Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)7 - Finetuning voluntary administration
Part 1 - General
Court's power to bind secured creditors
7.1 Secured creditors and owners or lessors of real or personal property (herein, 'secured creditors') are not bound to the terms of a deed of company arrangement (DOCA) unless they agree (subsections 444D(2) and (3) of the Corporations Act). However, the court has the power to order that these persons be bound, notwithstanding that they have not agreed to be bound:
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- where enforcement of their rights would materially adversely affect the arrangement; and
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- provided that their interests are adequately protected.
7.2 The court's power applies where 'it is proposed that a company execute a deed of company arrangement' (paragraph 444F(1)(a) of the Corporations Act).
7.3 There is some concern that the word 'proposed' could be interpreted as meaning at the point the administrator first forms the view that it would be in the creditors' interests to enter into a DOCA. This is an earlier time than when creditors formally resolve that a DOCA be executed.
7.4 The concern is that such an interpretation may cause the court's power to operate before the details of the arrangement are considered and approved by creditors. Recommendation 28 of the CAMAC Report (1998) stated that the Corporations Act should be amended to deal with this issue.
7.5 The Corporations Act will be amended to clarify that the Court may only make an order that secured creditors be bound by a DOCA after creditors have formally resolved that the DOCA be executed.
7.6 Clarification of the legislation in this area will provide certainty, and ensure that the court can only bind secured creditors at the later time. It will ensure secured creditors have adequate opportunity to consider the formal details of a DOCA proposal, and ascertain the position of other creditors on the matter.
7.7 Item 28 will amend paragraph 444F(1)(a) to provide that section 444F applies where creditors have resolved that the company execute a deed of company arrangement at a meeting under section 439A of the Corporations Act.
7.8 A DOCA releases the company from a debt in so far as the deed provides for the release and the creditor concerned is bound (section 444H of the Corporations Act). In this way, it is said that the company's debt is extinguished by the deed.
7.9 Third parties may act as guarantors or indemnify a creditor against loss for various debts owed by the company to creditors.
7.10 A possible view is that the acceptance of a DOCA extinguishes the liability of guarantors for debts of the company, by extinguishing the debt that is being guaranteed. This argument would not apply to an indemnity, however, as the person in that case guarantees against loss and the creditor would have suffered a loss by the non-payment of debt.
7.11 There is authority that supports the position that creditors' adoption of a DOCA does not affect their rights against third parties, including their rights under guarantees. [10] Recommendation 34 of the CAMAC Report (1998) stated that the Corporations Act should be amended to deal with this issue.
7.12 Certainty in this area is desirable. The law will be amended to unequivocally state that when creditors resolve to execute a DOCA, creditors' rights under a guarantee or indemnity are unaffected.
7.13 Item 30 will insert new section 444J of the Corporations Act that makes it clear that creditors' rights under a guarantee or indemnity are unaffected where a debt is released by acceptance of the terms of a deed of company arrangement (per section 444H of the Corporations Act).
7.14 A DOCA will set out circumstances as to when it will terminate. Additionally, the Court, upon application by a creditor of the company, the company or an interested person, can order the termination of DOCA under section 445D of the Corporations Act.
7.15 Creditors can also terminate a DOCA by passing a resolution at a meeting called for that purpose under section 445F of the Corporations Act (section 445C of the Corporations Act).
7.16 Currently, the deed administrator may convene a meeting under section 445F at any time, but must convene such a meeting if requested in writing by creditors that make up at least 10 per cent in value of the company's total claims.
7.17 There is a concern that a relatively small number of creditors could force an administrator to convene a meeting of creditors and a majority of those present and voting could terminate the DOCA, even where the company was complying with the terms. Recommendation 35 of the CAMAC Report (1998) stated that this area of law should be clarified.
7.18 To give greater certainty to the rehabilitation of companies through deeds of company arrangement, creditors should only be entitled to terminate a DOCA by resolution following a breach of the deed that has not been rectified before the resolution has been passed. The law will be amended to this effect.
7.19 In addition, the law will be amended to explicitly provide that ASIC can make an application for termination of a deed under section 445D of the Corporations Act.
7.20 It has been argued that ASIC is not included as an 'interested person' in this context. Circumstances may arise where it is in the public interest for ASIC to make such an application. An example is where creditors are unable, due to lack of financial resources, to make such an application, or where ASIC has information unavailable to creditors.
7.21 Item 33 will insert new section 445CA of the Corporations Act that provides that creditors are not entitled to pass a resolution terminating a deed unless there has been a breach of the deed and the breach has not been rectified before the resolution is passed.
7.22 The new provision does not require the breach to be material. However, it is envisaged that minor or technical breaches can be easily remedied before the resolution is passed. Consequently, requiring the breach to be 'material' is unnecessary. This also avoids the need for administrators to determine (or, potentially, seek court adjudication on) whether a particular breach is a material breach of the deed. Similar questions in the area of contract law have proven to be contentious.
7.23 Item 34 will amend subsection 445D(2) of the Corporations Act to add ASIC as a party who may apply to the Court for an order to terminate a deed.
Notification when deed wholly effectuated
7.24 Subsection 444A(5) of the Corporations Act provides that a DOCA is also taken to include prescribed provisions unless it provides otherwise. The prescribed provisions are set out in Schedule 8A of the Corporations Regulations. Item 12 of Schedule 8A provides that when a deed is terminated because it has achieved its purpose, [11] the administrator must certify to that effect in writing and, within 28 days, lodge with ASIC a notice of termination.
7.25 As the requirement that a deed administrator notify ASIC when a deed is wholly effectuated is a prescribed provision in the Regulations, it can be excluded in the actual deed when executed. In practice the provision is commonly excluded.
7.26 It is important that the public record reflect that the company has come out of external administration and that control of the company has reverted back to directors. Accordingly, the requirement to notify ASIC will be made a mandatory requirement.
7.27 Item 35 will insert new section 445FA of the Corporations Act, which requires a deed administrator to notify ASIC, in writing, when the deed administrator has applied all of the proceeds of the realisation of assets available for the payment of creditors, or paid to creditors the full sum determined by creditors to be received under the deed, or all the obligations under the deed have been fulfilled. Under the new provision, the deed administrator must lodge with ASIC a notice of termination of the deed within 28 days. This notice will be in a prescribed form, to be set out in the Regulations. It is envisaged that this form will largely replicate the form currently adopted in Item 12, Schedule 8A of the Corporations Regulations.
7.28 Items 31 and 32 will amend section 445C of the Corporations Act relating to when a deed terminates, to ensure that it is consistent with termination by way of a deed being wholly effectuated and notified to ASIC under the new section 445FA.
Power to consent to a transfer of shares of the company
7.29 There is currently a lack of consistency across voluntary liquidation, court-ordered liquidation and voluntary administration, with respect to the practitioner's power to consent to a transfer of shares or an alteration in the status of members of a company.
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- A transfer of shares in a company, or an alteration in the status of the members of a company, that is made during the administration of a company is void, unless the Court orders otherwise (section 437F of the Corporations Act).
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- By contrast, a transfer of shares in a voluntary winding up is permitted with the consent of the liquidator (subsection 493(2) of the Corporations Act).
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- Finally, any transfer of shares in a court-ordered winding-up is void (subsection 468(1) of the Corporations Act).
7.30 Recommendation 37 of the CAMAC Report (1998) called for improved consistency in this area of the law.
7.31 A consistent approach will be adopted across the three procedures, with respect to authorising a transfer of shares or a change in the status of members of a company. The intent is to provide maximum flexibility to practitioners in each of the types of proceeding, while retaining core shareholder protections.
