Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)4 - Improving outcomes for creditors
Part 1 - Enhancing protection of employee entitlements
Mandating the priority debt ranking in deeds of company arrangement
4.1 It is implicit in the current law that the priority provided for in a liquidation under section 556 will generally be observed in a deed of company arrangement (DOCA). The law provides a model deed which expressly preserves, in a DOCA, the priority applicable in a winding up (Clause 4, Schedule 8A, Corporations Regulations 2001 (the Corporations Regulations)).
4.2 The provisions of the model deed may be displaced by the meeting of creditors. To address the possibility that some creditors may be unfairly treated at the meeting of creditors the law allows creditors who consider a particular deed is oppressive or unfairly prejudicial or discriminatory to initiate proceedings in the Supreme Court or the Federal Court to have the deed overturned. However, it may be difficult for employees to use this mechanism, because each employee may be owed a small amount relative to the costs of court action. While the employees may pool their resources and act together, this has its own costs and incentive problems.
4.3 To enhance the standing of employee creditors in voluntary administrations, the Bill will amend the law to make it mandatory for a DOCA to preserve the priority available to employee creditors in a winding up unless employees agree to waive their priority. Interested persons, employee creditors or the administrator will have the right to initiate court proceedings to have the deed amended to modify the priority of employee entitlements, but only if those entitlements are protected.
4.4 The effect of this change will be that the burden of challenging a DOCA that does not observe the priorities for employee entitlements will be borne by those best placed to bear the costs and assess the merits of any court action. This is consistent with recommendation 49 of the 2004 Parliamentary Joint Committee on Corporations and Financial Services (PJC) Report Corporate Insolvency Laws: A Stocktake (the PJC Report).
4.5 A provision will require all DOCAs to apply the priority afforded to unsecured debts under paragraph 556(1)(e), (g) or (h), section 560 and section 561 of the Corporations Act 2001 (Corporations Act) unless a meeting of employee creditors (to be termed 'eligible employee creditors') agrees to vary that priority. Other provisions of the model DOCA will continue to be able to be displaced.
4.6 If an administrator proposes to put to creditors a DOCA that does not observe the priority, the administrator will first need to seek the agreement of the employees.
4.7 Specifically, the administrator will need to secure the agreement of a majority (by number and value) at a meeting of eligible employee creditors prior to proposing a formal DOCA and conduct a vote on whether the deed should be executed at the section 439A meeting (the major meeting of creditors in a voluntary administration).
4.8 If the consent to a modification of the employee priority is not obtained, administrators and other interested persons will have a right to seek an order from the Court to have the deed amended to allow for such a modification. This is consistent with the current regime in relation to the amendment or alteration of DOCAs. The Court will be empowered to uphold the modified deed if, in the Court's view, it offers eligible employee creditors the same or a better outcome than they would receive in a winding up.
4.9 Item 1 of Schedule 1 will introduce a new term ' eligible employee creditor', which defines those creditors who will vote on a proposal to modify the priority of employee entitlements. They are creditors whose debt or claim would, in a winding up of the company, be payable in priority to other unsecured debts and claims in accordance with paragraph 556(1)(e), (g) or (h) or section 560 or 561 of the Corporations Act.
4.10 Item 4 will insert new section 444DA of the Corporations Act that will mandate the priority of employee entitlements in a DOCA. Specifically, subsection 444DA(1) will require all DOCAs to include a provision to the effect that the assets of the company will be applied such that any eligible employee creditors is entitled to a priority at least equal to what they would have been entitled to under the priority set out in sections 556, 560 and 561.
4.11 New subsection 444DA(2) will provide that the rule requiring the DOCA to apply the priority set out in sections 556, 560 and 561 will not apply if, by resolution, eligible employee creditors consent to the non-inclusion of such a provision at a meeting which is held before the section 439A meeting. Subsection 444DA(3) will require the administrator to convene the meeting by giving written notice of the meeting to as many of the company's eligible employee creditors as reasonably practicable at least five business days before the meeting. Subsection 444DA(4) states that the notice is to be accompanied by a statement setting out the administrator's opinion about whether it would be in the eligible employee creditors' interests to not include the provision in subsection 444DA(1) in the DOCA, his/her reasons for that opinion and other information that will enable the employee creditors to make an informed decision.
4.12 New subsection 444DA(5) will provide that the Court may approve an alteration of the employee priorities in a deed, if the Court is satisfied the alteration is likely to result in the same or a better outcome for eligible employee creditors than would result from an immediate winding up of the company. Subsection 444DA(6) states that an application seeking an alteration of the employee priorities may be made by the administrator of the deed, any eligible employee creditor or any interested person. Subsection 444DA(7) states that the Court may make an order before or after the section 439A meeting.
4.13 Item 10 will amend paragraph 1364(2)(f) of the Corporations Act to allow the regulations to make provision for meetings of eligible employee creditors.
Treatment of the superannuation guarantee charge under the Corporations Act in external administration
4.14 Section 52 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) determines the priority of the superannuation guarantee charge (SGC) in a liquidation. It does not address the priority of the SGC in a receivership, voluntary administration or a DOCA.
4.15 Section 52 of the SGAA provides that in a winding up of a company, any SGC payable is to have a priority equal to that of a debt of the kind referred to in paragraph 556(1)(e) of the Corporations Act. Judicial consideration of this provision has determined that it does not confer the same priority status on the SGC as superannuation contributions enjoy under paragraph 556(1)(e) - section 52 of the SGAA merely directs observance of paragraph 556(1)(e) of the Corporations Act. [1]
4.16 It has been held that superannuation contributions and the SGC amounts are separate and distinct debts for the purposes of section 556 of the Corporations Act. [2] This is because the two debts do not have the same character. Paragraph 556(1)(e) of the Corporations Act gives a priority to 'superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date'. Subsection 556(2) of the Corporations Act defines 'superannuation contribution' as: 'a contribution by the company to a fund for the purposes of making provision for, or obtaining superannuation benefits for an employee of the company...'.
4.17 The SGC is a statutory tax liability owed to the Commonwealth. The SGC is not paid in respect of services rendered or paid to a fund. It does not arise as a result of a contractual obligation. As a consequence it does not fall within the term 'superannuation contribution'.
4.18 The superannuation guarantee system is the means of ensuring compliance with superannuation obligations for the benefit of employees. Every sum paid or recovered as an SGC is referable to a failure by an employer to meet the criteria with respect to making superannuation contributions for the benefit of employees. From a policy perspective, it is important that the SGC receive the same priority as superannuation contributions.
4.19 Recommendation 46 of the PJC Report stated that the Government should clarify how the SGC is intended to operate in relation to employers in external administration.
4.20 The first step to clarifying the treatment of the SGC in external administrations is to remove section 52 of the SGAA, which currently provides for priority in a winding up. This is necessary to avoid statutory duplication.
4.21 To ensure that 'superannuation contributions' and the SGC attract the same priority, section 556 of the Corporations Act will recognise the concept of the SGC, and include the SGC in paragraph 556(1)(e) along with superannuation contributions.
4.22 This amendment will apply to liquidation, and will also flow through to DOCAs as the subsection 556(e), (g) or (h) priority is to be mandated for DOCAs. Where a receivership precedes a liquidation, subsection 433(3) of the Corporations Act will ensure the SGC is dealt with in the same manner as in a liquidation.
4.23 Item 11 of Schedule 1 will repeal section 52 of the SGAA. Item 14 is an application provision that provides for the commencement of the repeal of section 52 of the SGAA.
4.24 Item 6 will ensure that the SGC is treated in the same manner as other debts in paragraph 556(1)(e) of the Corporations Act, ranking these debts equally with wages and superannuation contributions. Item 2 will provide that 'superannuation guarantee charge' has the same meaning as in the SGAA. Item 3 will provide that 'superannuation guarantee shortfall' has the same meaning as in the SGAA.
4.25 Item 7 will overcome the limiting effect of the wording of paragraph 556(1)(e) of the Corporations Act 'in respect of services rendered to the company by employees before the relevant date' by deeming the SGC to be a debt payable by the company in respect of services rendered in the quarter to which the corresponding shortfall relates (notwithstanding that the charge is payable to the Commonwealth).
Timing issues and priority for superannuation guarantee charge
4.26 When a company fails to make the required superannuation contributions by the due date, the SGC is incurred. If the SGC arises in respect of unpaid entitlements accruing after the date of appointment, there has been some uncertainty for practitioners as to whether the SGC should be afforded a priority in line with either:
- •
- other employee entitlements under paragraph 556(1)(e) of the Corporations Act; or
- •
- other post-appointment debts, such as expenses of the administration which are afforded a higher priority) under paragraph 556(1)(a) of the Corporations Act.
4.27 Notwithstanding that the SGC is a new debt distinct from unpaid superannuation, the SGC represents the economic equivalent of the unpaid superannuation amount and is imposed to ensure it is ultimately remitted to the employee. The nominal interest component reflects the period of late payment and is intended to represent any possible gains the contribution would have made in that time, had the money been in the control of the complying superannuation fund. The administration component represents the cost of administering the superannuation guarantee scheme, and is retained by the Australian Taxation Office (ATO).
4.28 Amendments will address the situation where SGC amounts are attributable to periods wholly before or wholly after the relevant date or the relevant date divides a quarter (which begins on 1 January, 1 April, 1 July or 1 October). The term 'attributable' relates to the period in which the employment services were provided to the company by the employee.
4.29 The amount of SGC attributable to the period occurring before the relevant date will be taken for the purposes of section 556 of the Corporations Act to be an amount referred to in paragraph 556(1)(e). The amount of SGC attributable to the period occurring after the relevant date will be treated as a cost of the winding up and taken for the purposes of section 556 of the Corporations Act to be an amount referred to in paragraph 556(1)(a).
4.30 This reform is consistent with recommendation 46 of the PJC Report, which stated that the Government should clarify how the SGC is intended to operate in relation to employers in external administration.
4.31 Item 7 will insert new subsections 556(1AB), 556(1AC), 556(1AD), 556(1AE) and 556(1AF) in the Corporations Act. New subsection 556(1AB) will address the situation where SGC amounts are attributable to a quarter that is wholly before the relevant date. New subsection 556(1AC) will address the situation where the relevant date divides the quarter. New subsection 556(1AD) will address the situation where the relevant date coincides with the first day of the quarter.
