors.

8.3 Provisional liquidator's powers

The provisional liquidator's powers are somewhat akin to those of a liquidator, except as restricted by statutory provision, court order and generally by the knowledge that a winding up order may eventually be refused.

The provisional liquidator will have the power to administer company affairs, but is unlikely to be given initially the power to realise assets (except in the ordinary course of business) or to pay dividends. He will usually undertake the activity of investigating the company's affairs to establish whether there is some reason for the company's not being wound up.

The company's property does not automatically vest in its provisional liquidator, but his administrative powers are sufficient to replace existing management control of corporate property for the interim period of his appointment.

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8.4 Post-appointment credit

A provisional liquidator's powers generally include taking possession of a company's assets (section 474(1)), control of its affairs until the winding up application is decided and preserving the company's assets until they become available to a liquidator or are ultimately returned to the control of directors.

The provisional liquidator's capacity to realise assets other than in the ordinary course of business is usually limited. However, s472(4) of the Act states that a provisional liquidator has the powers of a liquidator derived from s477(2). Section 477(2)(g) states:

Subject to this section a liquidator of a company may:

…

(g) obtain credit, whether on the security of the property of the company or otherwise."

However, such a loan would be subject to the same limitations discussed at 4.6 above.

8.5 Successful reorganisation

As mentioned above, a provisional liquidation is not normally used for the rehabilitation of a company, rather, a provisional liquidator usually has a short "caretaker" role. An exception to this is the case of Re United Medical Protection & Ors79 which provides a, to date, rare example of how provisional liquidation has been used in Australia to rehabilitate a company.

This case involved United Medical Protection (UMP), the largest medical defence organisation in Australia. Mr David Lombe, a partner of Deloitte Touche Tohmatso in Sydney, was appointed the provisional liquidator of the five companies in the UMP group. The winding-up applications had not been made on the grounds of insolvency but, rather, on just and equitable grounds because the circumstances were such that, there was a risk that the company "would be unable to continue to operate in the manner envisaged by the corporators and the present membership". The court's power to appoint a liquidator provisionally is conferred by section 472(2) of the Act.

The Commonwealth government provided various indemnities to UMP to enable it to continue in operation because of the significant consequences to the Australian community were UMP to collapse, leaving medical practitioners uninsured and unwilling to continue to practice as doctors. As a consequence of the Commonwealth indemnity the court closely supervised the provisional liquidation and made orders pursuant to which the companies continued in operation and continued to write cover notwithstanding the fact that they were in provisional liquidation.

As a result Legislative tort reform and the extension of federal assistance meant that UMP's forecast exposure to claims were significantly lowered and the four companies in question were over 17 months ultimately successfully turned around and the provisional liquidator formed the view that they were then solvent.

79 [2003] NSWSC 1031

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Mr Lombe applied to the New South Wales Supreme Court for orders terminating his appointment over four of the companies, and for leave to discontinue winding-up proceedings against them.

Section 482 of the Act authorises the court to terminate the winding-up of a company and Section 467(1) of the Act authorises the court on hearing a winding-up application to dismiss the application. There is no express provision in the Act for the court to terminate the appointment of the provisional liquidator, but the court rules give it power to set aside its interlocutory orders.

It is rare for a company in Australia to remain in provisional liquidation for a substantial period of time and there is very little case law dealing with the termination of a provisional liquidator's appointment. Justice Austin took the view the cases that deal with termination of winding-up and receivership were helpful by analogy, which led to his Honour to consider several factors relevant to the exercise of the court's discretion.

• whether the purposes for which the appointment was made had been exhausted, and whether there was a reasonable prospect that matters might arise in the future with which a provisional liquidator should deal;

• the effect of the termination on creditors, contributories and the provisional liquidator; and

• whether the termination of the appointment was in the public interest.

Mr Lombe applied to the court for his position as provisional liquidator of the companies to be terminated on several grounds. The consideration of the above issues led the court to agree with Mr Lombe's submission that the key questions were whether the companies were, in fact, solvent and whether (having regard to the interests of creditors and members) the company would comply with the requirements of the Australian Prudential Regulation Authority (APRA), the insurance regulator.

Mr Lombe submitted that, even though he had not been appointed on insolvency grounds, the "confluence of factors, ranging from difficulties in maintaining capital and spiralling claims", no longer existed. Additionally, the court heard the difficulties arising from the amalgamation that created the UMP group had been overcome. The court was satisfied that these factors had contributed to the value of the group and that sufficient action had been taken to remedy them. It was also satisfied on the evidence that UMP could meet APRA's prudential requirements in the future.

On the question of solvency, Justice Austin also accepted the evidence before him from Mr Lombe, APRA, ASIC and others. Justice Austin was satisfied that the four companies were, in fact, solvent and there were reasonable grounds for predicting that they would remain so, thus avoiding protection of the rights of unsecured creditors. This was based on a wealth of documentary evidence, forecasts, and the impact of legislative reform.