7.32 Under this approach, an administrator will have the power to consent to a transfer of shares in a company in administration. The administrator will need to be satisfied that it is in the best interests of creditors as a whole.
7.33 The ability to apply to the Court for an order authorising a transfer of shares will be retained, but will only be available where the administrator's consent has been unsuccessfully sought first. This will ensure the 'least cost' option for approval is explored first. The court's power will be exercisable on application by the prospective transferor or transferee of shares, with the administrator having standing to be heard on any application.
7.34 Administrators will also be granted a power to consent to an alteration in the status of members of a company. Such an alteration may not be approved unless it complies with the rules for the alteration of class rights in Part 2F.2 of the Corporations Act.
7.35 The amendments to effect similar changes for a court-ordered liquidation and a creditors' voluntary liquidation are found at items 81-82 and 85-87 of Part 3 of Schedule 1. The powers of deed administrators are generally dealt with in the deed, however item 29 of Part 1 of Schedule 4 of the Bill will clarify an existing limitation to the deed administrator's power to transfer shares.
7.36 Item 8 will replace section 437F of the Corporations Act with a new provision which will regulate transfers of shares during administration (subsections 437F(1)-(7)) and alterations in the status of members during administration (subsections 437F(8)-(15)).
7.37 In relation to a transfer of shares, new subsection 437F(1) will provide that a transfer is void unless the administrator gives written consent to the transfer, or the Court makes an order authorising the transfer. New subsection 437F(2) will provide that the administrator must be satisfied that it is in the best interests of creditors as a whole before granting his or her consent. New subsections 437F(3) and (5) will give the prospective transferor or transferee or a creditor standing to apply for a court order authorising the transfer if the administrator refuses consent or a court order setting aside any conditions imposed by the administrator. New subsections 437F(4) and (6) will empower the Court to authorise a transfer after an administrator has refused consent to the transfer, or has approved the transfer subject to conditions that have not been met, where the Court is satisfied it is in the best interests of the creditors as a whole to do so.
7.38 New subsections 437F(8)-(15) will provide that an alteration to the status of members of the company will be void unless the administrator gives written consent to the alteration. The administrator must be satisfied that the alteration is in the best interests of creditors as a whole before granting his or her consent and must refuse consent if the alteration would contravene the class rights provisions in Part 2F.2 of the Corporations Act (new subsection 437F(8)). Provision will also be made for the Court to authorise alterations where a liquidator has refused to grant consent, and to set aside conditions to which the liquidator's consent is subject.
Administrator's right of indemnity
7.39 Division 9 of Part 5.3A of the Corporations Act deals with the administrator's liability and indemnity for debts of the administration. Under section 443D of the Corporations Act an administrator is entitled to be indemnified out of the company's property for debts for which they may be liable. These debts include:
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- general debts in the performance or exercise of the administrator's functions or powers for goods bought, services rendered or property hired, leased, used or occupied (section 443A);
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- payments for property used, occupied or in possession of the company where an agreement has been made before the administration began (section 443B); and
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- certain taxation liabilities ('remittance provisions') per section 443BA.
The right of indemnity also extends to the administrator's fixed remuneration.
7.40 Section 443E of the Corporations Act grants a priority for these debts to the administrator, subject to the priority ranking order in section 556.
7.41 Section 443F of the Corporations Act grants the administrator a lien over the company's property to secure these rights of indemnity. However, the administrator has no statutory right of indemnity out of the company's property in respect of liabilities that fall outside section 443D.
7.42 In Commonwealth Bank of Australia v Butterell (1994), an administrator who on-sold stock in the company's possession that was the subject of a retention-of-title (ROT) clause was possibly liable in conversion to the person holding the benefit of the ROT clause. [12]
7.43 Young J held that since the claim was for conversion, it was not a liability for goods bought or property hired, leased, used or occupied within the meaning of section 443A. The administrator had no statutory right of indemnity out of the company's property in respect of that liability under section 443D.
7.44 Although in Butterell , the administrator was held to have an equitable lien over the proceeds of the on-sale, the decision served as an indication that there may be limits to administrators' rights of indemnity in other areas of tortious liability. Recommendation 41 of the CAMAC Report (1998) recommended law reform to deal with this issue.
7.45 The draft Bill amends the law to provide that an administrator is not liable in conversion for the sale of property subject to a lien, pledge or retention of title clause (paragraph 7.162 refers).
7.46 However, there are other torts that may not be covered by the existing provisions. The law will be amended to extend the administrator's right of indemnity to include any personal liabilities incurred in the due performance of the administrator's duties (except liabilities incurred negligently or in bad faith).
7.47 Item 22 will amend section 443D to include a right of indemnity for any other debts or liabilities incurred, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator.
7.48 Item 45 will make a consequential amendment to paragraph 556(1)(c) of the Corporations Act.
Deed administrator's ability to sell the company's shares
7.49 The model deed of company arrangement in Schedule 8A of the Corporations Regulations provides that a deed administrator has the power to enter into and complete any contract for the sale of shares in the company (clause 2(zc)). [13]
7.50 This clause does not give deed administrators a power to issue shares directly. It authorises the administrator of the deed to deal in existing shares consistently with the deed. It also literally empowers the administrator to deal in shares of a shareholder. If a deed made provision for the disposition of shares of shareholders, the administrator may enter into and complete contracts for their sale/disposition.
7.51 In relation to the issue of new shares, deed administrators are not directly empowered to issue shares but the deed may provide for the issue of securities by the directors. A deed is binding on company officers (the company) as well as the company's creditors and members (section 444G).
7.52 Unless the deed contains a contrary provision, the administrator has the power to carry on the business of the company for the purpose of administering the deed. Although it is the company (ie the directors) that is empowered to issue new shares, the deed administrator can cause this to happen.
7.53 There is a question as to whether the current law constitutes a power for the deed administrator to sell existing shares in the company without the consent of their holders (a compulsory sale power). In cases where the courts have considered the matter, it has been held that a deed administrator had no power to sell members' shares without their consent. [14]
7.54 A compulsory sale power may be beneficial to deed administrators, as it allows administrators to ensure trading of the shares resumes. It may be essential to the success of a deed that a share sale proceeds. For example, the DOCA may be based on an investor acquiring all (or a minimum proportion) of the shares in a company in return for a lump sum payment to creditors.
7.55 Often, the shares of a company under administration will have little residual value and members will not participate in any distribution. It may be argued that their consent should therefore not be required. However, a compulsory sale power may be open to abuse. For instance, a deed that involves creditors swapping their debt for equity in the company may unfairly advantage creditors if the underlying business of the company is strong.
7.56 Other considerations are that members have a proprietary right in the existing shares, and that other external administrators such as liquidators and receivers do not have comparable powers. Importantly, such a power could unfairly prejudice shareholders particularly where there is some residual value in the company.
7.57 The law will be clarified to provide that the deed administrator is able to sell shares in the company with either the consent of the holders of those shares, or with leave of the Court in the absence of shareholder consent. This is consistent with recommendation 42 of the CAMAC Report (1998).
7.58 The Court may only grant leave if it is satisfied that the sale would not unfairly prejudice the interests of shareholders. This is intended to direct the Court to consider the impact of a compulsory sale of shareholders where there may be some residual value in the company.
7.59 Under the new approach, members, creditors and ASIC will have standing to oppose a court application for leave. These parties will also be able to apply to the Court to have an oppressive or prejudicial DOCA terminated under section 445D of the Corporations Act.
7.60 Item 29 will insert new section 444GA of the Corporations Act which will permit a deed administrator to transfer shares in the company if the owner of the shares consents in writing or leave of the Court is obtained. A member or creditor of the company, any interested person or ASIC may oppose the application for leave.
