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Nathan Thai

on 17 October 2016

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WEEK 14 - Companies in Financial Difficulties
Legal Problem Question
Eric, Mary and Mei Ling are the only shareholders and directors of Acme Pty Ltd, a trading company that supplies food products to cafes around Brisbane. In recent times, Acme’s cash flows have been pressured because several large customers including CafeNow (a large franchised coffee shop with hundreds of outlets) have been late in paying their invoices.

This has meant that on several occasions Acme has not had sufficient funds to pay its bills, particularly rent. The owner of its warehouse (Leaseco Ltd) has written several letters warning that if Acme is late in paying its rent, it will be evicted from the premises.

At the same time as the company’s cash flow troubles occur, the employees take industrial action in an attempt to receive a pay increase. This strike stops deliveries from the warehouse for two days, with several customers cancelling their orders for supply from Acme. The cash flow problems are increased when the company’s bank, Eastbank Ltd, threatens to appoint a receiver and manager over the company if it does not pay its monthly interest within two weeks.
Eric, Mary and Mei Ling convene a board meeting to consider their options. Eric and Mei Ling would like to negotiate with their creditors to restructure the company’s debts. Mary, however, would like to sell out and change industries.

(a) Advise Eric, Mary and Mei Ling as to their options under the external
administration procedures under the Corporations Act, including the
advantages and disadvantages of such procedures.
(b) What impact would the procedures have on Acme’s creditors?

1. Is Acme Pty Ltd Insolvent - are there grounds for creditors to pursue Compulsory Winding up? AND/OR
2. Are there any external administration procedures for industrial actions taken by employees seeking pay increases?
3. Can Eastbank Ltd threaten to appoint a receiver and manager over Acme Pty Ltd based on nonpayment of interest within two weeks?
4. What external administration procedures would the members take in order to negotiate with their creditors to restructure company's debts?
5. Can Mary sell out and change industries
Voluntary administration
s 436A - commencement by company
s 436E - first meeting of creditor
s 439A - final meeting
s 439C - what creditors may decide
s 445D - have deed set aside
Lehmann Brothers Holdings Inc v City of Swan 2010 DOCA -

bind creditors only so far as creditors' claims relate to the relevant company.

What is the purpose of External Administration?
External administration refers to a situation wher an external person is appointed (in one of several ways either by the company, or its creditors, or the court) to manage the company in particular, its financial affairs with a view to either:
rescuing the company; or
to provide a fiar and ordely process for dealing with its property during insolvency

Learning objectives

Impact on Acme's
Nathan Thai & Lisa Filise
1. What is meant by Voluntary Administration?
A process through which companies in difficulties may be put under administration with the hope to be brought back to solvency.

- to maximise the chance that an insolvent company or its business continues to exist and, if not, to maximise its return to creditors and members
2. What is the difference between voluntary administration, receivership and winding up?
There are many differences such as the initial appointment, duration, impact on creditors/members, but essentially the main differences are;

- involves a secured creditor (e.g. bank) to appoint a 'reciever to take possession of the secured property and either sell it to repay the secured debt; or manage the business until the risk posed to the security can be removed.

Winding up/Liquidation
- main task is to sell all the of the company's assets and distribute the proceeds to the company's creditors - death of the company
3. What are the different procedures by which a company may be wound up?
- applicants most commonly creditors, members, ASIC. Administered because of company becoming
s 459A
some other ground

s 459


- commenced by special resolution of members where company
e.g. purpose of biz no longer pursuing

4. What is the importance of a statutory notice of demand

statutory demand
notice is a formal, attested demand issued under section
of the Corporations Act 2001 (Cth). It is a very effective debt recovery tool for debts owed by companies when used properly.

If such a demand is correctly issued and served and the debtor company fails to pay the debt (presumably no less than $2,000) within 21 days from the date of service of the demand, or otherwise fails to make arrangements to pay the debt to the creditor’s satisfaction, the company is presumed “

by the court and the creditor can make an application to wind the company up.

To advise the members/directors to there options regarding external adniministration procedures, we must consider the
main types and its

Winding up
(voluntary & compulsory)
Voluntary winding up
- is activated by special resolution under
s 491
, which requires 75% majority vote. Because
only Mary
wants to sell out the company this does not meet requirement to activate special resolution.

Further under
s 494
requires director's declaration, that company will remain solvent for at least 12 months. Based on the information provided, there is no guarantee Acme P/L is able to pay its debts within this period. IF Eric and Mei decide to wind up the company AND the directors declare the company is solvent for at least 12 months, the members must appoint a liquidator who takes control of the company from the directors. Eric, Mei and Mary must consider the possibility that if the liquidator determines the company is in fact INSOLVENT, then the process converts into a creditor's voluntary winding up,
s 496

Liquidators have extensive powers (under
s 477)
of investigation and they have the time to determine why the company failed, may be considered beneficial for the members

Liquidators have statutory obligations/the power to sue the directors for insolvent trading or breach of duty under
s 533

Lengthy and expensive which may offer lower return than VA
Compulsory winding up
- applicants include creditors, ASIC and other eligible applicants (applicant who has 'standing'
s 462
) which is commenced by the court under pt5.4 of the Corporations Act, and is usually granted on the basis of
s 459A
some other ground
s 461
. Therefore, this procedure is not considered an option for the members but rather be aware of the possibility this procedure may arise from the owner of the warehouse (Leaseco Ltd) who...'has written several letters warning that if Acme is late in paying its rent, it will be evicted from the premises.'

