Spinning around – Formal Reorganisation in Australia · 2005. 3. 21. · 1973 (the Insurance Act) and the Law Reform Miscellaneous Provisions Act 1946 (NSW). 2. Voluntary administration

Spinning around – Formal Reorganisationin Australia

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Michael QuinlanPartnerDeputy LeaderCorporate Insolvency and RestructuringAllens Arthur Robinson

1. Introduction

This paper looks at the principal formal reorganisation structures for corporations in Australia andconcentrates on those available to financially troubled companies. In Australia, personal andcorporate insolvencies are administered under separate legislation. Generally, the word ‘bankrupt’relates only to individuals. Individual bankruptcy is governed by the Bankruptcy Act and is notconsidered in this paper.

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

(1) voluntary administration (VA): VA is a process begun by the appointment of anadministrator 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 itshould enter into a Deed of Company Arrangement (DOCA) approved by its creditors, bewound up or revert to normal operation by its directors. A company need not be presentlyinsolvent to enter into VA. The methods by which a company can go into a VA are set outat 2.2 below, but the most common method is for the board to resolve that in the opinion ofthe directors voting for the resolution, the company is insolvent, or is likely to becomeinsolvent at some future time.

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

(3) court winding-up (also called liquidation): this refers to a winding up of a companypursuant 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 surplusassets 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.

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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 isCommonwealth legislation which regulates companies throughout Australia. In addition to the Actthere is other legislation which can be relevant to certain insolvencies such as the Insurance Act1973 (the Insurance Act) and the Law Reform Miscellaneous Provisions Act 1946 (NSW).

2. Voluntary administration

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

VA is a procedure designed to salvage insolvent or near-insolvent companies so that the companycan return to trading or provide a better return for creditors and shareholders. It is the only formalprocess in Australia with rehabilitation as one of its express goals. The objects of part 5.3 of theAct (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 insolventcompany 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 – resultsin a better return for the company's creditors and members than would result froman immediate winding up of the company."

There are two stages to the VA process. The first is the administration phase in which thecompany comes under control of an insolvency practitioner who must investigate the company’saffairs 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.

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

2.1 Requirements

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

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

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

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

2.2 Procedure

When VA initially commences, the administrator, irrespective of how appointed, must lodgea 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 bepublished within three business days after the appointment in a national newspaper or inthe daily newspaper of each state or territory in which the company has its registered officeor carries on business.

Where a chargee has appointed the administrator, the chargee is required to give writtennotice 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 madethe appointment, the company or the liquidator is required to give written notice of theappointment to a chargee who holds a charge over the whole or substantially the whole ofthe company’s property.

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

The first meeting of creditors must be held within five business days of the initialappointment of the administrator. At least two business days before the meeting theadministrator must give written notice of the meeting to as many of the company’s creditorsas 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 acommittee of creditors and to provide creditors with a chance to appoint someone else asadministrator (if they do not want the administrator appointed by the board of directors orliquidator, provisional liquidator or chargeholder (as the case may be)).

A committee of inspection can act for creditors in consultations with the administrator aboutthe administration and can receive and consider his or her reports but it cannot interferewith 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 daysof 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 daysbefore 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 administrationbegins.

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

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2.3 Effects

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

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

Shareholders have no part to play in the administration process (unless they are alsocreditors) and any transfer of shares in a company, or an alteration in the status of amember of a company that is made during the administration of the company is void unlessthe court otherwise orders.

Within five business days of his or her appointment, the administrator must hold a meetingof creditors. At this meeting the creditors can vote to establish a creditors’ committeeand/or replace the voluntary administrator. Within five business days of the conveningperiod, the administrator must hold the second meeting of creditors (the ‘decisionmeeting’); however, this meeting can be adjourned for up to 60 days without courtapproval. The administrator must obtain court approval if a longer period is required. Atthe 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 onlyhappen if the company is found to be solvent; or

(3) enter into a DOCA. A DOCA is effectively a compromiseagreement between the company and its creditors. It can in essence containwhatever agreement the creditors want it to although the court has power to setaside a DOCA if, for example, it believes it to be contrary to public policy. It canprovide a very flexible mechanism for the reorganisation of corporations.

If a DOCA has been executed following the administration period and within the periodprescribed by the Act, the DOCA is binding on all creditors (secured creditors who did notvote for the deed are not barred from enforcing their security), the company, its officers andmembers, 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.

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2.4 Involuntary voluntary administrations

Despite its name, there is scope for VA to be ‘involuntary’ on the part of the company, asan administrator can be appointed by a chargee of all, or substantially, all of the assets ofthe company and by a liquidator or provisional liquidator. However appointed, when anadministrator is appointed the administration would then proceed as discussed at 2.2above.

2.5 Doing business in reorganisations

The powers of administrators are set out in the Act and allow for the carrying on of thebusiness. An administrator acts as an agent of the company and is thereby able to bindthe company during the administration period. A committee of creditors may be appointedduring the VA. Such a committee has largely an advisory role. The creditors do not have arole in the day to day management of the company during VA but they make the criticaldecision at the second creditors’ meeting (see 2.2 above). Where a company is operatingunder a DOCA, the terms of the DOCA will govern the extent to which the deedadministrator can carry on the business of the company and the approvals that arerequired.

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

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

2.6 Stays of proceedings/moratoriums

When a company is under administration:

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

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

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

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

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• The owner or lessor of property that is used or occupied by, or is in the possessionof the company cannot take possession or otherwise recover it, except with theadministrator’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 therebeing a debt owing to them and they cannot make further supply conditional onpayment of outstanding debt.

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

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

• The courts may grant leave allowing the commencement or continuation ofproceedings against a company under administration if the claim has a solidfoundation and gives rise to a serious dispute. However, generally, the courts willrefuse leave to proceed, so as to prevent the unnecessary hindrance to theadministrator of the need to defend legal proceedings.

Importantly, there is no stay on the ability of contracting parties to exercise their rights toterminate contracts of supply or purchase of goods or service when a company is underadministration. 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 othercontracting party or on the appointment of an external administrator. For some companiesthe major value of the company resides in its contracts. The appointment of anadministrator can see that value rapidly disappear.

2.7 Sale of assets

Once appointed, the administrator acts as the agent of the company and has broad powersto run the company. During the administration procedure, the administrator has control ofthe company’s business, property and affairs and may: terminate or dispose of all or part ofthat business; dispose of any of that property; and perform any function, and exercise anypower, that a company or any of its officers could perform or exercise if the company werenot under administration.

The powers of other officers are suspended, except with the administrator’s writtenapproval and only an administrator can (with some exceptions, such as encumberedproperty) 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 providewarranties or indemnities in contracts of sale because they are reluctant to exposethemselves to personal liability should those warranties or indemnities ultimately prove to

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be incorrect. This can have a significant impact on the realisable value of assets. Wherethe main assets of a company are intangibles or intellectual property, the lack of warrantiesand indemnities can very dramatically impact on the ability of the company to sell thoseassets at all and, if they can be sold, on the realisable value.

2.8 Set-off and netting

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

2.9 Post-filing credit

The administration phase of VA is intended to be an interim administration which generallyresults in either a DOCA or a winding-up occurring. During the administration phase, anadministrator has power to obtain credit or take loans on behalf of the company. Unlessthe company has significant assets it is likely that a company in VA will have real difficultiesin obtaining new finance. The administrator of a company under VA is liable for debts heor she incurs in the performance or exercise, or purported performance or exercise, of anyof 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 thepayment of such liabilities. This indemnity has priority over all unsecured debts andfloating charges of the company.