This case demonstrates that the court is empowered under section 482 of the Act to terminate the appointment of a provisional liquidator. The court will carefully consider a range of factors before doing so, including the solvency of the company in the impact of the termination on creditors, contributories and the provisional liquidator. It is a rare example in Australia of the court supervising the provisional liquidator of a company in the actual

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continuation of its business operations and the successful turning around of that company to the extent that it can be taken out of external control.

8.6 Expedited reorganisation

The ``date'' of provisional liquidation is the date on which the court order appointing the provisional liquidator is made. This is to be distinguished from the ``commencement'' of liquidation, if an order is ultimately made for liquidation, which will usually be the date of the winding up order is made. However, should an application for the appointment of a provisional liquidator be made immediately after, ie contemporaneous with, the filing of an application for winding up, then in the event of a subsequent liquidation the date of provisional liquidation will be the same as the ``relation-back day'', being the day from which, or in respect of which, certain antecedent transactions may be set aside by the liquidator.

In practice the filing of an application for winding up, and the application to appoint a provisional liquidator are often made at the same time.

The timing of a provisional liquidation is often difficult to predict. While it is an interim measure, some provisional liquidations have continued for a number of years. It is interim to:

• a court liquidation;

• the withdrawal or dismissal of a winding up application; or

• some other form of administration which might be proposed to resolve the company's affairs, eg a court approved scheme of arrangement; or

• a voluntary administration leading to a deed of company arrangement.

While the provisional liquidation may take considerable time, the appointment of a provisional liquidator can be done quickly and one if its advantages if the speed of appointment. This is such so that a company, a creditor and even a contributory might seek the appointment of a provisional liquidator where assets are in danger of dissipation, deterioration or otherwise in jeopardy unless placed under independent control. There might, for example, be the need to immediately stay a creditors' action against the company.

Where urgency is not required or assets do not need immediate protection, there will be no need to appoint a provisional liquidator as a precursor to liquidation or as an alternative to other forms of administration such as receivership, official management or a scheme of arrangement.

It might be determined that provisional liquidation or Administration is necessary in the interests of urgent protection or as a means of permitting an independent person to examine the company's affairs to consider possible alternatives prior to the hearing of the winding up application.

8.7 Unsuccessful reorganisation

The introduction of the VA process in 1993 provided companies with a vehicle to initiate an interim administration without the need for a court application. VA, Schemes, receivership,

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controllership or even voluntary liquidation, may be more suitable to a company than the interim administration of ``provisional liquidation''.

Whatever the administration recommended, even if it be a provisional liquidation, the expected effect of appointing a provisional liquidator or some other administrator may be frustrated by the contractual right of a secured creditor to appoint a receiver, and for these reasons it may be necessary to canvass the attitude of that secured creditor prior to appointment.

8.8 Termination of provisional liquidation

A provisional liquidator's appointment will conclude if a winding up application is dismissed or withdrawn, as it is a prerequisite to the appointment of a provisional liquidator that a winding up application be still under consideration. It will also terminate if a winding up order is made, unless there is an appeal against the winding up order and the court has appointed a provisional liquidator pending the decision in that appeal or determined to continue the appointment of a provisional liquidator pending such decision.

A provisional liquidator might also have his appointment appealed against or be removed. Where a provisional liquidator is removed and not replaced by another liquidator, the provisional liquidation will terminate. The court might make an order for the removal of the provisional liquidator and the termination of the provisional liquidation if it is the company's interests.

On completing his term of office and accounting to the liquidator (if any), the provisional liquidator is entitled to be paid out of company property for all costs, charges and expenses (including the remuneration) incurred by him as may be authorised by the court, and he may retain sufficient to defray such costs.

8.9 How useful is provisional liquidation for reorganisation?

Provisional liquidation is normally not used in Australia as a restructuring process. The UPM example is probably not a herald for provisional liquidation becoming a favoured means of restructuring, primarily because of the amount of court involvement in the process in comparison to VA.

9. Proposed legislative reforms

The draft Corporations Amendment (Insolvency) Bill 2007 and Corporations and ASIC Amendment Regulations 2007 were released on 13 November 2006 by the Parliamentary Secretary to the Treasurer, the Honourable Chris Pearce MP, for public comment. The draft legislation embodies the reforms originally announced in October 2005 and addresses four main areas. It was open for public comment until 23 February 2007.

The reform package introduces some key changes to the current law relating to outcomes for creditors and the relevant proposed reforms for the purposes of this paper are discussed below.

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Pooling

Although there is currently no legislation in place providing for 'pooling' in an administration context, as noted in 2.18 and 4.11 above it has always been possible for administrators to pool the administration of companies in the same group. This has been done by proposing DOCAs in each group company providing for pooling. Such DOCAs to date have been effective if approved, in the usual way, that is by a majority in value and number of creditors in each company to be pooled. The draft legislation will make the preconditions for pooling during administrations of company groups and the procedures which should apply much clearer and protect the rights of objectors.