Lodgement of accounts with ASIC
7.61 There is no requirement for administrators to lodge with ASIC accounts of receipts and payments of the administration. In relation to deed administrators, the prescribed provisions in Schedule 8A require lodgement of accounts. [15] As noted previously, these provisions may be excluded.
7.62 Liquidators (per section 539 of the Corporations Act) and controllers (per section 432 of the Corporations Act) are required to lodge accounts on a six monthly basis.
7.63 The prescribed provisions in relation to lodgement of accounts by deed administrators are rarely adopted. The absence of a mandatory requirement for administrators and deed administrators to lodge accounts of receipts and payments with ASIC is inconsistent with other forms of insolvency administration. For external administrations where there is a requirement to lodge accounts, accounts are accessed by the public on a regular basis.
7.64 To improve transparency and facilitate creditor monitoring, the law will be amended to ensure the accounts of administrators and deed administrators are lodged with ASIC and placed on the public record. The provisions requiring the lodgement of accounts on a six monthly basis will be modelled on the current requirements for liquidators under section 539. This is consistent with recommendation 43 of the CAMAC Report (1998).
7.65 Item 10 will insert new section 438E of the Corporations Act requiring administrators to lodge accounts with ASIC. Item 36 will insert new Division 11A containing new section 445J of the Corporations Act requiring deed administrators to lodge accounts with ASIC.
7.66 As with current section 539 in relation to liquidators, the new provisions require administrators to lodge accounts on a six monthly basis. The new provisions also provide for ASIC to be able to cause an audit of the accounts. In relation to voluntary administration, the costs of an audit will form part of the expenses of the administration (new subsection 438E(7) refers). In relation to a company subject to a deed of company arrangement, such costs are payable by the company (new subsection 445J(7) refers).
7.67 Concerns have been expressed that insufficient information may be provided to creditors where a company is put into voluntary administration. It has been suggested that reports sent by administrators when convening the major meeting of creditors should be required to include 'any other matter material to the creditors' decision'. The proposal is consistent with the Statement of Best Practice on the Content of Administrator's Reports produced by the IPAA. It is also consistent with recommendation 58 of the CAMAC Report (1998) and recommendations 35 and 37 of the CAMAC Report (2004).
7.68 The information made available to creditors will be enhanced by including a requirement that the statement provided to creditors under paragraph 439A(4)(b) of the Corporations Act must include other information known to the administrator that will enable creditors to make informed decisions about whether to execute a deed of company arrangements, end the administration or wind up the company.
7.69 Item 12 will require administrators to include any other information known to them that will enable creditors to make an informed decision about the matters in subparagraphs 439A(4)(b)(i)-(iii) of the Corporations Act.
7.70 Currently, any offer by an administrator of a DOCA to creditors to substitute equity for all or part of their debt (an equity for debt offer) is subject to the fundraising provisions in Part 6D.2 of the Corporations Act.
7.71 An offer of securities under a Part 5.1 scheme of arrangement is exempt from the disclosure requirements in Part 6D.2 (subsection 708(17) of the Corporations Act). The rationale is that the offerees will have already received a detailed court-approved explanatory statement under section 412 of the Corporations Act. Also, a court must approve the final scheme.
7.72 A similar exception is desirable to facilitate equity for debt swaps in voluntary administrations. A similar exemption to that for a scheme of arrangement will enhance an administrator's capacity to issue a company's securities in a manner most beneficial to creditors. The exemption would not be available for offers or invitations to other parties. Recommendation 58 of the CAMAC report (1998) and recommendations 35 and 37 of the CAMAC Report (2004) stated that there should be an exemption from the fundraising provisions for offers or invitations to creditors to exchange debt for equity under a DOCA.
7.73 The fundraising provisions in Part 6D.2 of the Corporations Act will not apply to offers to creditors to exchange their debt for equity under a DOCA. An administrator making an equity for debt offer will only be required to provide a statement setting out all the information that is known to the administrator about the merits of the offer. The administrator's statement should indicate that it is not a prospectus and therefore may contain less information than a prospectus.
7.74 Item 46 will insert new subsection 708(17A) into the Corporations Act. An offer of securities made to any or all of a company's creditors under a deed of company arrangement will not require detailed disclosure under Part 6D.2 of the Corporations Act. The exemption will only apply where the offer does not require accepting creditors to contribute any further consideration. An administrator making an equity for debt offer will be required to provide a statement that sets out all relevant information about the offer that is within the knowledge of the administrator. The statement must indicate that it is not a prospectus and therefore may contain less information than a prospectus.
7.75 The effect of section 444D of the Corporations Act is that, once approved by creditors, a DOCA is binding on all creditors of the company in relation to claims arising on or before the date specified in the deed irrespective of whether a particular creditor voted in favour of or against the deed. On one view section 444D should be read subject to other provisions of the Corporations Act. On this basis, section 231 of the Corporations Act which contemplates a person becoming a shareholder through voluntary agreement may protect a creditor from being required to become a shareholder under a deed of company arrangement. Item 27 inserts new subsection 444D(4) into the Corporations Act, which will provide that section 231 does not operate to prevent a creditor from becoming a member of the company as a result of a creditor accepting an offer of shares in the company.
Appointment of administrator by directors and chargees
7.76 The directors of a company that is being wound up (either under the order of the Court or after members have resolved that the company be wound up voluntarily) cannot appoint an administrator (subsection 436A(2) of the Corporations Act). This is because once winding up proceedings commence, the company's affairs are under the control of the liquidator, and this rule avoids a conflict between the two external administrations.
7.77 The directors of the company can appoint an administrator between the filing of an application in Court and the making of a winding up order. This reasoning is based on the ordinary meaning of the phrase 'is already being wound up' in section 436A of the Corporations Act.
7.78 After an application for a winding up order is filed, the Court can appoint a provisional liquidator to preserve the company's property pending the hearing of the application. This occurs before the making of a winding up order by the Court (subsection 472(2) of the Corporations Act).
7.79 In a similar fashion to the provisions relating to the appointment of an administrator by directors, persons who are entitled to enforce a charge over all or substantially all of the company's property (substantial chargees) cannot appoint an administrator where the company is being wound up (subsection 436C(2) of the Corporations Act).
7.80 There is no provision expressly preventing the appointment of an administrator by directors of the company or chargees where the company has a provisional liquidator appointed.
7.81 Directors of a company under provisional liquidation should not be able to appoint an administrator, just as directors of a company under liquidation are not permitted to appoint an administrator. This is because only a provisional liquidator should be permitted to exercise the powers of officers of the company (including the power to appoint an administrator) whilst he or she is acting.
7.82 Further, voluntary administration and provisional liquidation should be regarded as mutually exclusive [16] and any continuing power of the directors to appoint an administrator is inconsistent with this notion.
7.83 However there is conflicting authority on the matter. In Object Design Inc v Object Design Australia Pty Ltd (1997) a single judge of the Federal Court considered that directors of a company under provisional liquidation could appoint an administrator. [17]
7.84 The judge in that case based his conclusion on his reading of subsection 471A(2A) of the Corporations Act, reasoning that the Corporations Law (as it was then) expressly contemplates that an administrator may be appointed notwithstanding that a provisional liquidator is in place.
7.85 Subsection 471A(2A) refers to 'an administrator appointed...beginning after the provisional liquidator was appointed' in relation to a power of an officer that is not suspended. However, it can be argued that this provision refers to the provisional liquidator's power under section 436B to appoint an administrator, rather than a residual power of the directors to do so.
7.86 In relation to substantial chargees, a person (other than a provisional liquidator, an administrator appointed after the appointment of the provisional liquidator, or a person acting with the approval of the provisional liquidator or the court) cannot exercise powers as an officer of a company while a provisional liquidator is acting (subsection 471A(2)). However, neither a person entitled to enforce a charge nor a receiver and manager appointed by that person is an 'officer' of the company.