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

In a recent decision1 the Court was prepared to vary this result and, for the purposes onlyof the administration before it, to rule that the taking of a loan was the rendering of aservice. 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 theindemnity under section 443D(a) CA;

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

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

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

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

Spyglass is an example of the potential breadth of the use of section 447A to amend Part5.3A of the CA to suit the administration of a particular company. An importantconsideration for the Court was that all of the parties and most importantly the majority ofcreditors, agreed with the orders that were proposed. The case shows that the Court willbe prepared to make orders to modify the common law interpretation of provisions of Part5.3A CA, but will first wish to ensure that the interests of the creditors will be served bysuch a modification.

If this approach is followed in other cases it may improve the ability of a company in VA toborrow 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 becomeexposed to personal liability.

If, following an administration, the creditors resolve to wind up the company rather thanenter 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 onbehalf of the company will depend on the terms of the DOCA. Any DOCA which gave thedeed administrator power to enter into loans on behalf of the company or to obtain creditwould be likely to provide that the deed administrator could repay that loan in priority toother debts and to indemnify the deed administrator from personal liability or alternativelyto 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 theregulations unless excluded) and normally will incorporate the order of priorities thatapplies in relation to a company that is being wound up.

2.10 Successful reorganisations

The creditors must resolve that the company enter into a DOCA if the company is to bereorganised by that method. A successful resolution requires a majority of the creditorsvoting on the resolution to vote in favour of the resolution and the value of the debts owingby the company to those creditors voting in favour to be more than half of the total value ofthe 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 whateveragreement the creditors want. The regulations of the Act set out prescribed terms ofoperation of that arrangement and those terms apply unless the creditors determineotherwise. The prescribed terms provide that priorities in respect of creditors aredetermined with reference to the priorities regime set out in the Act (see 2.15 below). Acreditor who is dissatisfied with a DOCA can seek orders from the court to set it aside incertain circumstances, including, for example that the DOCA was contrary to public policy(see 2.14 below).

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2.11 Expedited reorganisations

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

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

Once commenced, the VA process proceeds quickly and without the need for any courtinvolvement in the process at all. In the first stage, the administration stage, anadministrator is appointed. As soon as practicable after the administration begins, theadministrator must investigate the company’s business and form an opinion about whetherto 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 heldno later than five business days after the convening period. The meeting can be adjournedwithout the approval of the court, but it must be held within 60 days from the day of thesecond 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 votedfor. The document must be executed by the company and the administrator within 21 daysafter the end of the second creditors’ meeting.

It is important to recognise though that the present section 436A(1) does not limit voluntaryadministration to situations of actual or present insolvency and the extent to which theprocess can be used for presently solvent companies which satisfy the second limb ofsection 436A(1) remains to be fully explored. The obiter comments made in the decision inCrimmins v Glenview Home Units Pty Ltd [2001] NSWSC 599 (unreported 17 August 2001)support the view that the likelihood of insolvency occurring many years in the future wouldsuffice to satisfy section 436A(1). If this decision is followed it seems to afford directors ofcompanies an opportunity to appoint a voluntary administrator well prior to actualinsolvency. These issues are discussed in more detail in 9.1 below.

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2.12 Unsuccessful reorganisations

In a VA, the fate of the company depends on what the creditors decide at the secondmeeting of the creditors (see 2.2 above).

The chairperson of the meeting is the sole judge of whether a resolution has been carriedor lost and must declare the result of the vote. A declaration is conclusive evidence of theresult 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 thosepresent and voting, vote in favour of the resolution. Where the majority of creditors (innumber) 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 21days. If the instrument is not executed within this period then the company is deemed tobe 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 DOCAshould identify what then happens eg liquidation, deregistration or return to thedirectors. If the DOCA is silent on what happens on termination, control of thecompany will return to its directors.

On the application of the company, a creditor or other interested person, an executedDOCA 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 tocreditors;

• 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 thecompany 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 andthat on termination the company will be wound up and those circumstances exist ata particular time.

2.13 Claims and appeals

During the administration phase of a VA, creditors may not vote at creditors meetingsunless their claims have been admitted by the administrator or the creditors have lodgedparticulars of their claims with the chairperson. The administrator may call for formalproofs of debts or claims to be lodged before the meeting. Under the regulations thechairperson may admit or reject a proof of debt or claim for the purpose of voting. If thechairperson is in doubt whether a proof of debt or claim should be admitted or rejected, heor she must mark the proof as objected to and allow the creditor to vote, subject to the votebeing declared invalid if the objection is sustained. If the creditor has not provided theadministrator with sufficient information to enable him or her to determine whether thepurported creditor is or is not in fact a creditor or sufficient to enable to him or her to makea just estimate, the administrator is entitled to reject the proof for voting purposes2. Anappeal to the court from a decision of the chairperson to admit or reject a proof of debt orclaim for the purposes of voting may be taken within 14 days.

Where the administrator does not call for formal proof of claims and creditors lodgeparticulars 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 hasnot been established, cannot vote unless a just estimate of the value of the debt or claimhas been made.

2.14 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 orbefore the day specified in the DOCA;

• if bound by the DOCA, they cannot apply to wind up the company or proceed withsuch 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 thecompany executed the DOCA; or

• unless the court so orders.

A DOCA releases the company from a debt only insofar as the DOCA provides for itsrelease and the creditor concerned is bound by the DOCA.

2 Re Pan Pharmaceuticals Ltd (2003) 47 ACSR 139

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

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

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

2.15 Priority claims

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

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

2.16 Distributions

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

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

2.17 Conclusion of VA

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

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

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

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

An administration will also end where:

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• The creditors resolve at the second meeting to execute a DOCA, but the companydoes not comply with its statutory obligation to execute the DOCA within theprescribed 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 meetingbeing 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 companyprior to the appointment of the administrator.

2.18 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, egliquidation, deregistration or return to the directors. If the DOCA is silent, the company willbe returned to the management of the persons who managed it when the administratorwas appointed, free from monitoring by the administrator of the DOCA.

2.19 How useful is VA for reorganisation?

As a process which can be voluntarily commenced by a company's directors and lead to atailor made solution comprised by a DOCA voted on by the company's creditors, VA is byfar the most flexible option for formal reorganisation in Australia. As it can take placewithout the need for any court intervention, it can be done in a cost effective way.

It is the great flexibility of the process which is its greatest asset as a turnaroundmechanism.

There are features of the process which do make successful reorganisation more difficult toachieve, some of which are a result of the legislation which introduced VAs and some ofwhich are the result of a failure to utilise the process early enough. The fact that theprocess does not prevent the exercise of contractual rights of termination and does notfacilitate 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 theprocedure difficult to manage in large corporate collapses.

3. Receivership

There are a number of categories of receiverships. A common purpose is to appoint anindependent person, known as a receiver or receiver/manager, to collect or make safe income or

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assets or both, usually for the purpose of realisation or at least protection, so as to benefit aparticular 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 courtreceivership (discussed at 7 below), that is, a receiver may be appointed by the Court during thecourse 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 withthe interests of the appointee. A privately appointed receiver's role is not to rehabilitate thecompany or to act in the best interests of the company (subject to some exceptions which arediscussed below). We have however, included a discussion of privately appointed receivers so asto depict the broader picture of the Australian rehabilitation processes. This is due to the fact thatin Australia a private receiver can be appointed at the same time as a "rehabilitator" such as avoluntary administrator. Indeed, as discussed at 3.8 below, a substantial secured creditor maymake 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 assetscharged with a view to liquidating the secured creditor's debt3.