4.32 Where SGC amounts are attributable to a quarter which is wholly before the relevant date the SGC will be taken to be an amount within paragraph 556(1)(e) under new subsection 556(1AB). Where the relevant date divides the quarter, for the purposes of section 556 of the Corporations Act, the amount of SGC attributable to the period before the relevant date will be taken to be an amount referred to in paragraph 556(1)(e) and the amount of SGC attributable to the period after the relevant date will be taken to be an amount referred to in paragraph 556(1)(a) under new subsection 556(1AC). Where the relevant date coincides with the first day of the quarter the amount of SGC attributable to the quarter will be taken to be an amount referred to in paragraph 556(1)(a) under new subsection 556(1AD).
4.33 To avoid any doubt, the new provisions will explicitly address the situation where wages are paid after the commencement date, in relation to employment services provided prior to the commencement date, following an advance provided for that purpose (for example, under the General Employee Entitlements and Redundancy Scheme scheme). Such payments may give rise to a new liability under the SGAA, arising after the commencement date. Notwithstanding that the SGC liability arises after the commencement date in relation to a payment of wages made after the commencement date, new subsections 556(1AE) and 556(1AF) clarify that, where the SGC is attributable to wages for pre-insolvency services, the SGC charge falls within sec 556(1)(e). Otherwise the SGC is taken to be an expense under paragraph 556(1)(a).
4.34 Item 8 provides that the term 'quarter', when used in section 556 of the Corporations Act, has the same meaning as under the SGAA.
Superannuation guarantee charge and excluded employees
4.35 Under subsection 556(1A) of the Corporations Act there is a $2,000 limit on the amount that can be paid to excluded employees as a priority in respect of wages and superannuation. Excluded employees is defined in subsection 556(2) to include directors, their spouses (including de facto spouses) and relatives.
4.36 It has been a long standing policy of insolvency law that priority is not afforded to debts or claims in respect of directors and their relatives. The balance of any debts payable to excluded employees falls for consideration as an ordinary unsecured debt in a liquidation.
4.37 The limitation applicable in the case of excluded employees does not apply in relation to outstanding SGC amounts. [3] This has the potential to reduce the payments to ordinary employees as the amounts available to them as a priority debt may be reduced because of the inclusion, as a priority debt, of outstanding SGC amounts payable to directors.
4.38 An individual superannuation guarantee shortfall must be calculated as 9 per cent of an employee's salary or wages. The maximum amount of salary or wages which can be used in calculating an individual superannuation guarantee shortfall is equal to the maximum contribution base ($33,720 a quarter in 2005-06).
4.39 As a result of other amendments in this Bill (see 'Treatment of the superannuation guarantee charge under the Corporations Act' above), the SGC will be explicitly provided for in section 556 and aligned with the treatment of superannuation contributions under paragraph 556(1)(e). As a result of this change, subsection 556(1A) of the Corporations Act will apply the $2,000 limit to the SGC as well as to wages and superannuation contributions.
4.40 Section 64B of the SGAA sets out a formula which directs that any payment, including dividend payments, received must be allocated amongst all employees on a pro-rata basis. It does not permit the Commissioner of Taxation (the Commissioner) to allocate shares to employees to take account of special circumstances such as the limit that applies in the case of excluded employees under subsection 556(1A) of the Corporations Act or paragraph 109(1)(e) of the Bankruptcy Act 1966 (Bankruptcy Act) in respect of an employee. The Bill will address this issue, by introducing a new discretion for the Commissioner to make adjustments of this nature.
4.41 This reform is consistent with recommendation 46 of the PJC Report, which stated that the law should be amended to clarify how the SGC is intended to operate in relation to employers in external administration.
4.42 Item 13 will amend section 64B of the SGAA to allow the Commissioner to vary an employee's proportion where the amount of the payment is affected by the application of section 556(1A) of the Corporations Act or paragraph 109(1)(e) of the Bankruptcy Act in respect of an employee. Item 12 will make a consequential amendment.
4.43 Item 15 is an application provision providing for the commencement of new subsection 64B(3A) of the SGAA.
Superannuation guarantee charge and double payments
4.44 Where an insolvent company has not made required superannuation contributions, or has done so but late, the ATO, affected creditors and complying superannuation funds may look to prove as creditors in any subsequent insolvent administration. This gives rise to the possibility that two proofs will be admitted in respect of what is (in an economic sense) the same debt.
4.45 If an employee or a superannuation fund has a contractual entitlement to superannuation contributions, there are two types of double payment concerns in a liquidation context:
- •
- Superannuation contributions are paid late giving rise to an SGC. Whilst the employees or superannuation fund have no unpaid debt to prove for, they will effectively receive a double payment if the SG charge is consequently paid to the ATO by the liquidator and the ATO remits monies to their complying fund.
- •
- Superannuation contributions are unpaid and an SGC accrues. Both the ATO and the affected employees and superannuation funds prove for the outstanding SGC and unpaid superannuation respectively. As the debts are legally distinct, the rule against double proofs does not apply and a liquidator is obliged to admit all proofs. [4]
4.46 Amendments to the SGAA announced in the 2005-06 Budget and contained in the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005 will resolve the first issue:
- •
- The SGAA now allows for the offsetting of a late payment of contributions against an employer's SGC.
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- Under the offsetting rule, employers that make a late payment to a complying superannuation fund or retirement savings account within one month after the due date (which is 28 days from the end of the relevant quarter) can offset the late payment against the components of the SGC liability that relate to the employee's entitlements.
- •
- Where such a late payment occurs, the SGC will arise but the components of the SGC which relate to employee entitlements are able to be offset to the extent of the amount of the late payment. The employee related entitlements of the SGC are the shortfall and nominal interest components.
4.47 In relation to the second scenario however, with the amendments aligning the treatment of superannuation contributions with the SGC, the ATO, employees and superannuation funds will be entitled to participate in any available dividends payable in respect of each of their proofs.
4.48 In order to resolve this anomaly, external administrators will be required to reject a proof of debt when this scenario arises. It is preferable that the ATO's proof for the SGC be accepted rather than the affected employees' or superannuation fund's proof because the SGC includes the interest component and will ultimately give affected employees a greater benefit.
4.49 Section 553 of the Corporations Act provides for the admission to proof of debts and claims in a winding up. It will be amended to require the liquidator to refuse a proof of debt for a superannuation contribution that results in a SGC.
4.50 In the case of a voluntary administration and a DOCA, proofs of debt are required to determine creditors' eligibility to vote at the meetings of creditors. Administrators are guided by regulations 5.6.23 and 5.6.26 of the Corporations Regulations in this respect.
4.51 This reform is consistent with recommendation 46 of the PJC Report, which stated that the Government should clarify how the SGC is intended to operate in relation to employers in external administration.
4.52 Item 5 will insert new section 553AB of the Corporations Act. New section 553AB will require the liquidator to reject the whole, or a specified part of, a debt by way of a superannuation contribution where an SGC is attributable to the whole or part of that debt.
4.53 Item 4 will insert new section 444DB of the Corporations Act which will impose a similar requirement on deed administrators by prescribing it as a matter to be specified in a deed.
Clarification of the rights of subrogated creditors
4.54 A 'subrogated creditor' is a person who is entitled to be substituted for another creditor in a liquidation because they have advanced funds to meet a particular creditor's debt. As a general rule, a subrogated creditor is treated as a substitute for the original creditor, retaining all their rights.
4.55 An example is the right of the Commonwealth to stand in the shoes of employee creditors after the Commonwealth has paid out the entitlements of those employee creditors under GEERS. Banks may also advance funds to enable the payment of particular debts.
4.56 Under section 560 of the Corporations Act, where the company has paid wages, salary, superannuation contributions, money due for the various types of leave or a retrenchment payments using money advanced for that purpose by some other person, that creditor is entitled to the same priority in respect of that money as the recipient would have been entitled to if the payment had not been made.
4.57 A number of issues have been identified in relation to the rights of subrogated creditors.
4.58 First, it is unclear whether section 560 of the Corporations Act can apply to advances made after the relevant date. This issue has been recently highlighted as a consequence of the Commonwealth advancing funds through GEERS after a winding up begins or is taken to have begun. External administrators in practice have accepted advances from the Commonwealth under GEERS after the relevant date as advances for the purpose of section 560.
4.59 Second, it is unclear whether a subrogated creditor in a receivership or a voluntary administration retains their rights as a creditor when that administration moves into liquidation. The effect of this is that whilst the subrogated creditor enjoys the same priority as the creditor to whom it has advanced funds, they may not have the standing of that creditor, or enjoy the same rights (subrogated creditors enjoy rights as an 'interested person' in some cases). The rights of subrogated creditors should be consistent across the different forms of external administration. Subrogated creditors should retain the rights of the original creditors.
4.60 Third, as currently worded, section 560 of the Corporations Act may permit voting rights associated with a single debt to be split among two or more persons. This may allow the outcome of creditors meetings to be manipulated.
4.61 Fourth, it is necessary to clarify the rights of a subrogated creditor in a DOCA. The Bill will make it mandatory for a DOCA to preserve the priority available to eligible employee creditors in a winding up under section 556 of the Corporations Act unless eligible employee creditors agree to waive their priority. In relation to subrogated creditors, a Court has ruled that a DOCA that imports the section 556 system of ranking will not without more import the statutory right conferred by section 560 on persons who advance money for the payment of priority claimants. [5]
4.62 Finally, it is necessary to address an issue highlighted in the decision in Capt'n Snooze Management Pty Ltd v McLellan [ 2002 ] VSC 432 (Capt'n Snooze ), in particular the inclusion of the words 'out of' in section 560. In Capt'n Snooze , Hansen J interpreted the requirement that a payment must be made 'out of' monies advanced such that where the account from which the payments are made is in debit, or where the amounts advanced are 'mingled' with other monies, the operation of section 560 would not be attracted.