Leaseco Ltd may apply for company wind up based on company's failure to comply with a
statutory demand.
This can be done by the following conditions
s 459 E
- has to be no less than $2,000
- served a notice demanding the debt to be repaid within 21 day.
Although there appears to be no information regarding any genuine dispute to offset amount owing under s
459 H
or a defect in the demand which causes substantial injustice (
s 459J(1)(a)
) or some other reason (
s 459J(1)(b)
), if any of the three circumstance exist the company i.e. directors may apply to set aside the statutory demand

Similarly to compulsory winding up, this external administration is
not an option for Eric, Mary and Mei
, but they should be aware of the process entailed with receivership.

Commenced under two ways

1. Secured creditor i.e. Eastbank Ltd - generally occurs in most cases
2. By the court

By not making monthly repayments to the bank, Acme P/L has defaulted on its loan contract. As such a breach on the condition/requirement of the loan means Eastbank Ltd is entitled to appoint a receiver and manager under
s 418
An appointment of a receiver does not remove the directors from their position. Further in a private appointment where the scope of the receiver's power is determined by the terms of the security instrument, the directors may still hold a certain level of power over the management of the company.

Lack of
and a focus of just secured creditors means exclusion of other stakeholders and more importantly a termination to the property that is leased by Acme P/L. This means any of Acme's property leased under Eastbank Ltd may not be used to run the business. No time limit.
Voluntary Administration
As '
Eric and Mei Ling would like to negotiate with their creditors to restructure their company’s debt'
, this external administration procedure allows them to so. Under s 436A the directors may appoint an administrator in writing by passing board resolution. Once appointed, directors power will be suspended, the administrator will promptly convene a first meeting of creditors:
s 436E
and have a final creditors meeting held within 25 days unless court extend period:

On this meeting the creditors may resolve that the company execute a deed of company arrangement (DOCA), or that the administration end, or that a the company be wound up:
s 439C
. A DOCA is an arrangement whereby the creditors agree not to pursue their otherwise legally enforceable rights against a company in order to give the company better opporunity to meet its liabilities.

The legal problem presents that the employees are taking industrial action in attempt to receive a pay increase and several large customers have been late in paying their invoices. Through VA, it provides a very extensive moratorium over claims against the company which allows them time to restructure its affairs and time to address the above issues.

Once entered into a DOCA, it provides considerable flexibility between creditors and Acme P/L - with the hope the company returns to solvency or at least provide better return to the creditor

Allows Acme P/L to continue in business even if Eastbank Ltd would like to terminate any property currently owned by the bank.

Quicker and cheaper to implement than a scheme of arrangement.

There is not enough time for the administrator to fully investigate the company’s affairs and to make a proper recommendation to the creditors at the final meeting.

s 445D
any creditor or ASIC may apply to the court to have the deed set aside.
Scheme of Arranagement

Similar to VA Eric and Mei Ling have the option to enter a scheme of arrangement
Pt 5.1
which allows them to formulise a debt reorganisation with its creditors such as Leaseco Ltd with the aim to return the company to solvency.

Under this procedure, Acme Ltd will need to prepare an explanatory statement (
s 412
) which details the nature of the scheme, and this will be put forward to the creditors to vote. However for this to happen Acme Ltd must seek the courts permission to hold a creditors meeting to vote on the scheme. Once granted,
s 411(4)
provides that the creditors' meeting must approve the scheme by more than 50% in number and at least 75% by value. Final court approval is required after voting.
Scheme of Arrangements are flexible it’s a big advantage as Acme Ltd and Leaseco Ltd can design an appropriate restructuring proposal however this is also similar to DOCA in VA. Further, unlike DOCA individual creditors do not have the power to go to the court to have deed set aside.

Very time consuming - requires two approvals by court and approval by creditor. Further this scheme is cumbersome and expensive compared to VA
Creditor's split up - unsecured and secured
Scheme of Arrangment
Pt 5.1
s 412
s 411(4) - Administration of compromises etc.
Winding up
- Voluntary
s 491 - special resolution
s 494 - directors declaration
s 496 - members' voluntary leads to creditors' voluntary
s 477 - powers of liquidator
s 533 - report to ASIC for breaches

s 459P & s 462 - standing
s 461 - some other ground
s 459A - insolvency
s 459E - prerequisites
s 459F - failure to comply
David Grant & Co Pty Ltd v Westpac - any challenge to statutory demand must be brought within 21 days.
s 459J - Setting aside demand

s 418 - who may be registered? only a registered liquidator
s 419 - liability of liquidator
From the 4 four types of external procedures presented and assessing the advantages and disadvantages for each procedure, taking a voluntary administration will be most appropriate in this circumstance. Not only does this address two of the members’ incentive to renegotiate with the creditors to restructure the company’s debts, the core advantages such as rescuing the company from possible insolvency, to provide a better return for creditors as oppose to liquidation and more importantly, allowing time for Acme Pty Ltd to restructure, are all significant in tackling the issues face by the company. VA will allow time for large customers such as Café Now to pay their late invoices and allow time to negotiate with their employees' wages. Further as Acme have already been given several warning letters from Leasco Ltd and has defaulted on loan to Eastbank Ltd, a scheme of arrangement which is difficult to activate due to lengthy time, complexity will no be suitable comparatively to VA.
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