Although he/she is required to act in good faith to serve the purposes for which he wasappointed4 and to take all reasonable care to sell company property for not less than itsmarket value or otherwise for the best price that is reasonably obtainable5, the receiver'sprimary duty is to take such steps as are required to ensure that the secured creditor whoappointed him or her is repaid and then to cease to act as receiver as soon as thatobjective has been achieved.

3.2 Procedure

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

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

Where the company is insolvent, the administration of company property by a receiver willobviously be of interest to creditors since they are the dominant financial parties whilemembers are likely to receive nothing. But while, depending upon the nature of thereceivership, the receiver may attempt to protect their interests, his or her prime

3 Gosling v Gaskell [1897] AC 5754 Expo International Pty Limited v Chant [1979] 2 NSWLR 820 at 8345 s420A

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responsibility will seldom be to ordinary unsecured creditors. Such creditors must thereforegive consideration to the appointment of a liquidator or some other insolvency administratorwho 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 powersadditional to any powers contained in the secured creditor's charge under which he isappointed. These powers can however be limited by the terms of the charge6, althoughmost modern charges are drafted with a view to maximising the powers of a receiver andcontain a provision that the receiver can exercise any power, over the property which issubject 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 accordancewith 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 particularpersons;

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

Like VA, receivership of itself does not bring into operation the various recoverypossibilities 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 honestlyand for ends that the chargor and chargee mutually intended, usually being the realisationof the security and the repayment of the secured debt. An appointment for an ulteriormotive can be challenged on the grounds of bad faith7.

6 s420(2)7 See Shamji v Johnson Matthey Bankers Ltd [1986] FTLR 329; Pollnow v Garden Mews St Leonards Ltd (1984) 9 ACLR 82at 86

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Receivers are not directed to exercise their discretions in any particular way. Whilecreditors exercising powers as mortgagees are, at general law, obliged to act "in good faithwithout any intention of dealing unfairly" and therefore receivers are correspondingly liableto mortgagor companies, receivers are only liable if they exceed or abuse or wrongfully failto use their powers. In this way, their role can be compared to that of a fiduciary as theyare obliged not to:

• overreach their permitted functions;

• unjustly enrich themselves; and

• act for an impermissible purpose.

As discussed in more detail below, the extensive powers of a receiver to realise property ofa corporation are generally preserved under the Act where a voluntary administrator or aliquidator is also appointed, save for circumstances where a voluntary administrator isappointed and the secured creditor's charge is over some part of, but not substantially thewhole 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: Thecharge 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 theentitlement to receive any cash flow from the property – for example, rents onmortgaged land, or dividends on mortgaged shares) and sell them or foreclose.Foreclosure means that the creditor becomes the outright owner of the goods freeof the debtor's right of redemption;

(b) the power to appoint a receiver (more specifically the power to appoint a receiverout 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 withouthaving to seek a court order to do so).

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

Remedies that are available to the creditor pursuant to the Act: As well as the abilityto appoint a receiver pursuant to a deed of charge, if the creditor has a charge over all, orsubstantially all of the assets of the debtor, it also has the option of appointing anadministrator or a dual appointment of an administrator and a receiver.

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3.5 Post-appointment credit

A receiver who has the power to carry on business will consider the benefits andpossibilities of carrying on business when compared with a strategy of realising thecompany's assets. He or she may carry on business to complete work-in-progress or to bein a position to offer the business for sale as a going concern. He or she will be able toemploy any or all of the company's previous management, and as provided by Section420(d) of the Act:

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

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 shecommits no breach of duty to the company by refusing to do so, even though suchdiscontinuance may be detrimental to the company. However, when it is certain that thesecured creditor will be paid in full and that the risks of carrying on will be borne byunsecured creditors, wider responsibilities come into play.

If a receiver enters into a loan to carry on the business, or otherwise, such a borrowingwould be subject to the same limitations as discussed in relation to VAs at 2.9 above.

The main difference, however, is that a receiver does not have recourse to the "magicprovision" of section 447A (see 2.9 above) which gives the court power to make suchorders as it thinks appropriate about how the part of the Act relevant to VAs is to operate inrelation to a particular company.

3.6 Distribution of assets

Subject to his/her obligation to pay from the realisation of property subject to a floatingcharge certain priority debts8, a privately appointed receiver is under no obligation todistribute any of the funds obtained from realising the assets of the company to any of theunsecured 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 withproofs of debt, however, a deed of charge usually specifies the order in which proceeds ofenforcement 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 rentsreceived under leases of mortgaged real property). In addition, mandatory orders ofapplication 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 amandatory order of application of proceeds, which will override the relevant clause in adeed of charge. These considerations will change depending upon the nature of the assetcharged.

3.7 Agency

While the Act does not contain a provision that a receiver will be taken as acting as theagent of the company (unlike administrators who, by section 437B of the Act are expresslytaken to be acting as the company's agent when exercising a power as administrator),

8 See s433

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most modern charges contain a provision to the effect that the secured creditor and thecompany agree that, despite being appointed by the secured creditor, the receiver is to actas the agent of the borrower company. The charge usually goes on to provide that thecompany is solely responsible for anything done or not done by the receiver and for thereceiver'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 ofthe property of the company, (a substantial secured creditor), where such a substantialsecured creditor who enforces its charge and appoints a receiver and manager before orduring the 10 business day period after notice of the appointment of the voluntaryadministrator is given to it under section 450A(3) of the Act, the receiver and manager cancontinue in possession of, can manage and can realise that property for the benefit of thesubstantial secured creditor. In that situation, the receiver's powers and functions over theproperty of the company takes precedence over the administrator's powers and functionsover the property of the company9.

Thus the exercise by a substantial secured creditor of its right to appoint a receiver andmanager will generally deny an administrator any effective continuing role in the affairs ofthe company, other than reporting to unsecured creditors on how the actions of thereceiver and manager appointed by the substantial secured creditor affect their positionand 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 thename of and as agents of the company. Subject to any restrictions in the charge, section420(2)(k) of the Act also grants a receiver power to bring any proceedings in the name ofand on behalf of the company. Upon the making of the winding up order, receivers canuse either of these powers to continue the conduct of litigation in the name of the company,but no longer as agents of the company10.

Indeed a receiver or a secured creditor can even resume control of litigation where theliquidator 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 theexercise 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 hisor her appointment ceases as receiver, file notice of cessation with the Commission (Form

9 s441A(3) and s441A(4)10 Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587

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505). Additionally, he or she must cause a notice to be placed in the Gazette within 21days 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 circumstanceswhere the objectives for which he was appointed have already been achieved, the Actempowers a liquidator who has been appointed to the company to apply to the court for anorder that the receiver give up such control11. In deciding whether to order the removal ofthe receiver from control of property of a company, the court must have regard to theinterests of the company, the secured creditor and the other creditors12.

3.12 Successful reorganisations and bringing it to an end

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

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

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

• inform the company of the termination;

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

• notify suppliers, lenders and customers that the receivership is to terminate wherethe 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 subsequentchargeholders or unsecured creditors. If necessary to protect the assets, the receiver maypresent in the company's name a petition for winding up the company, but normally thiswould be left to unsecured creditors.

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

11 s434B12 s434B(3)

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Where urgency is required, receivership, administration or provisional liquidation can offera relatively speedy appointment to gain breathing space until further information can begathered. As directors face civil and potentially criminal exposure for incurring debts whenthe company is insolvent in situations of insolvency the directors should be keen to appointan external administrator quickly to avoid personal liability for debts incurred afterappointment. Where a contractual right exists to appoint a receiver and a person with thatright is particularly concerned for his or her own position, he or she may wish to initiate areceivership immediately rather than to allow the directors to select and/or appoint theirown voluntary administrator or allow the situation to deteriorate further. Unlike a VA, thereare no specific statutory time periods which apply to receivers to prompt an expeditedprocess, however, the personal liability of receivers for goods and services (and throughcontractual indemnities the liability of the appointer for the receiver's debts) provide astrong incentive for receivers to endeavour to achieve a repayment of their appointor's debtin whole or in part as quickly as possible.