4.63 The decision in Capt'n Snooze may affect a subrogated creditor's right of repayment of advances under section 560 of the Corporations Act. One way to address this issue would be for liquidators to establish a separate account, and use that separate account for the receipt and distribution of section 560 advances. However, the opening of separate accounts, and their administration, imposes an expense on liquidators. To avoid this expense, an amendment to section 560 will overcome the problem that has arisen from the decision in Capt'n Snooze . Specifically, section 560 will be amended to avoid the need for making an advance into a separate bank account.
4.64 These various concerns have been highlighted in the context of the administration of GEERS, where the Commonwealth's right to 'stand in the shoes' of employee creditors after those employees have had their entitlements paid out under the GEERS scheme is critical for the operation of the scheme.
4.65 Amendments to section 560 of the Corporations Act will clarify the section may apply to advances that are made before, on or after the relevant date. The law will be amended to ensure subrogated creditors have the same rights as the original creditors would have had under Chapter 5 of the Corporations Act if the advance had not been made. Persons making advances may not split voting rights associated with a single debt among two or more persons. The law will be amended to ensure that a DOCA mandating the priority available to eligible employee creditors also extends to the statutory rights under section 560.
4.66 Item 9 will replace section 560 of the Corporations Act with a new provision. New subsection 560(b) will clarify that the new section 560 applies to advances that are made before, on or after the relevant date. The new subsection 560(c) will make it clear that the person by whom the money was advanced has the same rights under Chapter 5 as a creditor of the company. The reference in section 560 to 'a payment made out of money advanced by a person' will be replaced in new subsection 560(b) with 'the payment was made as a result of an advance of money by a person'.
4.67 Item 4 will add new subsection 444DA(1), which will mandate the priority of employee entitlements including priorities conferred under sections 560 and 561 (except where the employees agree to waive the priority or the Court makes an order).
Part 2 - Better informing creditor decisions
Administrators and liquidators to make available declarations of relevant relationships and indemnities
4.68 Under common law, administrators have a duty to avoid placing themselves in a position where they may be subject to a conflict of interest or a conflict of duty. Further, section 448C of the Corporations Act identifies a number of circumstances in which a person must not seek or consent to appointment as an administrator. Notwithstanding the requirements under common law and statute, concerns have been raised about the independence of administrators.
4.69 For example, there may be a perception of a lack of independence where the administrator earlier acted as an adviser to the appointing board of directors, particularly where the administrator is subsequently required to consider the possibility of offences, negligence or breaches of duty or trust by the current and former directors.
4.70 Recommendation 1 of the PJC Report and recommendation 36 of the 1998 Corporations and Markets Advisory Committee Report Corporate Voluntary Administration ('CAMAC Report (1998)') both stated the Government should consider introducing new disclosure requirements to address concerns about the independence of administrators.
4.71 It is proposed to address the concerns about the independence of administrators by requiring administrators to declare any 'relevant relationships' and declare any indemnities that have been provided. These declarations will allow creditors to make a more informed decision about whether to replace the administrator.
4.72 The declarations will be provided to creditors with the notice of the first meeting of creditors. The categories of relationship that an administrator is required to declare are targeted around those parties that have the power to initially appoint an administrator. While conflicts may arise due to relationships with other parties, it considered that a relationship with these parties would pose a particular concern for creditors, and as such the administrator should be required to disclose them and explain why they do not amount to a conflict of interest or duty. While a conflict may not arise at law, the existence of such a relationship may be one factor for creditors to take into account when considering whether to replace the administrator. A key theme of the reforms in this Bill is to provide creditors with better information and more power to manage external administration processes.
4.73 The question of whether a 'relevant relationship' exists between an administrator and another person will be a matter of fact and degree. However, the term should be interpreted in light of the object of the provision to alert the creditors to relationships that may not give rise to a conflict, but which may be relevant in considering whether to replace the administrator. This would include relationships where a conflict might be perceived to exist in the absence of full disclosure. It does not require the disclosure of trivial interpersonal connections.
4.74 To maximise the usefulness of the declarations to creditors (including creditors who may be unfamiliar with insolvency proceedings) the declarations should be expressed in simple language. They should be no more than two pages in length.
4.75 Including a relationship in a declaration will in no way 'cure' any conflict of interest or conflict of duties that may arise out of that relationship, even if creditors approve the appointment after the declaration is made.
4.76 In light of the changes to the process for commencing creditors' voluntary liquidation, included at Part 3 of Schedule 1 of this Bill, stakeholders have raised concerns that similar concerns about the independence of liquidators may arise in relation to that proceeding. Accordingly, the requirement to disclose relevant relationships has been extended to liquidators in a creditors' voluntary liquidation. The requirement to disclose indemnities has not been extended to liquidators, given the different nature of that proceeding.
4.77 Item 18 will insert a definition of 'firm' in relation to an administrator or liquidator.
4.78 Item 16 will add a definition of a 'declaration of indemnities' to section 9 of the Corporations Act.
4.79 Items 17 and 19 will add a definition of a 'declaration of relevant relationships' to section 9 of the Corporations Act.
4.80 Item 21 will provide for a declaration of indemnities and relevant relationships to be supplied by an administrator appointed under sections 436A, 436B or 436C of the Corporations Act. The declaration must list any relationships falling within the definition of a 'declaration of relevant relationships' and must state why any of these relationships do not result in the administrator having a conflict of interest or duty. The declaration must be provided to as many creditors as is reasonably possible, at the same time as the administrator gives those creditors notice of the first meeting. The administrator must also table a copy of the declaration at the meeting. Failure to comply with these requirements will be an offence, punishable by a fine of 5 penalty units. In a prosecution for an offence to include a particular matter in a declaration under this section, it is a defence if the defendant proves that they made reasonable enquires and after those enquires had no reasonable grounds for believing the matter should be included in the declaration.
4.81 Item 24 will provide for a declaration of indemnities and relevant relationships to be supplied by a replacement administrator, appointed under subsection 449C(1) of the Corporations Act, and circulated with the notice of meeting required under subsection 449C(5) of the Corporations Act. The declaration requirements will not apply if the replacement administrator is appointed by creditors or by the Court, as there is a reduced prospect for a conflict with the directors, substantial chargee or previous liquidator in these circumstances. The provisions will otherwise operate in a similar manner to those discussed at paragraph 4.80 above.
4.82 Item 36 will provide for a declaration of relevant relationships to be made by a liquidator in a creditors' voluntary liquidation, and provided to creditors along with the notice of meeting under section 497 of the Corporations Act. Again, the new provision will operate in a similar manner to those discussed at paragraph 4.80 above.
ASIC's power to seek court review of remuneration
4.83 The remuneration of administrators and deed administrators is typically fixed by creditors of a company pursuant to paragraph 449E(1)(a) of the Corporations Act. Subsection 449E(2) of the Corporations Act lists parties that may apply to the court for a review of remuneration. Included in the list are officers, members and creditors of the company. The Australian Securities and Investments Commission (ASIC) is not included in this list. In the case of
Korda in the Matter of Stockford Limited (Subject to Deed of Company Arrangement
)
[2004] FCA 1682
(
Stockford
) [at para 4] the court commented that the lack of standing for ASIC to apply for review by the court 'is a surprising gap'.
4.84 The Bill will amend subsection 449E(2) of the Corporations Act to include ASIC as a party who may apply to the court for a review of the remuneration of administrators and deed administrators.
4.85 This proposal is consistent with recommendation 23 of the PJC Report.
4.86 Item 27 will amend the Corporations Act to allow ASIC to apply to a court for a review of an administrator's remuneration.
Factors for consideration by a court in setting remuneration
4.87 In Stockford [at para 2] the court called for 'closer judicial scrutiny [of administrators] fees'. In order to allow a more effective role for the court in reviewing and setting remuneration for insolvency practitioners, the Bill will provide greater guidance to the court by identifying relevant factors for consideration in setting remuneration.
4.88 The Corporations Act will be amended to require a court to give consideration to a number of factors when setting or reviewing the remuneration of an insolvency practitioner.
4.89 Relevant factors that the court must consider in setting remuneration include:
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- the extent to which the work performed, or likely to be performed, by the insolvency practitioner was reasonably necessary, or is likely to be reasonably necessary;
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- the period during which the work was, or is or likely to be, performed by the insolvency practitioner;
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- the quality of the work performed, or likely to be performed, by the insolvency practitioner;
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- the complexity (or otherwise) of the work performed, or likely to be performed, by the insolvency practitioner;
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- the extent (if any) to which the insolvency practitioner was, or is likely to be, required to deal with extraordinary issues;
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- the extent (if any) to which the insolvency practitioner was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;
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- the value and nature of any property dealt with, or likely to be dealt with, by the insolvency practitioner;
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- whether the insolvency practitioner was, or is likely to be, required to deal with one or more administrators, liquidators, receivers, or receivers and managers;
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- the number, attributes and behaviour, or the likely number, attributes and behaviour, of the company's creditors;
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- if the remuneration is ascertained, in whole or in part, on a time basis:
- -
- the time properly taken, or likely to be properly taken, by the insolvency practitioner in performing the work; and
- -
- whether the total remuneration payable to the insolvency practitioner is capped;
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- any other relevant matters.
4.90 It is not intended that insolvency practitioners should be required to report against each one of these matters (or even a given subset of these matters) when seeking approval for remuneration from creditors or a committee of creditors. This would be unduly onerous, particularly for routine matters. The requirements relating to reports to creditors and committees of creditors are dealt with separately below, and intentionally allow significant flexibility in the matters that are addressed in particular remuneration reports.
4.91 Items 20, 28, 30 and 35 will amend sections 425, 449E, 473 and 504 of the Corporations Act to require a court to give consideration to the factors identified in paragraph 4.89 when setting or reviewing the remuneration of an insolvency practitioner. Item 34 effects a minor consequential amendment to support this change.
Information to be provided to creditors to allow remuneration to be assessed
4.92 In Stockford [at para 15] it was noted that a report by a leading insolvency practitioner '...provided no information which would enable the creditors to determine the reasonableness or otherwise of the proposed rates.' There is currently no legal requirement for insolvency practitioners to provide information that would allow such an assessment to be made.
4.93 The Bill will amend the Corporations Act such that an external administrator must provide sufficient information to enable the approving party to assess remuneration as reasonable, including a summary description of the major tasks and the costs associated with each of them. This requirement will apply where the approving party is a committee of inspection, a committee of creditors or a meeting of creditors. This requirement will apply where remuneration is being set under sections 449E and 473, 495 and 499 of the Corporations Act.