7.87 The court in Aloridge Pty Ltd (prov liq apptd) v Christianos [18] accepted that a chargee over all or substantially all the property of a company in provisional liquidation had the power to appoint an administrator under section 436C of the Corporations Act.
7.88 There is a need for a uniform prohibition for both directors and substantial chargees appointing an administrator where a company has already had a liquidator or provisional liquidator appointed. The same conflicts between the two appointments will apply, whether the appointment is made by a director or substantial chargee.
7.89 The law will be amended in this area, to make it clear that directors and substantial chargees may not appoint an administrator once a provisional liquidator has been appointed. This is consistent with recommendations 45 and 46 of the CAMAC Report (1998).
7.90 Item 2 will amend subsection 436A(2) to provide that a resolution of the board to appoint an administrator under subsection 436A(1) does not apply to a company to which a liquidator or provisional liquidator has been appointed.
7.91 Item 4 will amend subsection 436C(2) to provide that a person entitled to enforce a charge over the whole, or substantially the whole, of the company's property may not appoint an administrator to that company if a liquidator or provisional liquidator has previously been appointed.
Transition from liquidation to voluntary administration
7.92 Section 436B of the Corporations Act permits a liquidator or provisional liquidator to appoint an administrator to the company. Subsection 436B(2) provides that a liquidator or provisional liquidator must obtain leave of the Court to appoint himself or herself as administrator where it appears that voluntary administration is the appropriate procedure for a company. In practice, liquidators call creditors meetings to discuss the company's affairs before appointing an administrator.
7.93 While section 436B would appear to allow liquidators and provisional liquidators to appoint their business partner, employer, or employee as administrator without first obtaining leave of the court, subsection 448C(1) of the Corporations Act disqualifies certain people related to the company from being appointed administrator without leave of the Court.
7.94 Subsection 448C(1) utilises the term 'officer', and disqualifies, inter alia, persons who are 'partners, employers, or employees of officers of the corporation' (paragraph 448C(1)(g)). The term 'officer', as defined in section 9, includes liquidators but not provisional liquidators. In any case, provisional liquidators are supervised by the Court.
7.95 To streamline the transition from liquidation to administration, the Corporations Act will be amended to allow a liquidator to appoint himself or herself as administrator without leave of the court where the appointment is supported by creditors. This is consistent with recommendations 47 and 48 of the CAMAC Report (1998).
7.96 The Corporations Act will also be amended to treat equally any appointment of a business partner, employer or employees of the liquidator or provisional liquidator, or his or her firm or corporation.
7.97 As liquidators in practice call creditors meetings to discuss the company's affairs before appointing an administrator, this meeting provides an appropriate forum to seek creditors' approval to enter voluntary administration.
7.98 This meeting would also afford creditors the opportunity to reject the appointment of that person as administrator. Liquidators will continue to have the right to seek leave of the Court for their appointment as administrator in the absence of a formal resolution of creditors.
7.99 Item 3 will repeal current subsections 436B(2) and 436B(3) and replace them with a new subsection 436B(2) which provides that the liquidator, provisional liquidator or certain related persons cannot be appointed administrator without either creditors' consent (by passing a resolution at a creditors' meeting), or with leave of the Court.
7.100 New paragraphs 436B(2)(a)-(e) will identify the types of persons the subsection applies to, namely the liquidator or provisional liquidator himself or herself, a partner, employee, employer or director, secretary, senior manager or employee if the insolvency practice is incorporated.
7.101 Item 39 will make a consequential amendment to subsection 448C(4) to ensure that 'officer' in paragraphs 1(g) and (h) does not include liquidator.
Stay and termination of a liquidation
7.102 A liquidator or provisional liquidator can appoint an administrator where it appears that voluntary administration is the appropriate procedure for a company. If the company then executes a DOCA, an application must be made to the Court for a stay or termination of the winding-up (under section 482 of the Corporations Act).
7.103 Under subsection 482(1A), the liquidator, a creditor or a contributory of the company has standing to make such an application. Deed administrators do not have standing to apply to the Court for a stay or termination of a winding up unless they are also the liquidator.
7.104 The law will be amended to provide that once creditors have resolved to execute a DOCA, the deed administrator has standing to make an application for a stay or termination of the winding-up. This will ensure a smooth transition from liquidation to administration. This is consistent with recommendation 49 of the CAMAC Report (1998).
7.105 When considering an application to terminate the winding up of a company subject to a DOCA, the Court will be directed to have regard to a non-exhaustive list of factors such as any misconduct by the company's officers and the commercial decision of creditors accepting the deed. The Court would also have regard to whether the company would remain insolvent after the termination of the winding up (following creditors' acceptance of the DOCA). This reflects the general position of the courts in relation to not permitting insolvent companies to return to commercial life.
7.106 Item 43 will amend subsection 482(1A) to include deed administrators as persons who may make an application for a stay or termination of a liquidation.
7.107 Item 44 will insert new subsection 482(2A) which provides a list of non-exhaustive factors the Court must consider when considering such an application for a company subject to a DOCA:
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- new paragraphs 482(2A)(a) and (b) will cover alleged misconduct by company officers reported to the Court by an administrator, liquidator or ASIC;
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- new paragraph 482(2A)(c) will relate to the commercial nature of the decision of the company's creditors; and
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- new paragraph 482(2A)(e) will require the Court to consider whether the DOCA is likely to result in the company becoming or remaining insolvent.
Application to replace administrator
7.108 Under section 449B of the Corporations Act, ASIC or a creditor of the company may apply to the Court for an order to replace an administrator.
7.109 In addition, a member of the company can also apply to the Court for the administrator to be replaced where an administrator is acting in a manner prejudicial to some or all of the company's members or creditors. This utilises the court's general supervisory powers under section 447E, and permits the court to make an order as it thinks just.
7.110 Liquidators and provisional liquidators of a company may be in a good position to assess the performance of an administrator of the company. Accordingly, the law will be amended to add these persons to the list of persons able to apply to the Court to replace the administrator. This is consistent with recommendation 50 of the CAMAC Report (1998).
7.111 Item 40 will amend section 449B to include a liquidator or a provisional liquidator of the company as a person who may apply to the Court to remove from office an administrator and appoint someone else.
7.112 The current law requires the administrator to hold a first meeting of creditors within five business days after the administration begins (subsections 436E(1)-(2) of the Corporations Act), and a second meeting to determine the company's future within 28 days (in the usual case) or 35 days (where Christmas or Easter intervenes) of his/her appointment (subsection 439A(1) of the Corporations Act). Creditors must receive at least two business days' notice of the first meeting (subsection 436E(3) of the Corporations Act).
7.113 The administrator has 21 days (or 28 days if the administration begins just before Christmas or Easter) to convene the second meeting (subsections 439A(1) and (5) of the Corporations Act). The second meeting must be held within 5 business days after the end of the convening period (subsection 439A(2) of the Corporations Act). The law allows for administrators to apply to the court to extend the convening period for the second meeting (subsection 439A(6) of the Corporations Act), and once held the second meeting may be adjourned for up to 60 days (subsection 439B(2) of the Corporations Act).
7.114 The setting of tight time frames and milestones for completion of the various tasks in an administration is an important feature of the voluntary administration procedure. On the one hand it is beneficial for stakeholders that the process be conducted without delay. It avoids the delays, abuses and expense that may occur if a much longer or unrestricted time frame is allowed.
7.115 On the other hand a limited extension of the period of time for holding the statutory meetings may increase creditors' opportunities to participate, and allow administrators more time to conduct an examination of the company's financial circumstances and consider the best options for its future.