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

Where there are no assets available and directors do not propose any action in relation tothe company, the receiver may notify ASIC so that the company may be struck off theregister (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 tofacilitate 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 avoluntary administrator, a receiver can be appointed without the need for court interventionwhere the right to appoint receivers arises as a matter of contract. Receivership can be aprocess which results in restructuring by, for example, the receiver selling a profitablebusiness out of an unprofitable corporate shell. There are also occasions where thesecured lender is willing to fund the receiver to turn an unprofitable or less profitablebusiness into a more profitable business, even in at least one instance funding theacquisition of competitive businesses to secure economies of scale. Whilst reorganisationcan occur in a privately appointed receivership, that is not its aim and so when it occursthat result will be more of a subsidiary benefit to the goal of ensuring the repayment of thesecured debt.

4. Court winding up

4.1 Requirements

A compulsory winding-up in insolvency is a winding-up of an insolvent company that beginswith a court order. A company is insolvent when it is unable to pay all its debts as and

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when they become due and payable. Any one of the following may apply to the court for acompany 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 thecompany is insolvent.

Most commonly, insolvency is proven by failure to comply with a statutory demand whichmay be served on a company by a creditor owed at least A$2000. A company is presumedinsolvent if it fails to comply with a statutory demand within 21 days of service unless withinthat period it has commenced proceedings to have the demand set aside or it has paid orcompromised the claim. The most common basis on which such demands are set aside inthat there is a genuine dispute about the debt or that the debtor has a counterclaim againstthe 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:

• the company has not commenced business within one year from its incorporationor 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 ratherthan the interests of the members as a whole, or in any other manner that appearsto be unfair or unjust to other members; or

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

A court liquidation may be used because:

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

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

4.2 Procedure

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

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

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

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

Any creditor or contributory may request the liquidator to convene separate meetings ofcreditors and contributories for the purpose of determining whether they desire theappointment of a committee of inspection and, if so, who are to be its members. If thedeterminations 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 beconvened 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 anybenefits for acting in the committee; however, where in exceptional circumstances theyprovide special services to the court, the court has the power to give leave to awardremuneration to the members of the committee.

The liquidator has the power to bring a wide range of proceedings in the name of, and onbehalf of the company including specific statutory rights of recovery such as insolventtrading and voidable transactions including unfair loans, unfair preference, uncommercialtransactions, improper director benefits and related party transactions. In the course ofcontrolling a liquidator’s exercise of power, the court may make an order authorisinganother person, such as a creditor or contributory, to sue in the company’s name upongiving the liquidator and the company an indemnity.

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

4.3 Effects

A compulsory liquidation essentially has the same effect on the company, shareholdersand 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:

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• a liquidator compromises a debt owed to the company where that amount isgreater than A$20,000; or

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

For the liquidator to enter into an agreement exceeding those thresholds he or she requiresconsent 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 mutualdealings, 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 againstthe 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 thecompany, or receiving credit, the creditor had notice of the fact that the company wasinsolvent. For example the appointment of a liquidator would prevent the creditor fromsetting off mutual debts or mutual credits arising under mutual dealings entered into afterknowledge of such appointment.

4.6 Post-filing credit

As described in 4.9 below, there is a statutory order of payment of unsecured creditors andthe Act requires that certain unsecured debts and claims must be paid in priority to all otherunsecured debts and claims. These debts and claims are, in general, only provable if thecircumstances that gave rise to the debt occurred before the commencement of thewinding-up. It is possible, however, that a debt incurred by a company may still be payablein 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 isafforded to expenses, other than ‘deferred expenses’. If the liquidator took out a loan orobtained 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 notauthorised by the liquidator, it is unlikely to be provable and would not rank for priorityrepayment.

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 mustlodge a proof of debt with the liquidator. In order to achieve this, a stay is imposedto prevent the assets of the company being wasted by litigation.

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• the leave of the court must be obtained in order to bring or continue proceedingsagainst a company, or in relation to the property of the company.

• factors which the courts will take into account when considering whether to grantleave include the potential disruption to the orderly liquidation of the company, theextent to which other creditors of the company may be prejudiced by the grant ofleave and the seriousness of any question to be tried.

• enforcement processes in relation to the property of the company cannot be begunor continued against a company.

• an applicant, seeking leave to obtain a remedy against a company that is beingwound up, must prove to the court that there is some good reason why its claimagainst the company should be pursued by a court action rather than by lodging aproof of debt with the liquidator.

• a secured creditor does not require the leave of the court to deal with the propertycharged.

On liquidation, unsecured creditors have no rights to specific items of the company’sassets; 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 claimmust have arisen from circumstances occurring before the day on which the winding-up istaken to have begun. After the liquidator receives a proof the liquidator must admit it orreject it wholly, or in part, or require further evidence supporting it. The liquidator’s dutywhen examining a proof is to require some satisfactory evidence that the debt on which theproof is based is a real debt. In some cases of real doubt the liquidator may be able toobtain directions from the court. If the creditor is unhappy with the liquidator’s subsequentdecision, 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 theground of objection. If the liquidator rejects the proof of debt, the creditor may appeal tothe court. If the liquidator admits it, a creditor or contributory can appeal to the court, ascan a receiver enforcing a charge (where the debt which has been admitted has priorityover the secured creditor the receiver represents). Any time limit is dictated by the rules ofthe court before which the appeal will be heard.

Section 560 of the Act allows persons who advance funds to the company for the purposesof the company meeting its employee entitlement obligations to step into the shoes of theemployees to the extent that their entitlements were meant, for the purposes of priority ofpayment of their claim.

4.9 Priority claims

In general, the starting point under the Act is that, unless otherwise provided, all unsecureddebts proved in a winding-up rank equally and, if the property of the company is insufficientto meet them in full then they are to be paid rateably. There is, however, where a company

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is being wound up, a statutory order of priority in which the funds are distributed. The orderis as follows:

(a) secured creditors under fixed charges; then

(b) expenses of the winding-up (including the liquidator’s and any prior receiver orvoluntary administrator or deed administrator’s remuneration); then

(c) unpaid wages, unpaid superannuation contributions, and other employeeentitlement (persons who advance funds to pay those claims have the priorities forthose 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 Actspecifically applies the provisions in respect of insolvency to the Crown and, as such, theinherent right to Crown priority is avoided. There are specific provisions in relation toinsolvent 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, theliquidator can distribute to creditors. Depending upon the complexity and size of thecompany, liquidation can last for several years and the liquidator may make severalpayments over that time. In an insolvent company there is a prescribed order of paymentof debts as described in part 4.9 above. Even in a company which appears to be solvent, aliquidator should follow the statutory order.

4.11 Conclusion of winding-up

In the case of winding-up, the final step to be taken in the process is the deregistration ofthe company. The steps for deregistration are governed by the Act and once deregisteredthe company ceases to exist and the liquidator’s role comes to an end.

4.12 How useful are liquidations for restructuring?

Liquidation is a process designed to facilitate the distribution of the assets of an insolventcompany to its creditors. Like receivership, it is not a process designed to facilitaterestructuring. In some liquidations the liquidator may be successful in identifying someprofitable 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 asubsidiary benefit to the goal of realising the company's assets for the benefit of itscreditors.