4.94 The requirements are expressed in general terms, as the matters that will need to be addressed and the amount of detail required to appropriately inform creditors will vary with the size and nature of the proceeding and the amount of remuneration sought. It is intended that the new requirements would provide practitioners with maximum flexibility and avoid the imposition of unwarranted costs (which ultimately are borne by creditors). To maximise the usefulness of the report to creditors (including creditors who may be unfamiliar with insolvency proceedings) the report should be expressed in simple language. It should be no more than two pages in length for routine matters.
4.95 It should not be taken that the creditors' report should address each of the matters that a court must consider in setting remuneration, or even a given subset of these matters. This would be unduly onerous and inflexible. Rather, the report should focus on explaining the main bases for the remuneration proposal, noting that further elucidation may be provided at the meeting of creditors or the meeting of the committee.
4.96 Item 28 will insert new subsection 449E(5) into the Corporations Act to require an administrator to prepare a report that will enable a committee of creditors to assess remuneration as reasonable. The item will also insert a new subsection 449E(6) into the Corporations Act to require an administrator to prepare a report that will enable a committee of inspection to assess remuneration as reasonable. The item will also insert a new subsection 449E(7) into the Corporations Act to require an administrator to prepare a report that will enable creditors to assess remuneration as reasonable.
4.97 Item 30 will insert new subsections 473(11) and 473(12) into the Corporations Act to require a liquidator prepare a report that will enable a committee of inspection, or the company's creditors, respectively, to assess remuneration as reasonable.
4.98 Item 31 will insert new subsection 495(5) into the Corporations Act to require a liquidator in a members' voluntary winding-up to prepare a report that will enable members to assess remuneration as reasonable.
4.99 Item 33 will insert new subsections 499(6) and 499(7) into the Corporations Act to require a liquidator in a creditors' voluntary winding up to prepare a report that will enable a committee of creditors, or creditors, respectively, to assess remuneration as reasonable.
Allow administrators to apply to seek approval from a court for remuneration if creditors have not met
4.100 Paragraph 449E(1)(b) of the Corporations Act states that the remuneration of an administrator of a company under administration or of a deed of company arrangement may be fixed by the court upon application by the administrator.
4.101 It was noted by Finkelstein J in the Stockford case that it is unclear whether an administrator is able to approach the court to have remuneration fixed under this section prior to a meeting of creditors occurring. Clarification of the section is desirable to ensure that administrators are able to approach the court to have remuneration fixed when creditors have not met. This is desirable as it may be the case that creditors are disinterested (especially where there are no assets available for distribution) and it is not possible to obtain a quorum of creditors in meeting to approve remuneration.
4.102 The Bill will make it clear that it is possible for an administrator to apply to a court for remuneration to be fixed when creditors have not met. It is anticipated that this would generally only be considered where an attempt to convene a meeting of creditors had been made but had failed to attract a quorum, however flexibility is provided to allow the court to deal with other extraordinary circumstances that may arise.
4.103 Item 25 will insert a new subsection 449E(1C) into the Corporations Act to specifically provide for an administrator to apply to a court to have remuneration approved when creditors, or a committee of creditors, have not met. It will also insert a new subsection 449E(1D), which will introduce a similar provision in relation to the remuneration of deed administrators.
Clarify the requirements for approval of administrator's remuneration
4.104 Paragraph 449E(1)(a) of the Corporations Act states that remuneration of an administrator or deed administrator may be fixed by a resolution of the company's creditors passed at a meeting convened under sections 439A or 445F of the Corporations Act.
4.105 Unlike other procedures, this does not anticipate approval of remuneration by a committee of creditors or a committee of inspection. Allowing for approval by a committee of creditors or a committee of inspection would streamline proceedings and reduce meeting costs, while still allowing creditors to monitor remuneration.
4.106 In the case of approving remuneration for a deed administrator, paragraph 449E(1)(a) of the Corporations Act does not make it clear whether one vote can be sufficient to approve a DOCA and approve remuneration.
4.107 A vote in favour of a DOCA should not be sufficient to be taken as approval of remuneration. It should not be possible to have a combined resolution that approves a DOCA and approves an administrator's remuneration.
4.108 The amendment makes it clear that remuneration of an administrator or deed administrator may be approved by a committee of inspection or a committee of creditors respectively, and that a separate and distinct resolution of creditors is required to approve remuneration of an administrator when a company enters into a deed of company arrangement.
4.109 Item 25 will replace subsection 449E(1) of the Corporations Act with new subsections 449E(1) and 449E(1A) which will clarify that a committee of creditors and a committee of inspection, in the case of a deed administration, may determine the remuneration to be received by the administrator or deed administrator. Alternatively, an administrator may seek to have remuneration approved by the creditors of the company or by a court.
4.110 Item 25 will also insert new subsection 449E(1B) to require a resolution dealing with remuneration to deal exclusively with that topic.
4.111 Item 26 is a consequential amendment to allow the Court to review the remuneration determined under subsection 449E(1) and (1A).
Allow a fixed amount of fees to be drawn down where a creditors meeting lacks quorum
4.112 Liquidators in a court-ordered liquidation are sometimes unable to obtain approval for remuneration as a result of creditors' meetings failing to attract a quorum of creditors. While court approval for remuneration may be sought, this may be impractical where only limited funds are available. This may restrict the extent to which an investigation into the circumstances of the company is conducted. Similar issues arise in relation to a creditors' voluntary winding-up.
4.113 The amendment will address this problem by allowing liquidators to draw down a maximum of $5,000 where a liquidator has called a meeting of creditors but failed to obtain approval for remuneration because of a lack of quorum.
4.114 Items 29 and 32 will insert new subsections 473(4A) and 499(3A) into the Corporations Act to provide for a liquidator drawing down a maximum of $5,000 where a creditors meeting fails to approve remuneration due to a lack of quorum.
Annual meeting in a creditors voluntary winding up
4.115 In a creditors' voluntary liquidation, a meeting of creditors and a meeting of the company must be held annually where the winding up continues for more than a year (paragraph 508(1)(b) of the Corporations Act). This requirement has been criticised. In relation to the meeting of members, it is said that the members have no economic interest in the conduct of the liquidation of an insolvent company. In relation to the meeting of creditors, it is said that the meetings are costly to hold and creditors often do not attend. Sometimes a quorum is not reached and the meeting has to be adjourned. These complaints suggest that the meetings of members and creditors do not add value to the external administration relative to the costs (for example advertising, meeting room hire, conduct of meeting, preparation and lodgement of minutes) of holding them.
4.116 Notwithstanding these concerns, it is important that those involved in the external administration of insolvent companies be required to keep the creditors informed of the progress of the administration. Meetings are an important part of the system of corporate regulation. It is desirable that meetings be held, and documents laid before those meetings for consultation and debate by stakeholders. However, other means of informing stakeholders of the progress of external administrations should also be available.
4.117 The Bill will remove the requirement to conduct annual meetings of members in a creditors' voluntary winding up. The requirement will be retained in a members' voluntary winding up, because members generally have an economic interest in these proceedings.
4.118 In relation to the annual meeting of creditors, the Bill will provide the liquidator with the choice of either calling an annual meeting of creditors or lodging with ASIC a report on the progress of the administration. Under this approach liquidators will not be required to incur the costs of convening a meeting which may fail due to a lack of quorum. They will retain the flexibility to hold a meeting if they consider it desirable (for example to seek to have the creditors fix their remuneration or to consider important issues affecting creditors). They will remain accountable to creditors through the requirement to prepare a progress report and notify creditors that the report is available free of charge.
4.119 Item 37 will amend paragraph 508(1)(b) of the Corporations Act to remove the requirement to hold an annual meeting of members. The amendment will also provide liquidator in a creditors' voluntary winding up with the choice of either convening a meeting of creditors (as currently required) or preparing and lodging with ASIC a progress report, within the specified time period.
4.120 Item 40 specifies what the progress report must contain. It must set out an account of the liquidator's acts and dealings and the conduct of the winding up during the preceding year, the tasks remaining to be done in the liquidation and an estimate of when the liquidation is expected to be completed. The liquidator will be required to notify creditors that the report has been prepared, and provide it to creditors on request free of charge.
4.121 Item 38 provides that the time period for the convening of the meeting or the lodgement of the report commences from the day on which the company resolved it be wound up voluntarily. This is intended to address concerns that arise where a lengthy administration precedes a winding up, and as such the liquidator is left with little time to meet their statutory obligations.
4.122 Item 39 is a consequential amendment, reflecting a restructuring of subsection 508(1) of the Corporations Act to reflect the above amendments.
Part 3 - Streamlining external administration
4.123 The Corporations Act currently requires that various notices, documents and other forms of communication, sent by an external administrator of a company to creditors of the company or ASIC, must also be published in a national newspaper or in a newspaper that circulates in each State or Territory in which the company has an office or carries on business.
4.124 The publication requirement can impose a significant cost on an external administration, and as such should be limited to circumstances where that cost is warranted. For example, where a proceeding is in its late stages, and the creditors of the company have largely been identified, there may be little justification for requiring communications with creditors to also be published.
4.125 It is also noted that an alternate form of public notice is provided through the Company Alert System administered by ASIC. Credit managers can use Company Alerts to monitor their loan or credit portfolio, and respond to changes in the status of a company as they arise.
4.126 Recommendation 19 of the PJC Report stated that the Government should consider alternatives to the current advertising and gazettal requirements for external administrations.
4.127 The Bill will remove the requirement to publish notices in newspapers, except where there is a strong policy rationale for such publication. For example, the requirement to publish notices in newspapers will be retained in circumstances where creditors and the public have not been alerted about important facts, such as the commencement of an insolvency proceeding, or where there is a need for notifying the broader community of an event. The Bill will also allow for related notices to be published together, to reduce costs.
4.128 Item 58 will remove the requirement in subsection 421A(3) of the Corporations Act for a managing controller to advertise that a report about a corporations affairs has been prepared and lodged with ASIC.
