Corporate insolvency handbook

1800 246 801 svpartners.com.au
A new and challenging world in a changing regulatory environment for
business requires innovative thinking and a fresh approach to the
traditional models used in business reconstruction, risk management and
insolvency services.
This Handbook, one in a series of SV Partners information guides, provides
practical information to a number of professions and industries involved in
the insolvency arena.
Readers are provided with an overview of two options available to both
companies (in distress) and creditors – liquidation and voluntary
administration.
The Handbook seeks to provide an overview of what may be expected
under such appointments in terms of rights and obligations of both
creditors and the appointee; reporting requirements which must be met,
together with details of the supervision undertaken on the administration
and the accountability of the appointees.
Amongst the Appendices is a comparison of different types of corporate
insolvency and voluntary administration; including advantages and
disadvantages, and a flow chart which provides a pictorial view of voluntary
administration.
Please contact our offices should you wish to speak with a director of the
firm who specialises in insolvency and risk management, or to gain detailed
information about the overview provided by this guide.
The information contained in this Handbook is intended as a general guide.
It is not intended or to be taken as advice to any person. While it is believed
that the information contained herein is accurate and reliable, no warranty
is given as to the accuracy and completeness of any statement or opinion.
No liability is accepted by SV Partners Pty Ltd, its directors and/or staff or
any associated entity for any error or omission or on any other account.
Further information is available on our website www.svpartners.com.au
Terry Van der Velde
Managing Director
foreword

LIQUIDATIONS
Who Appoints the Liquidator?
Who Must the Liquidator Report to?
1.0 Creditors and Shareholders
1.1 The Committee
1.2 Reports to Creditors
1.3 Meeting of Creditors
1.3.1 Calling of the Meeting
1.3.2 The Meeting
1.3.3 Voting
1.3.4 Proxies
1.3.5 Who May Vote?
1.3.6 Secured Creditors
1.4 So you are not happy with the result?
1.5 General Supervision
2.0 The Australian Securities & Investments Commission
2.1 Liquidator’s Accounts
VOLUNTARY ADMINISTRATIONS
How Does the Administration Begin?
What Happens on the Appointment of an Administrator?
The Administrator’s Personal Liability
So the Creditors Accept a Deed of Company Arrangement – What Now?
Creditor Voting
Particular Reasons for a registered security holder to support an
Deed of Company Arrangement (DOCA)?
Why Should an Unsecured Creditor Support a DOCA?
CORPORATE INSOLVENCY COMPARISONS
Further Information
contents

The types of liquidations you will have contact with are:
Creditors’ voluntary liquidation;
Members’ voluntary liquidation; and
Court liquidation.
Purpose of liquidation:
1. To realise assets of the company and distribute the proceeds amongst its
creditors.
2. To investigate the affairs of an insolvent company to ascertain the reason
for its failure and to ensure all recoverable property is retrieved – eg
preference payments and uncommercial transactions.
The liquidator has the responsibility of bringing the company’s affairs to an
end, and in this process is accountable to:
a) Creditors
b) Shareholders
c) The Court
Creditors can be either secured or unsecured.
In this paper we concentrate mainly upon the rights of unsecured creditors.
The Courts have stated the duties of a liquidator is:
a) to investigate the affairs of a company from its foundation onwards;
b) to act impartially;
c) to act with skill and diligence;
d) to avoid placing himself in a position where his/her interest conflicts or is likely to
conflict, with his/her duties.
A liquidator should get in all assets, and discharge all the liabilities, so far as the
assets allow. He/she should be alert to ascertain any misfeasance by officers,
former officers or promoters and, so far as the assets allow, proceed to recover any
preferences or any damages for which any such persons may be liable. Where the
history of the company shows a likelihood of some misfeasance, he/she should
investigate, so far as the assets allow, to see whether officers or former officers
have infringed the requirements of the law, at least where the liquidation will
otherwise result in no payment at all to external creditors, and where the external
creditors would have been paid in full if transactions which raise or assist to raise
the likelihood, had not been entered into. If the assets available (pending any
recovery for misfeasance etc) do not allow full compliance with the relevant duties,
the liquidator should report the circumstances, with his/her opinion of the
likelihood, and the reasons for his opinions, to the interested creditors and to the
"Australian Securities and Investments Commission” (ASIC). Liquidators actions are
governed by the powers outlined in the Corporations Act 2001.
liquidations