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5. Schemes of arrangement (Schemes)

5.1 Voluntary Schemes

Following the introduction of VA, Schemes are now rarely used in Australia in situations ofinsolvency because they are governed by technical rules and involve at least two courtapplications. A VA is less expensive and quicker to commence than Schemes and for thisreason, Schemes are not a procedure which is recommended for smaller privatecompanies nor are Schemes now normally used for a rehabilitation where there aresolvency issues.

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 thecourt, the ASIC and the creditors.

A creditors’ Scheme is a binding agreement between the creditors and the companywhereby the company’s obligations to the creditors are deferred, rearranged orextinguished. This type of arrangement might be preferable where there are a largenumber of creditors and individual arrangements with creditors are not feasible. A schemewill bind all creditors, even those who oppose it.

Members’ Schemes will inevitably involve some restructuring of the company and theirrights 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 ormember. In practice, the company will usually be cooperatively involved and is required toprepare an explanatory document.

5.3 Procedure

Before the court will order a meeting of creditors or members to be convened to considerthe proposed scheme, an applicant must secure or prepare various items of preparatorydocumentation and might also contact major creditors and members to convene aninformal meeting to ascertain their interest prior to approaching the court. Once thedocuments proposed to be sent to creditors have been prepared and other prerequisiteshave been completed, the applicant applies to the court for an order authorising theconvening of meetings.

Having secured court approval to the convening of a meeting or meetings, the requireddocuments must be posted to creditors and, where relevant, members.

Voting majorities of creditors or members must approve the scheme. The format formeetings is not uniform, but it must permit the interests of all of the various classes ofcreditors and members to be fairly discussed and separately voted on.

Once the Scheme meeting has been held, if the requisite voting majority is obtained, theapplicant then returns to the court to seek approval of the scheme. The Scheme does notcome into operation until the court approves it and a copy of the court order is filed with theASIC.

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A committee of inspection or management may be provided for by the Scheme either as amandatory 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. Thescheme may require the administrator to follow the committee’s instructions or generally inrelation 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 arrangementdocument which, following sanction by the court, will effectively act as a court-sanctionedcontract 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 dependupon the terms of the Scheme. This is also the case with financial restructuring of thecompany's finances or its equity base or to contracts and work-in-progress. In this way, theScheme 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 whetherbusiness is to be carried on at all or under the supervision of the Scheme administrator, orotherwise, one must refer to the scheme itself.

5.5 Setting off

Where, before the commencement of Scheme, a creditor also owes money to thecompany, the creditor will normally be entitled to set off amounts owing against the debtpayable to the company. As with a DOCA, the right to set-off will be determined byreference 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 ofcreditors (where applicable), must vote in favour of the resolution and the total value of thedebts of those voting in favour must be at least 75 per cent of the total debts owed by thecompany to all creditors voting, or 75 per cent of the debts owed by the company to theclass of creditors voting.

A Scheme only takes affect upon a court order, made following the passage of thenecessary resolution(s).


The Act does not set guidelines for a Scheme; it provides the machinery for a Scheme tobe agreed to, which is at the discretionary sanction of the court. Unlike VA, a Schemecannot be initiated quickly as it requires the scrutiny of the ASIC, the court, and theconvening of formal meetings.

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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 ormeetings (see 2.3); and

• reapply to the court for final sanction.

The proposed Scheme may be defeated at any of these stages, and if this occurs, thecontrol of the company reverts to the directors.

The effect of a failed Scheme depends on what has actually been provided for in thescheme 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 takeplace, 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 theprovisions of the scheme itself. A scheme must attempt to treat participating unsecuredcreditors equally, subject to the exceptions normally provided for in a winding-up. If it doesotherwise, 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 evenwhen 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 financiallytroubled companies though, a VA is much easier to commence and because of the factthat no court application is mandatory, can be a cheaper and a more effective method ofachieving similar goals to a Scheme. Unlike a Scheme, all creditors of a company in VAvote so that there is no need to identify individual classes of creditors or to achievemajorities 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.

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A voluntary winding-up may be undertaken by a resolution of the members in generalmeeting if the company is solvent. The directors are required to make a written declarationof 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 thatthe 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 creditorsvoting 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 companycannot be continued or begun except with the leave of the court. The powers of thedirectors are suspended; they do not lose office but they can only act with the writtenapproval of the liquidator or the approval of the court.

An order for winding up a company operates in favour of all of the creditors andcontributories of the company. A secured creditor does not require leave of the court todeal with the property charged. Unsecured creditors have no rights to specific items of thecompany’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 thecourt orders otherwise. There can be no change in the status of a member unless thecourt orders otherwise. Members who hold partly-paid shares will be called upon the paythe 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 theselling up and distribution of a company's assets. It is not a tool designed for or to beproffered 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 andconvenient to do so. A receiver can be sought by any party to a cause or matter involvingthe court's jurisdiction. In practice, applicants are usually mortgagees or debenture-holders,but the appointment could be sought in unusual circumstances by ordinary creditors andeven 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 toprotect the "public interest"

• under the Act where ASIC is conducting an investigation and it is necessary tofreeze the assets of companies or ASIC may apply to the court for an orderappointing a receiver of the property owned by or held by a securities industrydealer.

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• at the request of a liquidator or provisional liquidator, to an officer's or relatedentities property in circumstances where the officer or related entity may otherwiseavoid liability to the company.

The distinction between a privately appointed receiver and a court appointed receiver wassummed up in the case of Duffy v Super Centre Development Corp Ltd13:

There is some contrast to be borne in mind between the function of a privatelyappointed receiver and the function of a court appointed receiver, and I use theword `receiver' as a compendious word encompassing a receiver and manager. Tosome extent, the privately appointed receiver, particularly in current commercialpractice, makes an effort to restore the financial prosperity of the company whoseaffairs he has been appointed to administer by a debenture holder. A courtappointed receiver does not fill the same position. He is not what might bedescribed as a company doctor, but rather his function is that of companycaretaker

7.2 Procedure

Persons may seek a court-appointed receiver where there are difficulties in appointing areceiver by another mode, or where they have no power to appoint a receiver except byapplication to the court

The actual procedure for securing a court order will depend upon the circumstances inwhich the order is sought. In a court appointment, the court will always exercise adiscretion as to whether a receiver should be appointed.

The requirements for notification by the receiver and by the person appointing him or herare the same as for a receiver appointed from powers arising out of a document (see part 3above).

7.3 Successful reorganisations and bringing it to an end

The way a receivership ends and the way in which this effects a reorganisation isdiscussed at 3.11 above.

The appointment of a receiver does not prevent creditors or the company itself fromseeking to initiate liquidation, administration, provisional liquidation, proposing a scheme ofarrangement, or even appointing a receiver under a mortgage deed with prior rights. In thisway other reorganisation processes can be taken advantage of so as to rehabilitate thecompany, however, whether this ultimately benefits the rehabilitation is dependent uponthe parties that seek the alternate process (for example secured creditors may enforcetheir security thereby making rehabilitation difficult or impossible).


The appointment of a receiver pursuant to a court order is usually associated with arequirement to furnish security. The Supreme Court Rules in all States provide that a

13 (1967) 1 NSWR 382, per Street J at 383 to 384

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person shall not be appointed receiver ``pursuant to a direction of the court until he hasfiled an instrument of security''14. The court may, inter alia:

• order that the appointment of the receiver take effect immediately but that he orshe is not to receive any property until he or she provides security15 ;

• make the appointment but direct the receiver not to provide security or takepossession for a fixed period of time16;

• waive security if deemed not to be required;

• appoint a person without security — this is often done in New South Wales whenan official liquidator is appointed as receiver.

The receivership will commence as specified in the court order, or when security isprovided.