4.129 Item 69 will insert a new subsection 436E(3A) of the Corporations Act that will permit the notice of the first meeting of creditors in a voluntary administration required under subsection 436E(3) of the Corporations Act to be combined with notice of appointment of an administrator required under paragraph 450A(1)(b) of the Corporations Act. Item 78 will insert a complementary provision 450A(1A) of the Corporations Act.
4.130 Item 75 will remove the current requirement in paragraph 445F(2)(b) of the Corporations Act, which provides that the notice of a meeting of creditors must be published in a national newspaper or in a daily newspaper that circulates in each State or Territory in which the company has a registered office or carries on business.
4.131 Item 76 will amend subsection 445F(3) of the Corporations Act to reflect the amendments in Item 69, omitting the reference to 'paragraph (2)(a)' and substituting reference to 'subsection 2'.
4.132 Item 80 will repeal paragraph 450B(b) of the Corporations Act which requires that, as soon as practicable after a deed of company arrangement is executed, the deed's administrator must publish a notice of execution of the deed in a national newspaper or in a daily newspaper that circulates in each State or Territory in which the company has a registered office or carries on business.
4.133 Item 82 will remove the requirement in paragraph 450C(b) of the Corporations Act for a deed administrator to publish a notice in the prescribed form that a company has failed to execute a deed of company arrangement within the required period.
4.134 Item 85 will repeal paragraph 450D(c) of the Corporations Act which requires that, where a deed of company arrangement terminates because of paragraph 445C(b) of the Corporations Act, the deed's administrator must publish a notice of termination as prescribed. This will have the effect of removing the requirement (see regulation 5.3A.09 of the Corporations Regulations) to publish a notice of termination in a national newspaper or in a daily newspaper that circulates in each State or Territory in which the company has a registered office or carries on business.
4.135 Item 84 will delete 'and' from paragraph 450D(b) of the Corporations Act to reflect the amendment in item 85.
4.136 Subsection 249J of the Corporations Act facilitates electronic distribution of notices of meetings of members. However, there is no equivalent facility for electronic distributions of a number of notices that external administrators are required to send to creditors. An external administrator that wished to use electronic means to distribute notices would ordinarily need to seek the court's approval to do so.
4.137 Recommendation 20 of the PJC Report stated that the Government should consider making technology and e-commerce options more widely available to enhance communication with stakeholders in external administrations and reduce the costs of external administrations.
4.138 The Bill will introduce a facility similar to section 249J of the Corporations Act in order to allow external administrators to send notices electronically, provided certain conditions are met.
4.139 A provision similar to section 249J of the Corporations Act, new section 600G of the Corporations Act, sets out the framework for electronic communication of various notices and documents in relation to external administration. Section 600G permits various modes of electronic communication:
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- giving or sending the document to an electronic address or facsimile;
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- this mode would allow, for example, sending a document by attaching it to an electronic mail message;
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- giving or sending the document by other electronic means;
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- this mode would allow sending a document by some electronic means other than email; and
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- rather than sending the document, notifying the recipient that it is available for access by some electronic means;
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- this mode would allow, for example, the recipient to be notified by email that a document is available for viewing and/or download at an internet site .
4.140 Under all modes of electronic communication, it is a requirement that the recipient has first expressly nominated that particular mode for the purposes of receiving such notices and provided the person sending the document (the 'notifier') with the relevant electronic address details. It is envisaged that, in most cases, external administrators seeking to utilise the facility would seek the nominations of creditors for a particular electronic communication mode early in the external administration procedure, so that after the nomination has been made, the external administration could communicate with the creditor through that electronic means throughout the remainder of the proceeding. A key reason why this option may be attractive for creditors is that the speed of electronic communication will improve opportunities for creditor participation in the proceeding, and maximise the time available for making potentially complex decisions.
4.141 New section 600G of the Corporations Act lists the provisions of the Corporations Act to which the electronic communication facility will apply. Notes will be added to the relevant provisions to flag that the electronic communication facility is available. The amendments are not intended to limit the methods by which notices can be given, sent or lodged under other provisions of the Corporations Act.
4.142 Item 120 will insert a new section 600G of the Corporations Act that permits the sending of notices and other documents required or authorised under Chapter 5 of the Corporations Act through electronic means, provided certain conditions are met.
4.143 Subsection 600G(1) will identify the types of information that may be sent electronically under this new mechanism.
4.144 Subsection 600G(2) will allow notices or documents under the relevant provisions to be sent to an electronic address or facsimile number, if the recipient has nominated such an electronic address or facsimile number for the purpose of receiving such notices or documents. It is expected that external administrators would seek the nomination in a form that could be substantiated later in the event a dispute were to occur about its content.
4.145 Subsection 600G(3) is similar in form to 600G(2) except it deals with electronic means other than one that would involve an 'electronic address'. This provision will allow for the take up of future technologies that may permit electronic communication without using an 'electronic address' (such as an electronic mail address).
4.146 Subsection 600G(4) will provide that if a recipient nominates an electronic 'notification means' and also an electronic 'access means', the notifier may give or send the notice or document to the recipient by notifying the recipient (using the nominated notification means) that the notice or document is available and how the recipient may use the nominated access means to access the notice or document. Under this facility, external administrators would be able to distribute a notice by, for example, posting it to a website and advising the recipient that it is viable for viewing or downloading from that site. Recipients must first expressly nominate such a communication mode.
4.147 Subsections 600G(5) and (6) relates to the timing of the notices sent by electronic means and provides for a deemed giving or sending on the business day after it is either sent or the recipient is notified of its availability.
4.148 Subsection 600G(7) is intended to clarify that the electronic communication facilities under subsection (2), (3) and (4) do not limit any other modes of communication that may be available under the relevant provisions.
4.149 Items 40, 68, 73, 74, 75, 77, 79, 81, 83, 86, 90, 95, 101, 116, 118 and 119 will insert notes flagging the existence of the electronic communication facility in section 600G in the provisions to which it applies which are listed in subsection 600G(1). Similar notes have been added to many of the new notice provisions under the pooling arrangements in Schedule 4 of Part 1 of the Bill.
4.150 Item 89 will remove from subsection 473(4) of the Corporations Act (one of the provisions to which section 600G applies) the requirement to 'attach' documents to a notice, because the concept of attachment may not be applicable if electronic communication is utilised. The documents formerly required to be attached to the notice must still accompany the notice.
4.151 Item 100 will remove from paragraph 497(2)(a) of the Corporations Act (one of the provisions to which section 600G applies) the requirement for the notice to be sent 'by post' to recognise the possibility of electronic communication under section 600G.
Gazettal requirements for controllerships
4.152 The database maintained by ASIC provides the public with access to notices lodged in relation to controllerships. Section 427 of the Corporations Act requires the gazettal of certain matters related to controllerships in addition to notifying ASIC of the same matters. Gazettal is a significant expense for small controllerships.
4.153 The Review of Insolvency Practitioners recommended the repeal of provisions requiring gazettal of matters relating to controllerships. This would reduce the regulatory burden on controllers by limiting the notification requirements to lodgement of a notice with ASIC.
4.154 The Bill will repeal the requirement for gazettal of controllerships. The ASIC database will become the main source of information regarding controllerships.
4.155 Item 65 will repeal the subsections that require gazettal and notification of ASIC of matters related to controllerships and substitute provisions that require only the lodgement of notices with ASIC in relation to such matters.
4.156 Item 66 will repeal the subsection that requires both gazettal and notification of ASIC when a person ceases to act as a controller of property of a corporation. The substitute provision will require a notice to be lodged with ASIC when such an event occurs.
Limiting the requirement to maintain separate bank accounts to managing controllers
4.157 Section 421 of the Corporations Act requires all controllers to open and maintain a separate bank account for each controllership, and is designed to prevent the mingling of funds and make accounting for, and tracing of, the proceeds of the sale or profits from controllerships straight-forward and transparent. However, this requirement may be unduly onerous where a controllership is simple (for example, where a controller acquires rights over a single minor asset).
4.158 The Review of Insolvency Practitioners recommended that only managing controllers should be required to open a separate bank account when they receive money. The Review noted that 'the requirement to open a separate bank account is seen as burdensome and unnecessary' and indicated that the more complex controllerships are likely to be those where the controller is a managing controller.
4.159 The Bill will limit the requirement to maintain separate bank accounts to managing controllers. This change in no way inhibits the ability of a controller, who is not a managing controller, to maintain separate bank accounts should they wish to do so.
4.160 Items 53, 54, 55 and 56 will insert the word 'managing' before 'controller' wherever it occurs in subsection 421(1) of the Corporations Act. The intended effect of these amendments is to limit the requirement to maintain separate bank accounts to managing controllers.
4.161 Item 57 will insert the word 'managing' before 'controller' in subsection 421(2) of the Corporations Act such that the records kept by a managing controller under paragraph 421(1)(d) of the Corporations Act may be inspected by any director, creditor or member of a corporation.
4.162 The Review of Insolvency Practitioners noted that managing controllers are arguably in as good a position as receivers to discover misconduct in the course of their work and, if they do, they should be obliged to report the possible misconduct.
4.163 The requirement to report possible misconduct that is identified in the conduct of a proceeding will be extended to managing controllers.
4.164 Items 59, 60, 61, 62 and 63 will amend section 422 of the Corporations Act to require a managing controller to prepare a report and lodge that report with ASIC should they apprehend that an officer, member or employee of the corporation may be guilty of an offence in relation to the corporation.
4.165 Item 64 will expand the power of a court to allow it to require a report from a managing controller where it appears to the court that a past or present officer, employee or member of the corporation has been guilty of an offence under the Corporations Act.
Power to consent to a transfer of shares of the company
4.166 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).
4.167 Recommendation 37 of the CAMAC Report (1998) called for improved consistency in this area of the law.
4.168 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.
4.169 Under this approach, a liquidator will have the power to consent to a transfer of shares in a company in liquidation. The liquidator will need to be satisfied that it is in the best interests of creditors as a whole.
4.170 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 liquidator'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 liquidator having standing to be heard on any application.
4.171 Liquidators 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 alteration of class rights in Part 2F.2 of the Corporations Act.
4.172 The amendments to effect similar changes for voluntary administration are found at item 7 of Part 1 of Schedule 4. 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.