WHO APPOINTS THE LIQUIDATOR?
Creditors Voluntary
The company's members appoint the liquidator by resolution at a meeting of
members.
The creditors may, by resolution at a meeting of creditors to be convened
within 11 days of the meeting of members, appoint someone else if they so
desire or feel the current liquidator has a conflict of interest.
Court Liquidation
While the Court (either the Federal or Supreme) appoints the liquidator, the
creditors are able to nominate the liquidator at the time of the hearing of the
petition for the winding up order.
Invariably the creditors’ nominee will be appointed by the Court. The
nominee must, in these circumstances, be an Official Liquidator.
Members’ Voluntary
The company's members appoint the liquidator at an extraordinary meeting
of members.
WHO MUST THE LIQUIDATOR REPORT TO?
1. To creditors and shareholders; and
2. To the Australian Securities and Investments Commission.
1 Creditors and Shareholders
The liquidator is required to report to creditors regarding the
circumstances leading up to the liquidation, the likely return to creditors
and the outcome of his/her statutory investigations.
Creditors have various voting rights during the liquidation. These can be
expressed through a nominated Committee of Inspection.
1.1 The Committee
The function of the Committee is to advise and assist the liquidators and/or
to supervise the conduct of the liquidation.
The Committee’s views must be taken into account by the liquidator but
he/she does have the right to make the final decision – S479(1) and
S479(4).
liquidations

The Committee does have the following powers:
General Control S479
Convene a Committee
Meeting
S549 The liquidator must
have regard to the
Committee’s
directions.
Right to replace a member S550
To approve or reject Liquidator’s
remuneration.
S473
Authorise the Liquidator to enter
into long-term arrangements over 3
months.
S477(1)(a)(2B)
Compromise a debt due to the
company greater than $20,000.
S477(2A)
Right to direct investment of
surplus funds.
The Committee would generally be elected at the first meeting of creditors.
While there is no limit on the number of committee members it would
generally be 3 to 5 persons.
Formal meeting procedures as for creditors meetings apply, however the
usual 14 days notice is not required.
The liquidator will become the chairperson, and must keep minutes of the
meeting. These must record who is present and be filed with the Australian
Securities and Investments Commission within one month of the meeting.
To be eligible to be a Committee member, creditors must be represented
a) personally;
b) by an attorney; or
c) by a person authorised in writing by the creditor.
Committee members are not able to obtain personal gain by virtue of the
position they hold. If they do, then a creditor may apply to have the
transaction set aside. The Court has the power to approve transactions
before they are entered into; which if approved can go ahead.
liquidations

1.2 Reports to Creditors
Creditors will almost invariably receive a written report, or a number of
reports, from the liquidator.
Contents of Reports
a) Initial Report
This is likely to be no more than a brief introduction and advise of the
liquidator’s appointment, and provide an outline of the company’s asset and
liability position.
b) Subsequent Reports
Will probably be in some detail commenting on:
• strategy of realisation of assets;
• success in realisation of assets;
• summary of Report as to Affairs;
• statement of Receipts and Payments;
• details of the basis of the liquidator’s charges; and
• results of investigations.
c) Verbal reports
Will be given to creditors when
• they contact the liquidator’s office direct;
• at a meeting of creditors
1.3 Meeting of Creditors
If required to do so by not less than 10% in value of creditors, then a liquidator
must convene a meeting of creditors. The costs will be borne by the party
requiring the meeting, unless either the Court or the Committee of Inspection
approved the cost being an expense of the liquidation.
If the liquidator decides to call a meeting then the cost will be an expense of the
liquidation.
Other than the 10% requirement above, there is no compulsory obligation on a
liquidator to call a meeting.
HOWEVER, the liquidator is likely to call a meeting to:
a) report on matters of substance;
b) seek creditors’ agreement to a course that the liquidator proposes to undertake;
c) obtain funding;
d) obtain approval of remuneration (if there is no Committee);
liquidations

e) seek information;
f) obtain authority to enter into long term agreements – S477(2B); and
g) compromise a debt due to the company exceeding $20,000 – S477(2A).
1.3.1 Calling of the Meeting
Creditors must be given 14 days notice of the meeting which can be sent by:
• personal delivery;
• prepaid post;
• fax; or
• DX – document exchange.
Creditors can nominate to receive notices by electronic means if they so request.
At least 7 days before the meeting, the notice of meeting must be advertised in a
daily newspaper circulating in a state where business was conducted by the
company at any time during the two years immediately before the meeting.
1.3.2 The Meeting
Other than to:
a) elect a chairperson;
b) accept proofs of debt; and
c) adjourn the meeting
a quorum, which is comprised of
a) if the number of persons entitled to vote exceeds 2 – at least 2 of those persons
(personally or by proxy);
b) if only one person is, or 2 are, entitled to vote – that person or those persons
(personally or by proxy);
Must be present before a meeting can start.
The meeting must start within 30 minutes of the time nominated in the notice of
meeting otherwise it is adjourned to:
a) the same day, time and place the next week or
b) the day the Chairperson nominates being not less than 7 days and not more than
21 days after the day of the adjourned meeting.
Creditors may force an adjournment of a meeting to another day and place.
liquidations