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/herpowers, for example, a court-appointed receiver often has no power of sale, except withthe permission of the court. In addition, the fact that a moratorium does not exist when acourt appoints a receiver means that while the court appointed receiver may be workingtowards 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 indestroy any hope of rehabilitation. Court appointed receivers are not normally appointed toarrange or facilitate a restructuring. A court could give a court appointed receiver power toact 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 acorporation after an application to wind up the corporation has been filed, but before the hearing ofthe 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 wherethere is an appeal against the order and the decision on the appeal has not yet been made. Suchappeals are rare, and the appointment of a provisional liquidator during the course of such anappeal even rarer.

The procedure of provisional liquidation exists to protect the interest of financial participants in acorporation until such time as an application for winding up is determined.

14 NSW Pt 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 1715 Re Pountain (1888) 37 ChD 609 at 61016 Re Crompton & Co Ltd (1914) 1 Ch 954

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A provisional liquidation may be forced on a corporation against the wishes of its management orownership. This facility is particularly helpful to creditors and to oppressed minorities. Creditorsseek the appointment of a provisional liquidator in situations where it would be unwise to leavecompany affairs under the control of directors or shareholders who might effect a dissipation ofcorporate assets before a winding up application is heard.

In practice, provisional liquidation is not normally used for the rehabilitation of a company, rather, aprovisional liquidator usually has a short "caretaker" role. An exception to this is the case of ReUnited Medical Protection & Ors [2003] NSWSC 1031 which is discussed at 8.5 below whichprovides a, to date, rare example of how provisional liquidation has been used to rehabilitate acompany.

8.1 Procedure

To initiate a provisional liquidation there must have been previously (even if immediatelypreviously) a winding up application filed with the court. An application to appoint aprovisional liquidator is filed with the court usually by a creditor or the company itself. Thecourt 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 theappointment is necessary to prevent dissipation of assets or to preserve the position ofcreditors or contributories until the decision as to the winding up order is made. It has thisdiscretionary power whether the application for the provisional liquidator or the applicationfor 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 theapplicant for winding up, although in most cases they will be the same person. The courtwill normally grant an order for the appointment of a provisional liquidator where that orderis, or may be, in the interests of the dominant financial parties concerned. Where thecompany is insolvent, creditors are the dominant financial parties as members are toreceive nothing in the event of a liquidation.

8.2 Effect and moratorium

A company entering into provisional liquidation continues its legal existence, but withcertain restrictions, some flowing from the application to wind up itself and some flowingfrom the appointment of the provisional liquidator.

The company is described as being in provisional liquidation or as having a provisionalliquidator appointed.

Directors' powers cease on the appointment of a provisional liquidator, and the company'scontrol is clearly entrusted to him or her. While a provisional liquidator of a company isacting, a person cannot perform or exercise, and must not purport to perform or exercise, afunction 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 companybeginning after the provisional liquidator was appointed; or

(c) with the provisional liquidator's written approval; or

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(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 thecompany; 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 courtimposes.

The moratorium or suspension of officers' powers affects a secured creditor's right torealise or otherwise deal with his or her security.

Leave might be given to continue with or commence proceedings in areas where thejudicial forum is the most convenient way to settle the claim.

The effect of an appointment of a provisional liquidator on other forms of administrationswould be as follows:

(a) Receivership: a provisional liquidator may coexist with a receiver, whether thereceiver be appointed before or after the provisional liquidator. Where the receiverwas acting previously, his corporate agency is revoked, but this is unlikely tointerfere with his power to hold and dispose of corporate assets charged to hisclient. It does, however, eliminate the receiver's right of indemnification, as anagent, from the company should the assets charged to his client be used up.

(b) VA: not compatible with provisional liquidation, but the provisional liquidator mayinitiate a VA.

(c) Schemes: not compatible with liquidation, but a provisional liquidation may precedeit or follow it and coexist temporarily until the winding up order has beenconsidered.

The making of a winding up order terminates provisional liquidation. The court liquidatormay 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 duringthe course of the provisional liquidation. However, a provisional liquidator may need toseek court permission to wind up some of a corporation's affairs if it is in the interests offinancial participants to do so. The provisional liquidator may also take the opportunityduring his interim control period to investigate the affairs of the company in order to informthe 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 ownprovisional liquidation as an interim alternative to a subsequent administration. This willparticularly be the case where there is some urgency to freeze the company's position vis-à-vis its creditors or other financial contributors.

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8.3 Provisional liquidator's powers

The provisional liquidator's powers are somewhat akin to those of a liquidator, except asrestricted by statutory provision, court order and generally by the knowledge that a windingup order may eventually be refused.

The provisional liquidator will have the power to administer company affairs, but is unlikelyto 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'saffairs 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 hisadministrative powers are sufficient to replace existing management control of corporateproperty for the interim period of his appointment.

8.4 Post-appointment credit

A provisional liquidator's powers generally include taking possession of a company'sassets (section 474(1)), control of its affairs until the winding up application is decided andpreserving the company's assets until they become available to a liquidator or areultimately returned to the control of directors.

The provisional liquidator's capacity to realise assets other than in the ordinary course ofbusiness is usually limited. However, s472(4) of the Act states that a provisional liquidatorhas 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 orotherwise."

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 acompany, rather, a provisional liquidator usually has a short "caretaker" role. An exceptionto this is the case of Re United Medical Protection & Ors17 which provides a, to date, rareexample of how provisional liquidation has been used in Australia to rehabilitate acompany.

This case involved United Medical Protection (UMP), the largest medical defenceorganisation in Australia. Mr David Lombe, a partner of Deloitte Touche Tohmatso inSydney, 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 riskthat the company "would be unable to continue to operate in the manner envisaged by thecorporators and the present membership". The court's power to appoint a liquidatorprovisionally is conferred by section 472(2) of the Act.

17 [2003] NSWSC 1031

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The Commonwealth government provided various indemnities to UMP to enable it tocontinue in operation because of the significant consequences to the Australian communitywere UMP to collapse, leaving medical practitioners uninsured and unwilling to continue topractice as doctors. As a consequence of the Commonwealth indemnity the court closelysupervised the provisional liquidation and made orders pursuant to which the companiescontinued in operation and continued to write cover notwithstanding the fact that they werein provisional liquidation.

As a result Legislative tort reform and the extension of federal assistance meant thatUMP's forecast exposure to claims were significantly lowered and the four companies inquestion were over 17 months ultimately successfully turned around and the provisionalliquidator formed the view that they were then solvent.

Mr Lombe applied to the New South Wales Supreme Court for orders terminating hisappointment over four of the companies, and for leave to discontinue winding-upproceedings against them.

Section 482 of the Act authorises the court to terminate the winding-up of a company andSection 467(1) of the Act authorises the court on hearing a winding-up application todismiss the application. There is no express provision in the Act for the court to terminatethe appointment of the provisional liquidator, but the court rules give it power to set asideits interlocutory orders.

It is rare for a company in Australia to remain in provisional liquidation for a substantialperiod of time and there is very little case law dealing with the termination of a provisionalliquidator's appointment. Justice Austin took the view the cases that deal with terminationof winding-up and receivership were helpful by analogy, which led to his Honour toconsider 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 futurewith which a provisional liquidator should deal;

• the effect of the termination on creditors, contributories and the provisionalliquidator; 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 tobe terminated on several grounds. The consideration of the above issues led the court toagree with Mr Lombe's submission that the key questions were whether the companieswere, in fact, solvent and whether (having regard to the interests of creditors andmembers) the company would comply with the requirements of the Australian PrudentialRegulation 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 spirallingclaims", no longer existed. Additionally, the court heard the difficulties arising from theamalgamation that created the UMP group had been overcome. The court was satisfiedthat these factors had contributed to the value of the group and that sufficient action had

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been taken to remedy them. It was also satisfied on the evidence that UMP could meetAPRA's prudential requirements in the future.