4.173 Item 87 will remove the provisions governing the transfer of shares, and an alteration in the status of members during a court-ordered liquidation from subsection 468(1) of the Corporations Act. Item 88 will replace these provisions with a new provision which will regulate transfers of shares (new subsections 468A(1)-(7)) and alterations in the status of members during court-ordered liquidation (new subsections 468A(8)-(15)).
4.174 In relation to a transfer of shares, new subsection 468A(1) will provide that a transfer is void unless the liquidator gives written consent to the transfer, or the Court makes an order authorising the transfer. New subsection 468A(2) will provide that the liquidator must be satisfied that it is in the best interests of creditors as a whole before granting his or her consent. New subsections 468A(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 liquidator refuses consent or a court order setting aside any conditions imposed by the liquidator. New subsections 468A(4) and (6) will empower the Court to authorise a transfer after a liquidator 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.
4.175 New subsections 468A(8)-(15) will provide that an alteration to the status of members will be void unless the liquidator gives written consent to the alteration. The liquidator 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 468A(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.
4.176 Items 92, 93 and 94 will make similar amendments to the provisions regulating a transfer of shares or an alteration in the status of members during a voluntary liquidation (new section 493A of the Corporations Act).
Schemes of compromise or arrangement - court discretion to approve
4.177 Approval of a members' scheme requires a resolution to be passed by:
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- a majority of members present and voting (sub-subparagraph 411(4)(a)(ii)(A) of the Corporations Act); and
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- a special majority (75 per cent) according to the voting rights attaching to share capital (sub-subparagraph 411(4)(a)(ii)(B) of the Corporations Act).
4.178 The court has no discretion to approve a members' scheme if the resolution fails to attain both required majorities.
4.179 A members' scheme could be defeated by parties opposed to the scheme engaging in 'share splitting', which involves one or more members transferring small parcels of shares to a large number of other persons who are willing to attend the meeting and vote in accordance with the wishes of the transferor. By splitting shares to increase the number of members voting against the scheme, an individual or small group opposed to the scheme may cause the scheme to be defeated. This may occur even though a special majority is achieved in terms of voting rights attaching to share capital, and if the share split had not occurred, the majority of members were in favour of the scheme.
4.180 The Bill will amend Part 5.1 of the Corporations Act to confer a discretion on a court to approve a members' scheme where a resolution in favour of a compromise or arrangement:
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- is passed under sub-subparagraph 411(4)(a)(ii)(B) of the Corporations Act (special majority pursuant to share capital voting rights); but
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- is not passed under sub-subparagraph 411(4)(a)(ii)(A) of the Corporations Act (majority of members present).
4.181 Item 52 will amend sub-subparagraph 411(4)(a)(ii)(A) of the Corporations Act to give the court a discretion to make an order that the requirement for a majority of members present and voting may be dispensed with. It is intended that the court would only exercise the discretion to disregard the majority vote under sub-subparagraph 411(4)(a)(ii)(A) in circumstances where there is evidence that the result of the vote has been unfairly influenced by activities such as share splitting, however the court's discretion has not been limited to allow for unforeseen extraordinary circumstances.
Corporate membership of the committee of creditors and the committee of inspection
4.182 Section 436G of the Corporations Act provides that a person can be a member of a committee of creditors of a company under administration if, and only if, he or she is a creditor of the company, the attorney of such a creditor because of a general power of attorney, or authorised in writing by such a creditor to be a member.
4.183 Paragraph 548(3)(a) of the Corporations Act provides that a person is not eligible to be appointed a member of a committee of inspection unless, in the case of an appointment by creditors of the company, the person is a creditor of the company, the attorney of a creditor of the company by virtue of a general power of attorney given by the creditor, or a person authorised in writing by a creditor of the company to be a member of the committee of inspection.
4.184 Paragraph 548(3)(b) of the Corporations Act provides that a person is not eligible to be appointed a member of a committee of inspection unless, in the case of an appointment by the contributories of the company, the person is a contributory of the company, the attorney of a contributory of the company by virtue of a general power of attorney given by the contributory, or a person authorised in writing by a contributory of the company to be a member of the committee of inspection.
4.185 Recommendation 34 of the 2004 Corporations and Markets Advisory Committee Report Rehabilitation of Large and Complex Enterprises ('CAMAC Report (2004)') stated that the Corporations Act should be amended to make it clear that a corporation can be a member of a committee of creditors.
4.186 Paragraph 22(1)(a) of the Acts Interpretation Act 1901 provides that a person includes a body corporate and body politic as well as an individual. However, the reference to 'he or she' in section 436G of the Corporations Act suggests that membership of a committee of creditors may be limited to natural persons and, therefore, section 436G creates some uncertainty as to whether a corporation can be a member of a committee of creditors.
4.187 The Bill will amend section 436G and subsection 549(4) of the Corporations Act to confirm that corporate membership of a committee of creditors and a committee of inspection is possible, and that corporations may be represented at meetings by an officer or employee of the member or some other authorised person.
4.188 Item 70 will amend section 436G of the Corporations Act to insert '(1)' before 'A person'. Item 71 will amend section 436G to delete reference to 'he or she' and substitute 'the person', confirming that membership is not limited to natural persons. Item 72 will insert subsection 436G(2) to provide that if a member of a committee of creditors is a body corporate, the member may be represented at meetings of the committee by an officer or employee of the member, or an individual authorised in writing by the member for the purposes of subsection 436G(2).
4.189 Item 117 inserts new subsection 549(4) of the Corporations Act to provide that if a member of a committee of inspection is a body corporate, the member may be represented at meetings of the committee by an officer or employee of the member, or some other individual who is authorised in writing by the member under the provision to represent it at committee meetings.
Creditors' voluntary winding up
4.190 Directors of insolvent companies or companies in financial difficulty must carefully consider the options for external administration because they are under a legal obligation to cause an insolvent company to cease trading. If they fail to do so they may be held personally liable for the company's debts. One of the options available to directors of insolvent companies is to initiate a creditors' voluntary winding up.
4.191 Part 5.5 of the Corporations Act sets out the procedure for a creditors' voluntary winding up. Following a resolution by directors, a meeting of members is called to place the company into liquidation. A meeting of creditors must also be held, and that must be on the same day or the day after the member of meetings. The meetings of creditors may replace the liquidator. Section 497(1) provides that notices of meeting for the members' and creditors' meetings must be sent simultaneously.
4.192 Under subsection 497(2), creditors must be provided with seven days notice before the meeting of creditors. The combination of the notice and timing requirements for the creditors' meeting means that the meeting of members cannot be called to resolve that an insolvent company be placed in liquidation until nearly a week after the initial directors' resolution.
4.193 On the other hand, voluntary administration may be entered into directly from a directors' resolution. For that reason, it is often used as an indirect route to a creditors' voluntary winding up, even when it is clear that a company has no option but to be wound up. That is because the longer timeframe for entering a creditors' voluntary winding up may expose directors to potential liability for insolvent trading and possible personal liability for taxation liabilities of the company.
4.194 Using the voluntary administration procedure in cases where there is clearly no option but to ultimately wind up the company may result in unnecessary costs due to the investigative, reporting and meeting requirements of Part 5.3A of the Corporations Act.
4.195 The process for commencing a creditors' voluntary liquidation will be streamlined, and modelled on the process for putting a company into voluntary administration. However, the requirement for a meeting of members to put the company in liquidation will be retained, to protect members. Granting directors' the power to put a company into liquidation could disadvantage members, as it is difficult to halt a winding up once it commences.
4.196 To effect this change, the requirement to hold the members' meeting and creditors' meeting on the same day will be relaxed. The required timing for the creditors meeting will be extended to 11 days after the day of the members' meeting. The extension of this time period will mean that, in circumstances where a meeting of members can be called directly after the directors' meeting (by using the facility for members to consent to short notice under subsection 249H of the Corporations Act), an insolvent company may be placed into a creditors' voluntary winding up almost immediately.
4.197 The requirement to convene the creditors' meeting within 11 days after the day of the meeting at which the resolution for voluntary wing up is proposed will align the timing of the creditors meeting in a creditors' voluntary liquidation with the first meeting in voluntary administration. The amendments will also make provision for creditors appointing a different person as liquidator at the creditors' meeting. The liquidator's powers will be restricted until after the creditors' meeting is held, to protect the interests of creditors.
4.198 Item 112 will repeal subsections 499(1) and 499(2) of the Corporations Act and replace them with a new process for the appointment of a liquidator in a creditors' voluntary liquidation. Under the new section 449(1), the company in general meeting will be required to appoint a liquidator. (The process for the appointment of a liquidator where an administration or deed administration precedes the liquidation is dealt with at paragraphs 4.204-4.210 below.) Item 111 will provide that the creditors may remove the liquidator from office and appoint another person as liquidator, at the meeting of creditors convened under section 497 of the Corporations Act. Item 91 will provide that the liquidator must not exercise certain powers until the meeting of creditors has been held.
4.199 Item 97 will amend section 497 of the Corporations Act to require the creditors' meeting to be held within 11 days following the meeting at which the resolution for voluntary winding up is to be proposed. The amendment will also remove the requirement for the notice of the creditors' meeting to be sent out simultaneously with the sending of the notices of the meeting of the company.
4.200 Items 98, 102, 104 and 105 will clarify that the liquidator (rather than the company) is obliged to call a meeting of creditors and send out the relevant notices (including a list of creditors) to creditors. Item 106 and 109 will remove offence provisions that have been made redundant by these changes.
4.201 Item 99 will amend subsection 497(2) of the Corporations Act to clarify that the meeting referred to in that subsection is the same meeting of creditors referred to in subsection 497(1).
4.202 Item 107 will amend the provision concerning directors' duties (new subsection 497(5)), such that the directors will be required to make a report to the liquidator (rather than reporting to the company). Failure to meet this obligation will be an offence of strict liability, punishable by a fine of 10 penalty units or imprisonment for three months, or both. This is consistent with the penalty currently provided for a breach of subsection 497(5), and is consistent with several other offence provisions in the Corporations Act. The obligation for a director to attend the creditors' meeting will be removed, as the liquidator will now fill this role. Item 108 will also remove the obligation for the director and secretary to attend the meeting of creditors and disclose the affairs of the company, and to lodge a copy of their report to the company with ASIC. Item 110 will provide that the creditors may appoint one of their number or the liquidator to preside at the meeting.