1.3.3 Voting
Resolutions will be decided on voices unless a poll is called for before the
declaration of the result of the voices by:
a) the Chairperson;
b) 2 persons participating in the meeting; or
c) by a person holding not less than 10% of total voting rights of all people entitled
to vote at the meeting
If a Poll is conducted a resolution is carried if the resolution is carried by a majority
in number and value. The Chairperson has a casting vote.
1.3.4 Proxies
A liquidator must send to the creditor with the notice of meeting a form of Proxy.
Creditors can appoint any natural person over 18 years of age to act as the proxy.
If the proxyholder is the liquidator, or an employee or his/her partner, the proxy
cannot be used for the approval of the liquidator’s remuneration if it is to be paid
out of the assets of the company (unless the remuneration is paid as if the
liquidator was an unsecured creditor).
A company can only participate in a meeting by appointing a proxy.
The proxy given by a company should:
a) be signed by a person whose role in the company clearly authorises him or her
to appoint a proxy; and
b) be accompanied by a copy of a resolution under S249(3).
The lodgement of a proxy by facsimile is in order, so long as the original is also
lodged within 72 hours after lodging the faxed copy.
The convenor of the meeting can require proxies to be lodged prior to the
commencement of the meeting, but not more than 48 hours before its
commencement.
liquidations

1.3.5 Who May Vote?
Creditors must have lodged with the Chairperson details of their debt before they
can vote. The liquidator may require a formal proof of debt.
In addition, the Chairperson must admit the debt for voting purposes, before the
creditor can participate in the meeting.
Creditors cannot vote in respect of:
a) an unliquidated debt or claim;
b) a contingent debt or claim; and
c) a debt where the value of it has not been established unless a just estimate of its
value has been made
1.3.6 Secured Creditors
Can only vote for the difference between the value of their registered security and
the amount actually owed.
If a secured creditor votes in respect of his or her debt or claim the creditor will be
taken to have surrendered its security.
1.4 So you are not happy with the result?
If, as a creditor, you feel that a resolution (or the failure to pass a resolution) is
a) contrary to the interests of creditors; and/or
b) has prejudiced (unreasonably) creditors who voted against a resolution,
then you may apply to the Court for a review of the resolution.
Other Rights Available
RIGHT SECTION
Apply to Court for special consideration in view of
costs indemnification of the Liquidator
S564
To inspect Liquidators’ records in respect of the estate
and carrying on of business.
S531
Reg. 5.6.01 & 5.6.02
Proofs of Debt:
1. To inspect all proofs of debt;
2. To be advised of rejection within 7 days;
3. To appeal against wrong admission.
S531
Reg. 5.6.54(1)
S1321
Appeal to Court if aggrieved by act, omission or
decision of Liquidator.
S1321
liquidations

1.5 General Supervision
The liquidator is always accountable to the Court. Creditors have the right to make
a complaint to the Court (or for that matter to the Australian Securities &
Investments Commission) with respect to the conduct of a liquidator in respect of
his performance of duties.
The Court can take whatever action it thinks fit after making proper enquiries –
including an examination of the liquidator or any other person.
2 To the Australian Securities & Investments Commission
When the report to the company’s affairs is received the Court liquidator must
lodge a report with the Australian Securities & Investments Commission (S476)
providing details of:
a) share capital;
b) assets and liabilities;
c) cause of failure; and
d) whether or not further enquiry is desirable.
If it appears to the liquidator that:
a) an offence has been committed;
b) a misfeasance or misapplication has been committed by a person taking part in
the formation, promotion, administration, management or winding up of the
company; and
c) unsecured creditors will get paid less than 50 cents in the dollar
then the liquidator must provide a further report to the Australian Securities &
Investments Commission and state whether or not he intends to make an
application for examination pursuant to Section 533 of the Corporations Act 2001.
The liquidator may lodge further reports specifying any other matter that he thinks
appropriate to the Commission.
The liquidator’s statements are protected by a limited privilege in proceedings for
defamation.
2.1 Liquidator’s Accounts
Half yearly, the liquidator is required to lodge with the Australian Securities &
Investments Commission a statement of receipts and payments. As a creditor you
are entitled to obtain a copy of that statement.
liquidations