On the question of solvency, Justice Austin also accepted the evidence before him from MrLombe, APRA, ASIC and others. Justice Austin was satisfied that the four companieswere, in fact, solvent and they were reasonable grounds for predicting that they wouldremain so, thus avoiding protection of the rights of unsecured creditors. This was based ona 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 toterminate the appointment of a provisional liquidator. The court will carefully consider arange of factors before doing so, including the solvency of the company in the impact of thetermination on creditors, contributories and the provisional liquidator. It is a rare examplein Australia of the court supervising the provisional liquidator of a company in the actualcontinuation of its business operations and the successful turning around of that companyto 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 theprovisional liquidator is made. This is to be distinguished from the ``commencement'' ofliquidation, if an order is ultimately made for liquidation, which will usually be the date of thewinding up order is made. However, should an application for the appointment of aprovisional liquidator be made immediately after, ie contemporaneous with, the filing of anapplication for winding up, then in the event of a subsequent liquidation the date ofprovisional liquidation will be the same as the ``relation-back day'', being the day fromwhich, or in respect of which, certain antecedent transactions may be set aside by theliquidator.

In practice the filing of an application for winding up, and the application to appoint aprovisional liquidator are often made at the same time.

The timing of a provisional liquidation is often difficult to predict. While it is an interimmeasure, some provisional liquidations have continued for a number of years. It is interimto:

• a court liquidation;

• the withdrawal or dismissal of a winding up application; or

• some other form of administration which might be proposed to resolve thecompany'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 aprovisional liquidator can be done quickly and one if its advantages if the speed ofappointment. This is such so that a company, a creditor and even a contributory mightseek the appointment of a provisional liquidator where assets are in danger of dissipation,deterioration or otherwise in jeopardy unless placed under independent control. Theremight, for example, be the need to immediately stay a creditors' action against thecompany.

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Where urgency is not required or assets do not need immediate protection, there will be noneed to appoint a provisional liquidator as a precursor to liquidation or as an alternative toother forms of administration such as receivership, official management or a scheme ofarrangement.

It might be determined that provisional liquidation or Administration is necessary in theinterests of urgent protection or as a means of permitting an independent person toexamine the company's affairs to consider possible alternatives prior to the hearing of thewinding up application.

8.7 Unsuccessful reorganisation

The introduction of the VA process in 1993 provided companies with a vehicle to initiate aninterim administration without the need for a court application. VA, Schemes, receivership,controllership or even voluntary liquidation, may be more suitable to a company than theinterim administration of ``provisional liquidation''.

Whatever the administration recommended, even if it be a provisional liquidation, theexpected effect of appointing a provisional liquidator or some other administrator may befrustrated by the contractual right of a secured creditor to appoint a receiver, and for thesereasons it may be necessary to canvass the attitude of that secured creditor prior toappointment.

8.8 Termination of provisional liquidation

A provisional liquidator's appointment will conclude if a winding up application is dismissedor withdrawn, as it is a prerequisite to the appointment of a provisional liquidator that awinding up application be still under consideration. It will also terminate if a winding uporder is made, unless there is an appeal against the winding up order and the court hasappointed a provisional liquidator pending the decision in that appeal or determined tocontinue 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, theprovisional liquidation will terminate. The court might make an order for the removal of theprovisional liquidator and the termination of the provisional liquidation if it is the company'sinterests.

On completing his term of office and accounting to the liquidator (if any), the provisionalliquidator 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 hemay 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. TheUPM example is probably not a herald for provisional liquidation becoming a favouredmeans of restructuring, primarily because of the amount of court involvement in theprocess in comparison to VA.

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9. Government discussion papers

There are two government committees who have issued papers relating to suggestedcharges to the current Australian rehabilitation regime. The two government committeesand the related papers are:

1. the Joint Parliamentary Committee's Inquiry into Australia's Corporate InsolvencyLaws and Companies entitled "Stocktake on Corporate Insolvency Laws" (thePaper); and

2. the Markets Advisory Committee (CAMAC) entitled "Rehabilitating Large andComplex Enterprises in Financial Difficulty".

Two of the main issues that were discussed in the Parliamentary' Joint Committee's paper(and also raised by CAMAC) were:

(a) the need for early intervention for rehabilitation; and

(b) ipso facto clauses,

which are discussed at 9.1 and 9.2 below.

9.1 Early intervention for rehabilitation

The Paper recommends that the threshold test to permit directors to make the initialappointment of an administrator be altered by rewording the legislation from, if thecompany ‘is or is likely to become insolvent at some future time’ to ‘is insolvent or maybecome insolvent’. It is submitted that if the change were to be made, it would not bebeneficial to the rehabilitation of a company for the following reasons:

(a) It would not itself result in early intervention.

The reason why the Paper suggests this change is that it would like to seecompanies in need of rehabilitation taking advantage of the voluntaryadministration regime and the turnaround options it provides sooner rather thanlater. While corporate turnaround options are normally severely limited by the timedirectors come to seek them because they regularly leave it too late, this problemis largely caused by an unbridled optimism of most directors who always assumethat things will work out and fail to seek professional help early enough. Legislativereform of the type proposed will not of itself cause directors to move more promptlyto explore turnaround options.

(b) The present wording permits earlier intervention than we presently see.

The proposal displays a narrow view of the meaning of the expression "likely tobecome insolvent at some future time."

(c) A free for all.

The Australian VA process is a relatively effective and efficient process and itshould be available essentially for financially troubled companies or for companiesfor which real financial difficulty is likely even if not immediate - in short, forcompanies which are insolvent or likely to become insolvent at some time in thefuture.

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It is submitted that the rights of owners, lessors, secured creditors, litigants andothers should not be interfered with in circumstances other than those presentlypermitted by Part 5.3A. To allow any company which might become insolvent atsome future time to go into VA permits most companies to use the procedure. It istoo vague a test and opens the procedure unnecessarily to potential abuse.

(d) The present form of declaration – insolvent or likely to become insolvent at somefuture time.

As the appointment of a voluntary administrator is a decision taken by the directorsrather 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 casesas there have been have primarily dealt with whether the directors have followedthe form of section 436A ie have they passed a resolution to the effect that:

(i) in the opinion of the directors voting for the resolution, the company isinsolvent, or is likely to become insolvent at some future time; and

(ii) an administrator of the company should be appointed

or whether the resolution has been properly passed by property appointeddirectors.

Such procedural errors have sometimes been cured by a court and sometimes not18. For example, the court did have cause to consider the legitimacy of anadministrator's appointment in a case in which moves were afoot to replace theincumbent directors for the dominant purpose of preserving their position19. Therethe court found that the administrator's appointment was voidable and terminated aDOCA which had been the result of the VA process. It is probably sufficient for thedirectors to form a single opinion about "actual or likely insolvency" rather thanforming separate opinions as to present and future insolvency: Kazaar v Duus(unrep) AG 3005/1998; Re Ray Davis Contracting Pty Ltd (unrep) QSC 221.