7.116 The Bill will allow a slightly longer time for holding the first and second meetings of creditors. The first meeting will be held within eight business days after the beginning of the administration, with a requirement for five business days' notice of the meeting to creditors. The period for holding the second meeting of creditors will be extended to 25 business days with a new convening period of 20 business days.
7.117 These reforms are informed by recommendations 2, 6, 7 and 8 of the CAMAC Report (1998), recommendation 7 of the CAMAC Report (2004) and recommendations 15 and 16 of the PJC Report.
7.118 For consistency, references to 'days' in relation to meetings will be amended to 'business days' where appropriate. This is consistent with recommendation 59 of the CAMAC Report (1998).
7.119 In addition, the Bill will allow more flexibility for holding the second meeting under section 439A by permitting the meeting to be held within 5 business days before or after the end of the convening period. This facility may be used in simple administrations, where the full convening period is not required to conduct the necessary investigations and prepare the necessary reports.
7.120 In summary, the reforms are as follows:
| First meeting | Current | New |
| Timing of meeting | 5 business days | 8 business days |
| Notice of meeting | 2 business days | 5 business days |
| Second meeting | Current | New |
| Convening of meeting | 21 or 28 days | 20 or 25 business days |
| Notice of meeting | 5 business days | No change |
| Timing of meeting | Within 5 business days after the end of the convening period | Within 5 business days before or after the end of the convening period |
| Adjournment period | 60 days | 45 business days |
7.121 Item 5 will amend subsection 436E(2) to extend the period of time for holding the first meeting of creditors from 5 to 8 business days. Item 6 will amend subsection 436E(3) to extend the convening period for holding the first meeting of creditors from at least 2 business days to at least 5 business days.
7.122 Item 11 will amend subsection 439A(2) to allow the second meeting of creditors to be held be held within 5 business days before or after the end of the convening period.
7.123 Item 13 will amend subsection 439A(5)(a) to provide that the convening period is calculated from the day after the administration begins. Currently the convening period for the second meeting of creditors is calculated from the day when the administration begins. It is more usual to calculate the period from the day after the administration begins. The current method of calculation may jeopardise some administrations. The proposal is consistent with recommendation 7 of the CAMAC Report (1998).
7.124 Item 14 will amend subsection 439A(5) to extend the convening period from 28 days to 25 business days where the administration begins before Christmas or Easter. Item 15 will amend subsection 439A(5) to clarify the extent of the convening period in keeping with the change in terminology from 'days' to 'business days'. Item 16 will amend paragraph 439A(5)(b) to extend the convening period from 21 days to 20 business days. Item 17 will amend paragraph 439A(5)(b) to provide that the convening period is to be calculated in the usual case from the day after the administration begins and to clarify the extent of the convening period in keeping with the change in terminology from 'days' to 'business days'.
7.125 Item 18 will amend subsection 439A(6) to allow the Court to extend the convening period for the subsection 439A meeting on an application made after the convening period has ended. Item 19 will clarify that an extension granted on an application after the convening period has ended will be limited to situations where there would otherwise be substantial injustice to creditors. The court will be required to have regard to the administrator's conduct and any other relevant matters when considering the costs of an application. This is consistent with recommendation 8 of the CAMAC Report (1998).
7.126 Item 20 will amend subsection 439B(2) to clarify the power of an administrator to adjourn a meeting for up to 60 days, or to a notified date within the 60 day period. It will replace the current reference to 60 days with 45 business days consistent with the change in terminology from 'days' to 'business days'.
Decision period for chargee to enforce a charge
7.127 Section 441A of the Corporations Act permits the holder of a charge over the whole or substantially the whole of the property of a company to enforce the charge without regard to the administration provided that the chargee does so within the 'decision period'. The decision period is defined in section 9 of the Corporations Act, and generally means the 10 day period following notification being provided to the chargee of the appointment of the administrator.
7.128 Item 5 of Schedule 4 of the Bill will extend the time for holding the first meeting of creditors from 5 business days to 8 business days after the commencement of the administration. A consequence of this amendment is that a chargee will have a reduced period of time after the first meeting of creditors to decide whether to enforce the charge. That is, the chargee will generally have to elect whether to enforce the charge within 2 business days after the first meeting of creditors. A substantial chargee should have a similar period of time after the first meeting of creditors to make a decision as provided under the current law.
7.129 Item 1 of Schedule 4 will amend the definition of 'decision period' in section 9 so as to allow a decision period of 13 business days.
Conversion of 'days' to 'business days'
7.130 Part 5.3A of the Corporations Act currently uses two different types of methodology for establishing periods or dates in the course of an administration, namely 'business days' and 'days'. It would be preferable for a consistent terminology to be adopted. References to 'days' in Part 5.3A of the Corporations Act will be replaced with reference to 'business days'. This is consistent with recommendation 59 of the CAMAC Report (1998).
7.131 In subsections 438B(2), 443B(2), 443B (3) and 446A(5) of the Corporations Act, '7 days' will be changed to '5 business days'. In paragraphs 444B(2)(a), 444B(2)(b) and 446A(5)(b) of the Corporations Act, '21 days' will be changed to '15 business days'.
7.132 Items 9, 21, 24, 37 and 38 substitute business days for days, as outlined above.
Role of administrator and administrator of deed
7.133 The roles of the administrator and the administrator of the deed of company arrangement overlap. The period of administration is defined in subsection 435C(1) and (2) of the Corporations Act, and extends to the execution of the deed of company arrangement. Subsections 444A(3) and 444B(5) of the Corporations Act impose obligations on the administrator of the deed before the relevant instrument is executed.
7.134 The role of the administrator of the deed of company arrangement should commence when the deed of company arrangement is executed by the company and the deed's administrator. The obligation under subsection 444A(3) will be made an obligation of the administrator of the company and the references to in subsections 444B(5) and (6) to the administrator of the deed be replaced with references to the 'proposed' administrator of the deed.
7.135 Item 23 will amend subsection 444A(3) so that it refers to 'The administrator of the company' rather than 'The administrator of the deed'.
7.136 Consequential amendments are made to subsections 444B(5) and 444B(6). Item 25 will amend subsection 444B(5) so that it refers to 'The proposed administrator of the deed' rather than 'The administrator of the deed'. Item 26 will amend subsection 444B(6) so that it refers to 'the deed's proposed administrator' rather than 'the deed's administrator'.
Notification that a company is subject to a deed
7.137 Companies subject to a DOCA must indicate that fact on all of their public documents and negotiable instruments after the company's name where it first appears (subsection 450E(2) of the Corporations Act). This serves as an indication to any prospective creditors dealing with the company.
7.138 The notification that a company is subject to a DOCA may have adverse impacts on a company's goodwill and reputation. This will, in turn, affect the company's ability to continue trading and impinge on the rescue of the business, ultimately reducing the amount available to creditors.
7.139 It is acknowledged that there may be circumstances where a deed is still yet to be terminated but there is little risk to prospective creditors. An example of such a situation may be where a deed administrator has received the money to be paid to creditors but cannot pay such money because of unresolved disputes over proofs of debt.
7.140 In Re Brashes Pty Ltd [19] , Hayne J held that the court could exercise its general discretion under section 477A of the Corporations Act to exempt a company from the obligation to include the words 'subject to deed of company arrangement' on its public documents.
7.141 To remove any uncertainty, the Corporations Act will be amended to provide the company with an express right to apply to the court for an order that the company be exempt from including the relevant words in its name. This is consistent with recommendation 33 of the CAMAC Report (1998).
7.142 Section 450E will be amended to provide that a company under a deed of company arrangement can apply to the Court for an exemption from the requirement to indicate that fact on all public documents and negotiable instruments after the company's name.