The primary purpose of a voluntary administration is to provide a flexible
procedure enabling a company time to attempt a compromise or
arrangement with its creditors, which may save the company, the business
and jobs while maximising the return to creditors. If the attempt fails, the
legislation facilitates the winding-up of the company.
HOW DOES THE ADMINISTRATION BEGIN?
Appointment by the company’s directors
Appointment by the company is initiated when the director(s) of the
company resolve that the company is or is likely to become insolvent (S
436A).
The directors simply have to be satisfied that there is a likelihood that the
company will be insolvent at some future time.
Appointment by the liquidator or provisional liquidator
An administrator can be appointed by a liquidator or a provisional
liquidator (S 436B). The liquidator or provisional liquidator may act as the
administrator provided that the Court’s approval is obtained.
Appointment by the holder of a registered security over the whole, or
substantially the whole, of a company’s property
The holder of a registered security over “the whole, or substantially the
whole, of a company’s property” may also appoint an administrator: S
436C.
Bringing the administration to an end
An administration will end when:
(i) a Deed of Company Arrangement is executed; or
(ii) the creditors resolve that the administration should end; or
(iii) the creditors resolve that the company be wound up; or
(iv) the Court, on application of the company, orders that the
administration end; or
(v) the time period for calling a meeting of creditors as prescribed
under the Corporations Act has not been met.
voluntary administrations

Removal of the administrator
The administrator of a company may be removed by resolution of the
creditors at the first meeting of creditors. This meeting must be held within
eight business days after the administration begins.
WHAT HAPPENS ON THE APPOINTMENT OF AN ADMINISTRATION?
The administrator takes control
On appointment, control of the company and its property, business and
affairs vests in the administrator.
Notice of the appointment must be published on the ASIC website. Before
the end of the next business day after appointment, notice must also be
given to any holder of a registered security over the whole, or substantially
the whole, of the company’s property: S 450A(3).
Where an administrator has been appointed by the holder of a registered
security over the whole, or substantially the whole, of the company’s
property, the chargee must give written notice of the appointment to the
company as soon as practicable but before the end of the next business
day.
A moratorium is put in place
To give the company breathing space, as and from the commencement of
the administration, a moratorium comes into effect preventing creditors
from taking actions or proceedings against the company or its property
during the administration without the administrator’s written consent or
the Court’s leave.
Subject to the exceptions mentioned below, the moratorium also binds
owners or lessors of property being used, occupied by or in the possession
of the company. The administrator must not dispose of such property
except:
• with the written consent of the owner; or
• in the ordinary course of the company’s business; or
• with the leave of the court.

The moratorium also prevents a person enforcing a registered security over
property of the company during the administration except with the
administrator’s written consent or the court’s leave: S 440B.
Exceptions to the moratorium:
(i) Creditors who hold a registered security over “the whole, or
substantially the whole, of the property of a company” are in a
special position - they are not bound by the moratorium if the
charge is enforced in respect of all of the secured property,
either before the commencement of the administration or
within 13 business days of being notified of the administrator’s
appointment.
(ii) A secured creditor holding a registered security over the
company’s property who has begun to enforce that registered
security prior to the commencement of the administration: S
441B.
(iii) A secured creditor who holds a registered security over
“perishable property” or an owner or lessor of such property.
(iv) Owners or lessors of property used, occupied by or in the
possession of the company who have enforced a right to take
possession of the property prior to the administrator’s
appointment.
Directors’ guarantees are unenforceable
A guarantee given by a director or a relative of a director cannot be
enforced during the administration except with the Court’s leave. That
protection ends if the company goes into liquidation and will usually end if
a Deed of Company Arrangement is entered into.

THE ADMINISTRATOR'S PERSONAL LIABILITY
Personal Liability
The administrator is personally liable for debts of the company incurred in
the performance of the administrator’s functions and powers, for services
rendered, goods bought and property hired, leased, used or occupied by
the company; but is entitled to a right of indemnity out of the company’s
property for that liability: SS 443A and 443B.
The administrator will therefore need to be satisfied that the company has
sufficient free assets out of which to meet the statutory indemnity and/or
has an agreement with the principal creditors to the effect that the
administrator’s liabilities will be met. The administrator is not taken to
have adopted existing agreements. Suppliers of essential services
(electricity, gas, water or a telecommunication service) are specifically
prohibited from insisting on the payment of arrears as a condition of
further supply: S 600F.
Where the company entered into an agreement prior to the administration,
to use the property of which someone else is the owner or lessor, the
administrator has five business days within which to decide whether or not
to continue to use the property. Unless the administrator gives a notice to
the owner or lessor of the property within five business days after the
beginning of the administration the administrator will be personally liable
for amounts due under the agreement while he uses or keeps possession of
the property or goods.
Indemnity
The administrator is entitled to an indemnity out of the company’s
property for remuneration and personal liabilities incurred during the
administration. The indemnity has priority over debts of the company
secured by a circulating security over property, unless the registered
security holder has either commenced enforcement of or actually enforced
the registered security before the administration began.