4.203 Item 103 will amend the threshold for creditors to be sent a copy of the list of creditors, from debts exceeding $200 to debts exceeding $1,000. This will further reduce the cost of commencing this form of external administration. Item 96 will make a similar change to subsection 496(3), where a company in a members' voluntary liquidation turns out to be insolvent.
Creditors to have power to appoint different person as liquidator in administration
4.204 Section 446A of the Corporations Act provides for an administrator or deed administrator to become the liquidator of a company in a broad range of situations. In some instances creditors may consider that it is desirable to have a different person act as liquidator, notwithstanding that this could introduce new costs (which indirectly will be borne by creditors). One reason for such a decision could be a desire to have the conduct of the administration, or the pre-commencement conduct of the company, reviewed by a different practitioner.
4.205 The Bill will allow creditors to appoint a different person as liquidator when a company proceeds from administration into liquidation or from a deed of company arrangement into liquidation.
4.206 This proposal is consistent with recommendation 2 of the PJC Report.
4.207 Item 22 repeals subsection 446A(4), which currently provides that the administrator or deed administrator is taken to be nominated as the liquidator when a company under administration or a DOCA is put into liquidation. Item 23 inserts a cross-reference to the replacement provisions, which are now found in section 499. Item 112 repeals subsections 499(1) and 499(2) of the Corporations Act, and replaces them with new provisions providing for the appointment of a liquidator in a creditors' voluntary winding up. Item 112 also introduces new provisions dealing with the case where a company proceeds from administration or a DOCA into a creditors' voluntary liquidation.
4.208 New subsection 499(2A) deals with the situation where a company proceeds from administration into a creditors' voluntary winding up because the creditors resolve that the company be wound up under section 439C(c). The default position is that the administrator will be liquidator, but the provision allows creditors to appoint a different person as liquidator.
4.209 The new subsection 499(2B) will provide for the administrator becoming liquidator when a company fails to execute a deed as required under subsection 444B(2).
4.210 The new subsection 499(2C) will provide for the appointment of a liquidator where a company proceeds from deed of company arrangement into a creditors' voluntary winding up as a result of a resolution by creditors to terminate the deed and wind up the company. The default position is that the deed administrator will be liquidator, but creditors may choose to appoint a different person as liquidator.
4.211 Paragraph 451A(2)(a) of the Corporations Act provides that where there are two or more administrators of a company, a function or power of an administrator of the company may be performed or exercised by any one of them, or by any two or more of them together, except so far as the instrument or resolution appointing them provides otherwise.
4.212 Paragraph 451B(2)(a) of the Corporations Act provides that where there are two or more administrators of a deed of company arrangement, a function or power of an administrator of the deed may be performed or exercised by any one of them, or by any two or more of them together, except so far as the deed, or the resolution or instrument appointing them provides otherwise.
4.213 Subsection 506(4) of the Corporations Act provides that when several liquidators are appointed, any power given by the Corporations Act may be exercised by such one or more of them as is determined at the time of their appointment, or in default of such determination, by any number not less than two.
4.214 Joint and several appointments of administrators of a company, under paragraph 451A(2)(a), and of administrators of a deed of company arrangement, under paragraph 451B(2)(a), are convenient and efficient, enabling multiple appointees to divide responsibilities in large and complex cases.
4.215 There is some uncertainty as to whether subsection 506(4) allows for joint and several appointments of liquidators. Under subsection 506(4), where the powers of multiple liquidators have not been determined at the time of their appointment, they may be appointed 'jointly' and not 'jointly and severally'.
4.216 The Corporations Act does not explicitly provide for joint and several appointments of receivers or receivers and managers.
4.217 Recommendation 57 of the PJC Report stated that consideration should be given to repealing subsection 506(4) and replacing it with a provision in similar terms to sections 451A and 451B. That is, where more than one liquidator is appointed, their functions or powers should be able to be exercised by any one of them, subject to the resolution or instrument appointing them providing otherwise. The Report also recommended that consideration be given to similar provisions being included in Parts 5.2 and 5.6 of the Corporations Act dealing with receiverships and windings-up generally.
4.218 Amendments to sections 434D, 434E, 506(4), 530 and 530AA of the Corporations Act will provide for multiple 'joint' or 'joint and several' appointments in liquidations and receiverships, except where the instrument of resolution of appointment provides otherwise.
4.219 Item 67 will insert a new section 434D of the Corporations Act which provides that where there are two or more receivers of property of a corporation, a function or power of a receiver of property of the corporation may be performed or exercised by any one of them, or by any two or more of them together, except so far as the order or instrument appointing them provides otherwise. New section 434D will also provide that a reference in the Corporations Act to a receiver, or to a receiver of property of a corporation, is a reference to whichever one or more of those receivers as the case requires.
4.220 Item 67 will also insert new sections 434E, 434F and 434G of the Corporations Act which includes similar provisions with respect to multiple receivers and managers, controllers and managing controllers respectively. These provisions are not intended to apply where two or more receivers, receivers and managers or controllers are appointed over property of the company and they are appointed: over different property; by different secured creditors; or under different instruments.
4.221 Item 114 will insert a new section 530 and 530AA of the Corporations Act, which include similar provisions with respect to liquidators and provisional liquidators respectively.
4.222 Item 113 will repeal subsection 506(4) of the Corporations Act, because its subject matter will be dealt with by new section 530.
4.223 Items 41, 42, 43, 44, 45, 46, 47 and 48 will amend the definitions of 'controller', 'liquidator', 'managing controller', 'provisional liquidator' and 'receiver' in section 9 of the Corporations Act to recognise that there may be more than one appointee.
Change of company name in external administration
4.224 When a company is under external administration, a number of issues relating to its name may arise.
4.225 The company name is an asset that may have some value as part of a business sale in external administration. As such, facilitating a change of name may maximise the value of an asset, improving outcomes for creditors. However, it is extremely difficult for a special resolution to be passed for a public company in external administration, particularly considering the problems identified in relation to companies in external administration holding annual general meetings6. In the case of external administration, the interests of creditors should be prioritised. As such, there is a case for allowing greater flexibility for practitioners to be able to change the name of a company.
4.226 On the other hand, it is important that creditors of externally administered companies have adequate opportunity to identify that a company is subject to external administration. Companies commonly change their name, often to their Australian Company Number (ACN) only, before appointing an administrator, to minimise the potentially damaging commercial effect of having their prior name associated with a voluntary administration. This practice may disadvantage creditors who may not associate the new name with the company with which they have been dealing. For instance, creditors may not recognise the new name in notices of creditors' meetings, in notices calling for proofs of debt and in general correspondence.
4.227 Recommendation 60 of the CAMAC Report (1998) stated that any company that changes its name during the course of, or in the six months before, a voluntary administration should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation.
4.228 The Bill will introduce a series of new rules relating to the names of companies under external administration, to better balance the competing interests discussed above.
4.229 The law will permit liquidators, administrators and deed administrators to lodge an application with ASIC to change a company's name without the need for a special resolution of members, where they are satisfied it is in the interests of creditors as a whole to do so.
4.230 The law will also provide that any company that changes its name during, or six months prior to, an external administration should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation. This will include public documents issued by an external administrator.
4.231 In relation to deeds of company arrangement, there may be limited circumstances where a deed is still yet to be terminated but there is little risk to creditors arising out of a change of name. Accordingly, the law will provide an opportunity for the deed administrator to apply to the Court for an exemption from the requirements to disclose the company's former name as well as the new name in circumstances where the Court considers that there is little risk to creditors. (A similar ability to apply to the Court will be introduced in relation to the requirement to disclose that a company is under a DOCA - see items 41 and 42 of Part 1, Schedule 4).
4.232 Item 49 will insert new section 157A of the Corporations Act which permits liquidators, administrators, deed administrators and managing controllers to lodge an application with ASIC to change a company's name without the need for a special resolution of members, where it is in the interests of creditors as a whole to do so.
4.233 Item 50 will insert new section 161A in the Corporations Act, which provides that a company that changes its name during, or six months prior to, an external administration should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation. New subsections 161A(3), (6) and (7) will provide that, in relation to a company subject to a DOCA, the deed administrator can seek leave of the Court for an exemption from the requirements of new section 161A.
4.234 Contravention of subsections 161A(2) or (3) will comprise an offence. The new offence provision is comparable to existing subsection 541(2), which makes an offence based on subsection 541(1) (a subsection which requires notification that a company is in liquidation) one of strict liability. Several other offence provisions in the Act such as sections 448C, 448D and 471A have similar penalties. Item 121 will amend the penalties schedule to provide a penalty for an offence against subsection 161A(2) or (3) of 10 penalty units or imprisonment for three months, or both.
Exemption from the requirement to hold an annual general meeting
4.235 Section 250N of the Corporations Act requires public companies to hold an annual general meeting (AGM) within 18 months of registration and at least once in each calendar year and within five months after the end of its financial year. Public companies can apply for an extension of the time for holding AGMs from ASIC under section 250P. However, ASIC currently cannot give an exemption from the requirement to hold an AGM.
4.236 The above sections continue to apply whilst a company is under external administration. Further, section 508 provides that if a creditors' or members' winding up continues for more than one year, the liquidator must convene an AGM within three months after the end of the first year from the commencement of the winding up and the end of each succeeding year. There is no requirement for an AGM in the case of a winding up by the Court.
4.237 The cost of holding an AGM, which in the case of companies in external administration is borne by creditors, may be considerable. In a large number of cases, these meetings have little value to an administration relative to the cost required to hold the meeting. It is understood to be rare that any business is conducted at these meetings. It has been observed that AGMs of members and creditors in a creditors' voluntary liquidation rarely attract a quorum and are generally considered to be an unnecessary drain on funds which may otherwise be distributed to creditors.
4.238 The amendments to section 508 discussed above (paragraphs 4.115-4.122) will remove the general requirement for liquidators in a creditors' voluntary winding-up to convene an annual meeting of members. The rationale for this change is that members do not generally have an economic interest in an insolvent company. However, this does not affect the obligation for public companies to convene an annual meeting under section 250N. For public companies, there may be a higher level of stakeholder interest in the conduct of the external administration and a continued meeting requirement may be warranted.