7.143 The Court may grant such an exemption if it is satisfied that the granting of leave will not result in any significant risk to the interests of the company's creditors as a whole. The Court must also consider the interests of prospective (post-deed) creditors, who are at the most risk. Pre-deed creditors have had the benefit of notification so their interests are unlikely to be at risk in this context. (A similar ability to apply to the Court has been provided in relation to the requirement to disclose former names at item 50 of Part 3, Schedule 1).
7.144 Items 41 and 42 will amend section 450E to provide that a deed administrator or any interested person can seek leave of the Court for an exemption from the requirements of subsection 450E(2).
7.145 Currently, the replacement of an administrator at the first meeting of creditors may require creditors to pass two resolutions:
- •
- the first to remove the existing administrator; and
- •
- the second to appoint the replacement administrator.
7.146 Consequently, an administrator could be removed without a replacement being appointed.
7.147 Uncertainty in this area will be addressed by amending the Corporations Act to provide that the removal of a current administrator and the appointment of a replacement administrator must be effected through a single resolution. This is consistent with recommendation 3 of the CAMAC Report (1998).
7.148 Item 7 will amend section 436E(4) of the Corporations Act to clarify that the removal of a current administrator and the appointment of a replacement administrator must be effected through a single resolution.
Part 2 - Rights to property during administration
Right of a person to retain pledged property
7.149 Under sections 440B and 440C of the Corporations Act, chargees and owners or lessors of property used, leased or occupied by the company are prohibited from exercising their rights once an administrator has been appointed to the company. Exceptions to this rule are where the administrator consents, or where the person acts with leave of the court.
7.150 There remains some uncertainty regarding the application of section 440B to lienees and pledgees. A key purpose of taking possession of property under a lien or pledge is to provide additional security for the lender. However, this must be balanced against the need to facilitate the rescue of a viable company in the interests of other creditors and stakeholders. In some cases, the ability to continue to trade in stock in the ordinary course of business is essential to the continued viability of the company.
7.151 The Bill will clarify that a lienee or pledgee retains the right to retain property subject to a lien or pledge upon insolvency of the debtor. The right to retain property will be subject to a restriction upon the sale of the property during the course of a voluntary administration. These reforms recognise the purpose of a lien or pledge in providing additional security for a loan whilst also protecting the interests of other creditors.
7.152 Item 48 will insert new sections 440BA and 440BB into the Corporations Act. New section 440BA will provide that a person in possession of company property held under a lien or pledge will be entitled to retain possession of the property, but must not sell the property without leave of the Court or the consent of the administrator. New section 440BB will provide that, if a company in administration is a lessee of property, distress for rent may not be carried out against the property without the administrator's written consent or the leave of the Court.
Power of an administrator to sell property subject to a lien, pledge or retention of title clause
7.153 Section 442C of the Corporations Act prohibits an administrator disposing of property that is subject to a charge, that is used or occupied by the company, or is in the possession of the company but of which someone else is the owner or lessor. Exceptions to this rule include where the sale is in the ordinary course of the company's business, where the administrator has the written consent of the chargee and where the administrator has the leave of the court.
7.154 It has been suggested that there is a need to clarify the law in relation to the operation of this provision in respect of property subject to a lien, pledge or retention of title clause. The reforms need to strike an appropriate balance between protecting the interest of the owner and security holder, and facilitating the rescue of viable companies in the interest of other creditors and stakeholders.
7.155 Section 442C of the Corporations Act will be amended to provide that the administrator may sell property subject to a lien, pledge or retention of title clause, in the ordinary course of the company's business, or with the written consent of the owner or security holder, or with the leave of the Court. The amendments will also allow for a chargee, lienee, pledgee, lessor or owner to apply to the Court for an injunction if a proposed sale of the property would prejudice their interests. The administrator will be provided a right of inspection for property held under a lien or pledge, and a right to take possession to sell such property in order to effect a sale. The purchaser of the property would take clear title.
7.156 To protect the interests of the security holder, the administrator will be obliged to retain the amount secured by a lien or pledge, for payment to the holders of those securities, when a power of sale is exercised over property subject to a lien or pledge. The administrator will be required to act reasonably in exercising the power of sale. Similar provisions will be introduced for property that is in the possession of the company but owned by a third party due to the operation of a retention of title clause.
7.157 Item 47 will amend section 9 of the Corporations Act to define 'retention of title clause'.
7.158 Items 55, 56 and 57 will amend section 442C of the Corporations Act to clarify that the provisions stating when an administrator may dispose of encumbered property also apply to property subject to a lien or pledge.
7.159 Item 58 will insert new subsections 442C(4), 442C(5) and 4442C(6) into the Corporations Act to provide for a court injunction where a proposed disposal of property would prejudice the interests of an owner, lessor, chargee, lienee or pledgee.
7.160 Item 58 will also insert a new subsection 442C(7) into the Corporations Act to provide that a disposal of property by an administrator is sufficient to extinguish a charge, lien or pledge. This new subsection will ensure that persons acquiring property from the administrator of a company will obtain clear title to that property.
7.161 Item 59 will insert a new subsection 442CA(1) into the Corporations Act to provide for a right of inspection where an administrator proposes to sell property subject to a lien or pledge.
7.162 Item 59 will also insert a new subsection 442CA(2) into the Corporations Act to provide an administrator with a right to obtain possession of property of a company that is subject to a lien or pledge in order to effect a sale. This subsection will provide an administrator with immunity from any action in conversion that might otherwise arise from actions taken to sell property of a company that is subject to a lien or pledge.
7.163 Item 59 will also insert a new section 442CB into the Corporations Act to provide that an administrator must act reasonably in exercising a power of sale over property subject to a lien, pledge or retention of title clause.
7.164 Item 59 will insert new section 442CC into the Corporations Act to provide for the treatment of the proceeds of a sale of property subject to a lien or pledge. The administrator will be required to set aside the net proceeds of the sale, to the extent required to satisfy the debt secured by the lien, pledge or retention of title clause, or any other security that has a priority over the debt secured by the lien, pledge or retention of title clause. If the net proceeds of the sale are insufficient to meet these debts, the entire amount must be set aside to pay those debts in order of priority.
Right of a creditor to sell property subject to a lien or pledge
7.165 Under the amendments discussed above, it will be clarified that a lienee or pledgee may not sell property subject to a lien or pledge without the agreement of the administrator. If the administrator agrees to the sale, a question arises about the treatment of the proceeds of the sale.
7.166 Where the administrator agrees to a lienee or pledgee selling property in their possession, the power of sale will be subject to a requirement to return to the administrator any sale proceeds in excess of the debt secured by the charge. The power of sale will not be exercisable where there is a security over the property that has a higher priority in liquidation.
7.167 Item 54 will insert new sections 441JA into the Corporations Act to regulate the sale of property subject to a lien or pledge by a lienee or pledgee. New section 441JA will permit the holder of the lien or pledge who sells the property to retain the net proceeds where they equal or fall short of the debt secured. Where they exceed the debt secured, the holder will be required to pay to the administrator the excess. Where the net proceeds fall short of the debt secured, the holder will be able to prove for the balance as an unsecured creditor.
General moratorium for bankers' liens and collateral lodged with clearing and settlement facilities
7.168 Bankers' liens over, inter alia , unpresented cheques and bills of exchange would be unworkable if the banker needed to obtain the consent of an administrator or prior leave of the court under new section 440BA of the Corporations Act in order to dispose of such instruments.
7.169 Shares are often lodged as security with the Options Clearing House (OCH). OCH has indicated that it cannot accept shares or money market securities as collateral should administrators be permitted to sell property that is subject to a lien or pledge under section 442C.