Whilst the expression "likely to become insolvent at some future time" has not beenconsidered on many occasions by the courts in the particular context of therequirements of the resolutions for the appointment of a voluntary administrator,the expression "likely" appears in other legislation and has been considered by thecourts on a number of different occasions in different contexts. For example,Heery J's decision in Munroe Toople & Associates Pty Limited v The Institute ofChartered Accountants (Australia) [2002] FC ASC 197; [2002] 122 FCR 110; ATPR41-879 supports the view that 'likely', at least in the context of in sections 45, 46and 47 of the Trade Practices Act, does not require a standard of more likely than

18 Re Continental Pacific Insurance Co (Australia) Ltd (unrep) NSWSC Barrett J (26/8/02) (appointment validated); GlenMorton Holdings Pty Ltd v D'Aloia (unrep) FAC per Merkel J 14/9/01 (appointment validated); Wagner & Anor v InternationalHealth 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); ReWood 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)19 Cadwallader v Bajco Pty Ltd NSWSC Austin J (unrep); NSWCA [2002] NSWCA 328 per Heydon, Santow JJA and Gzell J

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not but rather simply a real chance or possibility. In Tillman's Butcheries PtyLimited v Australasian Meat Industry Employees Union (1979) 42 FLR 331 at 339Bowen 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'. …

As noted above, section 436A(1) enables directors to appoint a voluntaryadministrator when, in the opinion of the directors voting for the resolution, thecompany is insolvent or is likely to become insolvent at some future time. If thedirectors of a company want to appoint a voluntary administrator to the companyunder Part 5.3A of the Act they need to pass a resolution that in their opinion thecompany is insolvent or is likely to become insolvent at some future time.

The provision does not limit VA to situations of actual or present insolvency and theextent to which the process can be used for presently solvent companies whichsatisfy the second limb of s436A(1) remains to be fully explored. The obitercomments made in Crimmins v Glenview Home Units Pty Ltd [2001] NSWSC 599(unreported 17 August 2001) support the view that the likelihood of insolvencyoccurring many years in the future would suffice to satisfy s436A(1). If thisdecision is followed it affords directors of companies an opportunity to appoint avoluntary 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. Kazar v Duus …

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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)

It is submitted that under present law, directors of a company which was notpresently insolvent but had inadequate resources to meet expected debts as theyfell due for payment in the future could, in appropriate circumstances, appoint anadministrator before the debts had in fact fallen due for payment. It is worth takinginto account the fact that in Associated Dominions 20 in the High Court found that alife insurance company which would only run out of money in 7 years time wasthen presently insolvent21. So long as the directors form a genuine or bona fideview of present insolvency, or the likelihood of insolvency at some time in thefuture, it would be difficult to say how such an appointment could be challenged onthe grounds of improper purpose 22.

(e) Does the present wording require amendment?

While the present wording in section 436A has been interpreted by some judgesas being very flexible (for example in Crimmins v Glenview Home Units Pty Ltd[2001] NSWSC 599 (17 August 2001) recommendation 14 is designed to alleviateperceptions that the VA procedure is only available to insolvent companies. Forreasons including those set out in above, it is submitted that the amendment is avery crude way of seeking to bring about that end and that it has the real potentialof facilitating abuse of the process by healthy companies.

20 The Insurance Commissioner v Associated Dominions Assurance Society Pty Limited (1953) 89 CLR 7821 The decision in Edwards & Ors v Attorney General & Anor (unreported) [2004] NSWCA 272 suggests a different resultmay obtain where the future liabilities are not contractual certainties but potential future tort claims.22 see Taylor, T Australian Insolvency Management Practice at ¶l 54-560

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On 30 June 2004, the Parliamentary Joint Committee tabled its final report (the FinalReport) in Parliament on the operation of Australia's insolvency laws and recommendedthat the threshold test permitting directors to make the initial appointment of anadministrator under the VA procedure be revised in order to alleviate perceptions that theVA procedure is only available to insolvent companies. However the Parliamentary JointCommittee did not state with as much certainty its position regarding a new threshold testfor the initiation of the procedure by directors, that is, changing the test from "the companyis insolvent or likely to become insolvent at some future time" to "the company is insolventto may become insolvent". While the Parliamentary Joint Committee conceded that the VAprocedure could be moderated, it did not specifically accept the revised test and simply"noted" the suggestion. The report reads:

The Committee notes the suggestion that the test be reworded to read 'thecompany is insolvent or may become insolvent'.

Unfortunately this result does not clarify the way in which this area may evolve in Australia,however, it will be interesting to note the way in which this area progresses and, perhaps, asign of things to come.

9.2 Ipso facto clauses

The Paper made a proposal that creditors should be prohibited from enforcing ipso factoclauses, unless the court grants leave in certain defined circumstances.

While there can be real difficulties for companies in VA where contracting parties exercisetermination rights on appointment, it is submitted that any legislative response has toattempt to draw a boundary line somewhere between the wish to rehabilitate companies,the rights of secured creditors, the availability of funding for healthy companies and therights of creditors and contracting parties. It is submitted that Part 5.3A does a good joband fixes that boundary line at around the right place at the moment.

Counter-parties with contracts with companies in administration should have the right todecide if they want to continue to trade with them or not. If they form the view that thecompany can be turned around they may well not exercise their ipso facto rights andcertainly, in the author's experience, many counter-parties would much prefer that acompany with which they trade remain in business and continue to use their goods andservices.

No doubt preventing the exercise of contractual termination rights could have a real role toplay in the successful turnaround of some businesses – One-Tel may be an example – butsuch a provision would be a substantial interference in the rights of counter-parties andmay well have deleterious effects on their own financial situation and on the economy as awhole. One might ask the question: shouldn't market forces determine with whomcompanies trade rather than administrators and courts?

A hesitation may be that any provisions seeking to curb the rights of counter-parties toexercise rights under ipso facto clause would need to be very carefully put together toavoid the situation in which counter-parties include immediate termination provisions oninsolvency events or include provisions giving rights to terminate earlier than on theappointment of an administrator. It would be difficult for a court to interfere, for example, if

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a counter-party has terminated in accordance with its contractual rights and contracted withan innocent third party before the administration has begun or before the administrator getsthe matter before the court.

The Final Report concluded that it is more appropriate for a court to consider whether, in aparticular situation, contracts should be kept on-foot rather than introducing legislation toautomatically overriding ipso facto clauses in a VA.

9.3 An indication of things to come? – Other conclusions of the Final Report

Other key recommendations of the Final Report, in addition to those discussed at 9.1 and9.2, were:-

• directors to be made more accountable for failing to keep proper records andunpaid employee entitlements;

• uncommercial transactions to be extended by removing insolvency as aprerequisite;

• the timetable for VAs to be extended;

• an insolvency procedure modelled on Chapter 11 of the US Bankruptcy Code isnot appropriate for Australia;

• provisions for disqualification of directors for dishonest conduct to be broadened;and

• the Australia Taxation Office to be given broader powers with respect tooutstanding Superannuation Guarantee Charge.

10. Conclusion

Australia has a range of formal external control procedures for corporations. This paper gives anoverview of each of them and briefly comments on how useful each area is as a tool forrestructuring. Only VA was specifically designed to, if possible, facilitate reorganisation. VA is aflexible 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 orinterest to readers. The text of this document should not be relied upon as legal advice. Mattersdiffer according to their facts. The law changes. You should seek legal advice on specific factsituations as they arise. Parts of this paper have been extracted from the Allens Arthur RobinsonAnnual Reviews of Insolvency and Restructuring Law 2002 and 2003.

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 & RestructuringForums and Insurance Forums;

• The 1999, 2000, 2001, 2002, 2003 and 2004 Annual Reviews of Insolvency & RestructuringLaw; and

• The 1999, 2000, 2001, 2002, 2003 and 2004 Annual Reviews of Insurance & ReinsuranceLaw.

Documents

Spinning around – Formal Reorganisation in Australia · 2005. 3. 21. · 1973 (the Insurance Act) and the Law Reform Miscellaneous Provisions Act 1946 (NSW). 2. Voluntary administration