4.239 ASIC will be granted a discretion to grant an individual public company an exemption from the requirement to hold an annual general meeting on application made by an external administrator.
4.240 Item 51 will insert new section 250PAA in the Corporations Act, giving ASIC the power to make an order exempting a specified class of companies in external administration from the requirement to hold an annual general meeting under section 250N. Item 51 will also insert new section 250PAB to allow ASIC to provide individual exemptions from the requirement to hold an annual general meeting under section 250N.
Part 4 - Facilitating pooling in external administration
4.241 Part 4 of Schedule 1 of the Bill sets out a statutory 'pooling' mechanism to facilitate the winding up of companies in corporate groups. The Bill introduces a new Division 8 for pooling in a liquidation under Part 5.6 of the Corporations Act.
4.242 The Bill for pooling provides for two separate methods of pooling: voluntary pooling and Court ordered pooling.
4.243 In a voluntary pooling, the liquidator of a group of companies may make a determination that the winding up be conducted on a pooled basis and submit that determination to separate meetings of the 'eligible unsecured creditors' of the companies proposed to be pooled. The pooling may proceed if 75 per cent of the eligible unsecured creditors by value and 50 per cent by number of each of the companies in the group approve the making of the determination. The determination takes effect after the resolutions have been passed. The determination does not take effect if the required majorities are not obtained for any company in the proposed group. If an eligible unsecured creditor objects to the determination, that creditor may apply to the court to have the determination terminated or varied on the grounds (inter alia) that the determination would materially prejudice that creditor.
4.244 The concept of an 'eligible unsecured creditor' is a central one to the pooling regime. In general terms, it includes all the unsecured creditors of the group but excludes other companies in the pooled group (that is, it excludes intra-group companies from voting on or objecting to the pooling determination).
4.245 In the case of Court ordered pooling, the Court may determine, by order, that a group of companies in liquidation is a pooled group if it is satisfied that it is just and equitable to do so. The Court may not make the order if the order would materially disadvantage an eligible unsecured creditor of a company in the group and the eligible unsecured creditor has not consented to the making of the order.
4.246 New sections 571 and 574 of the Corporations Act will provide for voluntary pooling.
4.247 New section 571 of the Corporations Act will permit a liquidator to make a determination that a group of companies is a pooled group for the purposes of the section. A pooling determination must be in writing and sent to the unsecured creditors of each of the companies in the group.
4.248 For a liquidator to be able to make such a determination each company in the group must be being wound up. The term 'group' is not defined or used in a technical sense in the Bill. It has its ordinary meaning as a collective noun. The relationships between the companies that may be the subject of a pooling determination will be specified in new subsection 571(1)(b). Specifically, the companies in the group must:
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- be related companies; or
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- be jointly liable for one or more debts; or
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- own or operate property that was used in connection with a business, scheme or undertaking carried on jointly by the companies.
4.249 The term 'pooling' is not defined in the new model. However, new subsection 571(2) will outline the consequences of a pooling determination. The section provides that the consequences of a pooling determination are:
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- each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group;
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- each debt payable by a company in the group to any other company in the group is extinguished.
4.250 Under new paragraph 571(1)(d) a liquidator would have the power to modify the outcome of a pooling determination in certain ways, if they consider it is just and equitable to do so. Specifically, the liquidator may modify the consequences of a determination as provided for in subsections 571(2)-(7) if the liquidator considers it is just and equitable as between the various creditors to do so. This power will permit the maximum flexibility for the terms of the pooling determination to reflect the specific circumstances of the companies in the group.
4.251 The broad power of a liquidator to vary the outcome of a pooling determination is considered to be desirable from a policy perspective, as it will allow the liquidator to minimise the prospect of a disaffected creditor applying to the court to have a determination terminated or varied. In this regard, it is noted that the procedure for pooling will be accompanied by a number of amendments intended to protect minority creditors and prevent the 75 per cent majority disadvantaging the 25 per cent minority. Eligible unsecured creditors will have a right to apply to the Court to have the pooling determination varied or terminated if they are materially disadvantaged by the pooling determination, the information provided to creditors is false or misleading, material information was omitted or the pooling determination would be oppressive or unfairly prejudicial to, or unfairly discriminate against, creditors. In the case of a members' voluntary winding up, members are afforded similar rights to apply to have the pooling determination varied or terminated.
4.252 Employee creditors will be provided with additional protections, in that the eligible employee creditors are guaranteed a return at least equal to that provided if their employer company had been wound up separately (subsection 571(1)).
4.253 The term 'eligible unsecured creditor' is defined in new section 579Q of the Corporations Act. Eligible unsecured creditors will generally comprise the external unsecured creditors of the companies in the group. It is not generally intended that other companies in the pooled group who may be unsecured creditors of other companies in the group should be able to vote for the pooling determination or a variation of the determination. A pooling determination will have the effect that each debt payable by a company in the group to any other company in the group is extinguished once the determination takes effect. The regulations will be able to extend the definition of 'eligible unsecured creditor' so as to include or exclude a creditor as an eligible unsecured creditor for the purposes of the definition. This will ensure that the provisions are flexible enough to take account of different circumstances and ensure the integrity of the pooling mechanism.
4.254 New subsection 571(2) will not apply to a secured debt unless the debt is payable by a company in the group to any other company in the group. External secured creditors are excluded from the scope of a pooling determination to the extent of their security (new subsection 571(9)).
4.255 New section 574 of the Corporations Act will provide that, within five business days after a liquidator makes a pooling determination, the liquidator must convene separate meetings of the unsecured creditors of each of the companies in the group for the purpose of considering and making a decision about the determination. The liquidator must give written notice of the proposed determination to each eligible unsecured creditor, together with a statement identifying each of the companies in the group and setting out: the liquidators opinion about particular matters (whether it would be in the interest of creditors for the determination to take effect, the extent to which particular creditors and particular companies are likely to be disadvantaged by the determination, and the likely return to creditors if the determination takes effect and if it does not); the reasons why disadvantaged creditors should vote for the determination; and any other information that will enable creditors to make an informed decision about whether to approve the determination.
4.256 A pooling determination comes into force immediately after the resolutions approving the making of the determination are passed (new section 578 of the Corporations Act). A copy of the pooling determination must be lodged with ASIC within 7 days of it taking effect (new section 573 of the Corporations Act).
4.257 A pooling determination under new section 571 of the Corporations Act will not limit a liquidator's power under section 477 of the Corporations Act, for example to make any compromise or arrangement with creditors or compromise any debts or claims (new subsection 571(11)).
4.258 Provisions also permit a pooling determination in force in relation to a group to be varied, subject to similar protections for creditors as discussed at paragraphs 4.251 and 4.252 (new sections 574, 577, 578(2) and 579A of the Corporations Act).
4.259 In exercising a function or power in connection with a proposed pooling determination with due care and in good faith, a liquidator or an administrator will not to be taken to be in breach of fiduciary duties owed to a particular company or to creditors of a particular company, or duties to a company in a group under sections 180, 181, 182, 183 or 184 of the Corporations Act (new section 579 of the Corporations Act).
Item 133 - Court-ordered pooling
4.260 New sections 579E and 579G of the Corporations Act will provide for court-ordered pooling.
4.261 New section 579E will empower a Court to determine, by order, that a group of companies is a pooled group for the purposes of section 579E. The Court may make such an order if it is satisfied that it is just and equitable to do so. In considering whether to make an order the Court must have regard to the following matters (new subsection 579E(12)):
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- the extent to which a company in the group and the officers or employees of a company in the group were involved in the management of any of the other companies;
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- the conduct of a company in the group and the officers or employees of a company in the group towards the creditors of any of the other companies;
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- the extent to which the circumstances that gave rise to the winding up of any of the pooled companies were attributable to the actions of any of the other companies in the group or the officers or employees any of the other companies in the group;
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- the extent to which the business of the pooled companies has been intermingled;
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- the extent to which creditors of any one or more of the pooled companies may be advantaged or disadvantaged by the making of the pooling order; and
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- any other relevant matters.
4.262 A court may not make a pooling order if the order would materially disadvantage an eligible unsecured creditor of a company in the group and that eligible unsecured creditor has not consented to the making of the order (new subsection 579E(10)).
4.263 New subsection 579E(2) will provide that the consequences of a pooling order under section 579E are:
- •
- each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against each other company in the group;
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- each debt payable by a company in the group to any other company in the group is extinguished.
4.264 An application for a court-ordered pooling may only be made by the liquidator or liquidators of the companies in the group (subsection 579E(11)).
4.265 Under new section 579G of the Corporations Act the Court may make ancillary orders in approving the making of a pooling determination. It may:
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- exempt specified debts or claims from the determination;
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- transfer property or liabilities from one company to another;
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- modify the application of the Corporations Act in relation to the winding up of the companies in the group; and
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- give such directions in relation to the winding up of the companies in the group as the Court thinks fit.
4.266 The Court's power to make an order or direction under section 579G includes power to provide for different returns for different classes of creditors or the subordination of the debts and claims of specified creditors.
4.267 Subsection 579G(2) specifies that the liquidator or a creditor of a company in the group has standing to make an application for an ancillary order.
4.268 New section 579L of the Corporations Act makes provision for consolidated meetings of creditors.
4.269 Item 124 will add a note at the end of subsection 473(3) of the Corporations Act cross-referencing the provision that provides for the conduct of consolidated meetings of creditors. Under new section 579L of the Corporations Act a resolution passed at a consolidated meeting of creditors of the companies in the group is taken to have been passed by the creditors of each of the companies in the group. A resolution about remuneration passed at a consolidated meeting of creditors of the companies in the group will be taken, for the purposes of subsection 473(3), to be a resolution of the creditors of a particular company.
4.270 Item 125 will permit regulations to be made in relation to a pooled liquidation so as to make provision for the matters currently dealt with in section 538 of the Corporations Act, such as the maintenance of bank accounts by a liquidator, payments into such accounts, and the deposit of bills, notes and other securities. Item 126 will allow a liquidator of companies in a group to lodge one set of accounts of receipts and payments for the group. Items 127, 128, 129, 130 and 131 will make provision for the formation of a committee of inspection for the group.
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