7.170 The Corporations Act will be amended to provide that bankers' liens are exempt from the moratorium under Part 5.3A of the Corporations Act.
7.171 Securities lodged as collateral with a clearing and settlement facility will also be exempt from the moratorium under Division 6 of Part 5.3A of the Corporations Act.
7.172 Item 49 will insert a new section 440JA into the Corporations Act to exempt property that is the subject of bankers' liens and securities held as collateral by a clearing and settlement facility from Division 6 of Part 5.3A of the Corporations Act.
Clarifying the injunction power allowing a court to prevent enforcement of a charge
7.173 Where a chargee takes action that falls within section 441B by dealing with property under a charge, the administrator may apply to a court for an injunction to prevent that action. A court's injunction power under paragraph 441D(1)(a) of the Corporations Act covers actual, but not foreshadowed, enforcement action by a chargee over particular property. In some circumstances an administrator may have notice of conduct of a chargee that is likely to occur in the future that would adversely affect the interests of creditors. It is desirable that the power of the court to grant an injunction be extended to cover injunctions against threatened enforcement action by a chargee.
7.174 The Corporations Act will be amended to clarify the power of a court to grant an injunction to prevent threatened enforcement action by a chargee.
7.175 Item 53 will amend paragraphs 441D(1)(a) and 441D(1)(b) to provide a court with power to grant an injunction where a person proposes to engage in conduct to enforce a charge of a type that is listed within subsection 441B(1) of the Corporations Act.
Clarifying the powers of a court to allow the enforcement of a charge
7.176 A chargeholder over all or substantially all the property of a company can continue enforcing its charge if it commenced enforcement before or during the 10 day decision period that follows the commencement of the administration (this is known as the substantial chargeholder's exception). This exception is contained within section 441A of the Corporations Act.
7.177 Other chargeholders can continue enforcing their charges under the circumstances identified in section 441B of the Corporations Act.
7.178 The case of
Albert v Namba Pty Ltd
(1997)
24 ACSR 577
raised the possibility that chargeholders may not be able to enforce their charges through court proceedings, given the separate prohibition on court enforcement procedures in sections 440F and 440G of the Corporations Act.
7.179 Chargeholders who are permitted by the Corporations Act to enforce their charges should be able to do so during the administration period through court enforcement, as well as extra-curial action.
7.180 The Corporations Act will be amended to clarify that a chargeholder who is permitted to enforce a charge under sections 441A or 441B is able to do so through court enforcement as well as the extra-curial action provided for in those sections.
7.181 Items 51 and 52 will amend subsections 441A(3) and 441B(2) to clarify that court enforcement of a charge is not prevented by the prohibition on court enforcement procedures in sections 440F and 440G of the Corporations Act.
Part 3 - Liquidation following administration
Priority for debts incurred during a DOCA
7.182 There is some uncertainty about the priority of post-deed creditors, where a liquidation follows a DOCA.
7.183 Although the provability of debts incurred by a company under a DOCA was addressed through the enactment of subsection 553(1A) of the Corporations Act, that provision does not deal with priorities.
7.184 A provision will be included to clarify that post-deed creditors have no statutory priority over pre-deed creditors, except where the deed administrator is personally liable for debts that fall within paragraph 556(1)(a) of the Corporations Act.
7.185 Section 556 will be amended to state that, where a liquidation immediately follows a deed of company arrangement, the statutory priority afforded to debts owed to post-deed creditors under paragraph 556(1)(a) only applies in circumstances where the deed administrator is personally liable for those debts.
7.186 Item 67 will amend subsection 556(1) to provide that the priority afforded to post-deed creditors under paragraph 556(1)(a) only applies to expenses incurred by the deed administrator, or claims made under section 553(1A) for debts incurred during a DOCA, if the deed administrator is personally liable for the expenses.
7.187 Item 64 will add a note at the end of subsection 553(1A) to signal that the paragraph 556(1)(a) priority applies only to debts incurred under a deed of company arrangement for which a deed administrator is personally liable.
Priority for borrowings during administration
7.188 During administration, it is very often vital in order to maintain the business of a company that it obtains new finance. However, lenders may be reluctant to advance funds to a company in administration on an unsecured basis unless they will receive priority treatment in the event that the company ultimately fails.
7.189 To deal with this issue, recommendation 31 of the CAMAC Report (2004) stated that a post-administration lender should be given priority over pre-administration creditors provided a special majority of the pre-administration creditors agreed. However, a possible difficulty with this proposal is that it requires a meeting of creditors, which is expensive to organise and may not be practical within the commercial time constraints.
7.190 An alternative solution to this issue would build on the system of personal liability, indemnity rights and priority already in place regarding certain debts incurred by an administrator.
7.191 A deed administrator is personally liable for debts he or she incurs in the course of the administration, but only for services rendered, goods bought, and property leased or hired (subsection 443A(1) of the Corporations Act). Administrators have a right of indemnity from the company's property to cover those expenses under section 443D of the Corporations Act. If the company does proceed to liquidation, such expenses are generally entitled to a priority under paragraph 556(1)(c) of the Corporations Act. In some cases they may be entitled to a higher priority under paragraph 556(1)(a) or lower under paragraph 556(1)(de) of the Corporations Act. By this mechanism, those debts incurred by an administrator effectively receive priority over pre-administration debts.
7.192 The amendment will include debts incurred by the administrator in relation finance obtained during administration in section 443A, so that a similar mechanism can be used to give borrowings priority over pre-administration creditors. As the administrator will be personally liable for those borrowings, it is expected that administrators would exercise appropriate caution in using this option. However, in appropriate circumstances it would provide an administrator with the facility to offer a lender enhanced comfort that their funds will be repaid in the event of a failure.
7.193 Under current section 443E, debts covered by the administrator's right of indemnity, in some circumstances, take priority over debts secured by a pre-existing floating charge. However, it is not considered appropriate to allow new borrowings to take priority over debts secured under a pre-existing floating charge, unless the holder of the charge first consents to that result, as this would introduce an unacceptable level of uncertainty as to the value of the floating charge.
7.194 Item 60 will insert new paragraphs (d), (e) and (f) in section 443A(1) to make administrators personally liable for debts incurred by administrators in relation to post-commencement finance. It is intended that this would cover not only the borrowing itself, but also interest and other expenses related to the borrowing. Through the operation of sections 443D and 556, those debts will receive priority in a subsequent liquidation.
7.195 Item 62 will insert a new subsection 443E(4), which provides that the right of indemnity in respect of borrowings under the new paragraph 443A(1)(d), (e) and (f) does not take priority over debts secured by a floating charge on property of the company except to the extent the chargee has consented in writing.
7.196 Item 61 will make a consequential amendment to paragraph 443E(1)(b).
Uncommercial transactions during voluntary administration and deed of company arrangement
7.197 Part 5.7B of the Corporations Act provides for the recovery of property or compensation for the benefit of creditors of an insolvent company. Transactions which may be 'voidable' under section 588FE include uncommercial transactions which are also insolvent transactions.
7.198 Companies might enter into uncommercial transactions during the administration or, particularly, under a DOCA when the company remains in the control of the directors. However, if the company later enters liquidation, those transactions may not be voidable because of requirement that the uncommercial transaction is also an insolvent transaction. Under section 588FC of the Corporations Act, the company's own insolvency is an element of the definition of an insolvent transaction.
7.199 Unfair loans and unreasonable director-related transactions are voidable under subsections 588FE(6) and 588FE(7) of the Corporations Act respectively regardless of whether they are also insolvent transactions.