The draft legislation provides that during voluntary administration, a pooling decision may be made by the administrator with the unanimous consent of creditors. If any creditor objects, the administrator may approach the court to obtain approval for the pooling decision. The court may make a pooling order despite any objections from creditors. The model proposed by the draft legislation allows DOCAs to include pooling arrangements or to confer authority on the administrator to prepare a pooling proposal.

A pooling decision will have the effect of:

• making each company jointly and severally liable for the debts of all other companies in the pooled group; and

• extinguishing any debts between companies in the group.

The recent decisions in Black Stump80 referred to at 4.11 above showed the present difficulties with pooling in liquidations81.

The draft legislation provides a method for pooling during liquidation which differs from the method during voluntary administration outlined above in that a pooling decision may be made either:

• by the liquidator with the unanimous consent of eligible unsecured creditors; or

• by the liquidator approaching the court for a pooling order without first seeking the creditors' consent (the court may make such an order despite any objections from creditors).

Only those companies in a group which have entered administration or liquidation may be pooled.

Finetuning voluntary administration

Although it is generally acknowledged that the voluntary administration procedures currently in place are effective, a number of reforms have been proposed to fine tune the voluntary administration process. These include:

80 Tayeh; Re Black Stump Enterprises Ltd [2005] NSWSC 475; Re Blackstump Enterprises Ltd [2005] NSWCA 480; Re Blackstump Enterprises Ltd (No 2) [2006] NSWCA 60; see also AAR paper dated 17 October 2006 that considers the Black Stump cases. 81 See also the recent decision in Whittingham, Re; Hunter Valley Gravel Supplies Ltd [2006] NSWSC 1070.

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• slightly extending the timing for the holding of creditors' meetings. The first creditors' meeting which currently must be held within 5 business days of the commencement of the administration will instead need to be held within 8 business days of the commencement of the administration. The period for the holding of the second creditors' meeting will be extended from 21 or 28 days (depending on whether or not the administration commenced in December or the month before Good Friday) to 20 or 25 business days. Five business days' notice must be given to creditors for both the first and second creditors' meetings.

• addressing the current inconsistency in the law by giving both liquidators and administrators the ability to consent to the transfer of shares is satisfied that such a transfer is in the best interests of the creditors.

The above proposed changes should make reorganisation within the voluntary administration process slightly easier.

Facilitating borrowing by insolvency practitioners

The draft legislation also aims to improve the ability of companies in voluntary administration to borrow by extending the administrator's right of indemnity to cover personal liability incurred in the performance of their duties and also by affording priority in liquidation for borrowings during a prior administration.

Protecting employee entitlements

Under the law as it currently stands, a creditor may challenge in court a DOCA on the basis that it is oppressive or unfairly prejudicial or discriminatory because it does not reflect the statutory priority requirements and results in a return which is worse than would be the case in a liquidation.

The draft legislation requires that a DOCA must adhere to the priority requirements of the Act unless a majority in value and number of creditors affected by any proposed changes to those requirements agree to such changes. The court may approve a DOCA which does not preserve the statutory priority requirements if this would result in the same or better outcome for the affected creditors. The administrator, an affected creditor or another interested party may make an application to the court for such an order.

In effect, this amendment will place the burden on the administrator, rather than on the affected creditor, to bring an action under a DOCA which does not comply with the statutory requirements.

10. Conclusion

Australia has a range of formal external control procedures for corporations. This paper gives an overview of each of them and briefly comments on how useful each area is as a tool for restructuring. Only VA was specifically designed to, if possible, facilitate reorganisation. VA is a flexible process which can be cost effective. There are recommendations to reform the process, some of which may improve it.

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NOTE: This document is intended only to provide a general review on matters of concern or interest to readers. The text of this document should not be relied upon as legal advice. Matters differ according to their facts. The law changes. You should seek legal advice on specific fact situations as they arise. Parts of this paper have been extracted from the Allens Arthur Robinson Annual Reviews of Insolvency and Restructuring Law.

Visit our website, www.aar.com.au, for:

• An electronic, fully-searchable version of this paper;

• Past papers presented at Allens Arthur Robinson Corporate Insolvency & Restructuring Forums and Insurance Forums;

• The 1999, 2000, 2001, 2002, 2003, 2004, 2005 and very soon the 2006 Annual Reviews of Insolvency & Restructuring Law; and

• The 1999, 2000, 2001, 2002, 2003, 2004, 2005 and very soon the 2006 Annual Reviews of Insurance & Reinsurance Law.

If you have enjoyed this paper you may enjoy reading Allens Arthur Robinson's "Director's Duties During Insolvency", 2nd Edition, Thomson published in December 2006 (Email LRA.Service@thomson.com) – why not buy a copy today!