7.200 Due to the potential for abuse, the Bill will allow uncommercial transactions entered into during a voluntary administration or DOCA immediately preceding a liquidation to be voidable, regardless of whether the company was insolvent at the time of the transaction or became insolvent due to the transaction. However, any transactions done by or under the authority of the administrator or deed administrator will not be voidable. This is consistent with recommendation 51 of the CAMAC Report (1998).
7.201 New provisions will make voidable uncommercial transactions occurring between the relation-back day and the date of the resolution or court order for winding up, in circumstances where the winding up was immediately preceded by voluntary administration or a DOCA. However, transactions entered into by or on the authority of the administrator or deed administrator will not be subject to the new rules.
7.202 Item 68 will add two new subsections to section 588FE. Subsection 588FE(2A) will apply when the company concerned was under administration immediately before the company resolved that it be wound up, or the court ordered that it be wound up. Subsection 588FE(2B) will apply when the company concerned was subject to a DOCA immediately before those events.
7.203 If a liquidation is immediately preceded by a voluntary administration or DOCA, any uncommercial transactions entered into by the company (or an act done to give effect to the transaction) on or after the relation-back day, but before the order or resolution to wind the company up, will be subject to avoidance. However, transactions or acts done on behalf of the company by, or under the authority of, the administrator or deed administrator will not be voidable under the subsections.
Period for challenging voidable transactions
7.204 A liquidator's power to challenge voidable transactions must be exercised within three years after the relation-back day, or such further time as the court permits (subsection 588FF(3) of the Corporations Act).
7.205 Where liquidation follows the failure and termination of a deed of company arrangement, the relation-back day will generally be the day on which the administration began. If the company is under a DOCA for a long period, the liquidator may have only a short time frame in which to bring an action, or the time for bringing an action may have even expired before termination of the deed.
7.206 To address situations where there is a long period between the relation-back day and the termination of a DOCA, subsection 588FF(3) will be amended to allow a liquidator either three years from the relation-back day or one year from their appointment to challenge voidable transactions, whichever is later.
7.207 This proposal is consistent with recommendation 50 of the CAMAC Report (2004).
7.208 Item 69 will amend paragraph 588FF(3)(a) to allow a court to make orders in relation to voidable transactions under an application made up to three years after the relation-back day or 12 months after the appointment of a liquidator, whichever is the later.
7.209 Item 70 will make a consequential amendment to paragraph 588FF(3)(b).
7.210 Currently there is no requirement for creditors to be given an updated report as to the affairs of the company if an administration or DOCA proceeds to liquidation by way of a special resolution (which would usually be deemed to have been passed pursuant to subsection 446A(2) of the Corporations Act). Such a report may be of benefit to any new insolvency practitioner who assumes control of the company's affairs and to creditors generally.
7.211 Recommendation 53 of the CAMAC Report (1998) proposed that the officer in control of a company under administration (or under a deed of company arrangement) should be required to lodge with ASIC at the time the company goes into liquidation a copy of the section 439A report in relation to the company, together with a further report on any additional matters or material changes which affect the financial position of the company that the person is aware of.
7.212 There is, however, no requirement currently to lodge the section 439A report, as it may contain commercially sensitive information. Notwithstanding that when the company is in liquidation this is likely to be less of a concern, it is not proposed to require lodgement of the section 439A report as recommended by CAMAC.
7.213 Rather, the Bill will allow a liquidator who takes office immediately following a period of administration or a DOCA to request a report from the administrator, deed administrator or any officer of the company about the company's affairs as at a date specified in the notice. This is similar to the power a court-ordered liquidator has under section 475 of the Corporations Act.
7.214 The new provision is modelled on the current powers of a court-appointed liquidator to seek a report as to affairs under section 475 of the Corporations Act. The notice may require information about particular affairs, or the affairs of the company more generally, at a particular point in time.
7.215 To avoid an administrator or deed administrator being required to report on the affairs of the company as at a time prior to their appointment, the notice may not specify a time that is earlier than the commencement of the administration or DOCA respectively. This limitation is consistent with the objective of the new provision to provide an update, rather than repeating all the previous investigations conducted in the administration of the company.
7.216 There will be an obligation for company officers in receipt of such a notice to provide the information sought. Failure to do so without reasonable excuse will be an offence of strict liability.
7.217 Reasonable costs of preparing the report may be claimed and paid by the liquidator out of the property of the company as a priority debt.
7.218 Item 63 will insert a new section 446C into the Corporations Act. The section will apply in circumstances where a company resolves that it be wound up voluntarily while it is under administration or a DOCA. It is intended that a deemed resolution under subsection 446A(2) would also trigger the provision.
7.219 The general framework of the new section 446C is modelled on section 475 of the Corporations Act. Subsection 446C(2) will give a liquidator of a company in a voluntary liquidation that follows an administration or a DOCA the power to give a written notice to current or former officers of the company requiring information to be provided about the affairs of the company.
7.220 Subsection 446C(3) will provide that the information sought must be provided within 14 days of the officer receiving the notice. However, the officer may apply in writing for an extension and, if there are special reasons for doing so, a liquidator may allow a longer period (subsections 446C(4) and 446(5)).
7.221 Unless the officer has a reasonable excuse for failing to comply with a notice (subsection 446C(9)), failure to provide the information within the time period will constitute an offence, which is declared under subsection 446C(10) to be an offence of strict liability. The new offence provision is comparable with other offence provisions in the Corporations Act relating to similar subject matter. For example, sections 448C, 448D and 471A are offences of strict liability that attract the same maximum penalty. Item 71 will insert into Schedule 3 a penalty for the breach of subsection 446C(3) of 25 penalty units or imprisonment for six months, or both.
7.222 Subsection 446C(8) will allow the person in receipt of the notice to claim from the liquidator reasonable expenses for preparing the report, which will be paid out of the property of the company. Item 66 will provide for such expenses to have a priority in the liquidation under a new paragraph 556(1)(da).
Priority for costs of making a winding up application
7.223 The costs of making an application for a winding up order are generally afforded priority in a liquidation. A decision of the New South Wales Supreme Court,
McDonald v Deputy Commissioner of Taxation
(2005)
23 ACLC 324
, has indicated that the costs of an application for a winding up order will not receive priority where an application for a winding up order is made, but prior to court approval of the winding up the company is put into voluntary administration and then into liquidation through the route of voluntary administration rather than as a result of the application. The circumstance that the court considered in that case is not uncommon.
7.224 To encourage members of the public to make applications for the winding up of insolvent companies, it is desirable for the costs of a winding up application which is not withdrawn or dismissed before the company enters administration to be recoverable as a priority in a subsequent liquidation, even if the liquidation was an outcome of the voluntary administration process rather than as a direct result of the application.
7.225 The costs of making an application for a winding up order against a company will receive priority where the company is later liquidated in a creditors' voluntary winding up initiated through the voluntary administration procedure. This may occur if creditors resolve that the company be wound up under paragraph 439C(c) of the Corporations Act and a deemed voluntary winding up occurs through the operation of subsection 446A(2) of the Corporations Act or if the company goes into liquidation following a DOCA. This may arise in the circumstances set out in paragraphs 445C(a), (b) or (c) because of the operation of subsection 446A(2) of the Corporations Act.
7.226 New paragraph 556(1)(ba) of the Corporations Act will have the result that the costs of making an application for a winding up order attract priority under that paragraph, where the company is placed into voluntary administration after the filing of a winding up application and liquidated under Part 5.5 through the operation of subsection 446A(2).
7.227 Item 65 will insert a new paragraph 556(1)(ba). Paragraph 556(1)(ba) will give priority to the costs of a winding up application where the application was made under section 459P during the 12 months ending when the winding up that has come about through the operation of the voluntary administration procedure commenced, the application has not been withdrawn or dismissed and the Court did not make an order under section 459A that the company be wound up in insolvency.