SO THE CREDITORS ACCEPT A DEED OF COMPANY ARRANGEMENT –
WHAT NOW?
If the creditors resolve that the company should execute a Deed of
Company Arrangement, then the administrator of the company will
become the administrator of the deed unless the creditors resolve
otherwise: S444A.
The deed must be executed by the company within 15 business days after
the creditors’ meeting to decide the company’s future. The administrator
must execute it before or as soon as practicable after the company
executes it.
All pre-deed creditors are bound by the deed irrespective of whether they
voted in favour of the deed S 444D.
The administrator of a Deed of Company Arrangement (as opposed to the
administrator of a company) is not made personally liable by the
Corporations Act for debts incurred by the company during the operation of
the Deed of Company Arrangement.
The position of secured creditors and owners or lessors of property under
a Deed of Company Arrangement.
The moratorium on the enforcement of rights is lifted once the Deed of
Company Arrangement is executed; but the Court has a power, on the
application of the deed administrator, to restrain a registered security
holder from realising its security or otherwise dealing with the security, or
to restrain an owner or lessor from repossessing property, except as the
Court permits.
The moratorium may however, remain in place where a registered security
holder votes for a deed, the terms of which restrict the registered security
holder from taking action to enforce the charge.

CREDITOR VOTING
• The administrator or his/her nominee must chair the meeting;
• Creditors may participate in meetings by telephone where
telephone facilities are available and the chairperson considers it
appropriate;
• A resolution put to the vote of a meeting must be decided by
majority on the voices unless a poll is demanded by the
chairperson, by two or more creditors present and entitled to vote
at the meeting, by a person present in person, by proxy or by
attorney and representing not less than 10 per cent of the total
voting rights of all the persons entitled to vote at the meeting;
• Where a poll is taken, a resolution is carried if:
a) a majority in number of the creditors vote in favour; and
b) the value of the debts owed by the corporation to those voting in
favour of the resolution is more than half the total debts owed to
all the creditors participating in the poll.
If a vote results in a deadlock, the chairperson may resolve the deadlock by
exercising a casting vote.
• Where the outcome is determined by the exercise of the
chairperson’s casting vote, any creditor may apply to the court for a
review of the outcome and appropriate order.
• Registered security holders may vote at creditors’ meetings during
the voluntary administration in respect of their debts without
forfeiting their security.
• If a creditor believes that the outcome of a meeting has been
influenced by the votes of creditors who are associated entities of
the company the creditor may apply to the court for an appropriate
order, including orders setting aside the resolution and reconvening
the meeting.

PARTICULAR REASONS FOR A REGISTERED SECURITY HOLDER TO
SUPPORT A DEED OF COMPANY ARRANGEMENT (DOCA)?
Where there is a doubt as to whether enforcement of the security would
realise sufficient sums to repay the secured debt, putting together a Deed
of Company arrangement with the co-operation of the directors and the
other creditors may result in a better outcome for the secured creditor.
However, the circulating asset element of the registered security may be
depleted during the administration as the administrator has an indemnity
for remuneration and debts incurred during the administration which rank
in priority to the company’s unsecured debts and debts secured by a
circulating asset.
(i) The registered security holder may want the affairs of the and
the directors of the company to be investigated. The
administrator has investigative powers that are not available to
a Receiver & Manager.
(ii) There may be an advantage in an administrator running a
business to overcome potential problems with parties such as a
landlord who has rental arrears, lessors of property who want
to take possession, retention of title creditors etc.
(iii) The assets covered by the security may be such that it makes
no difference to a registered security holder whether they are
recovered by a Receiver & Manager or Voluntary Administrator.
(iv) If the registered security holder is satisfied with the capabilities
and integrity of the person to be appointed administrator, the
registered security holder may be prepared to allow the
administration to proceed.
(v) Transactions between the company and the registered security
holder could be liable to challenge pursuant to the voidable
transaction provisions of the Corporations Act if the company
was to go into liquidation. The administrator does not have the
power to challenge voidable transactions. It may therefore
sometimes be in the registered security holder’s interests to
keep the company out of liquidation.
(vi) The registered security holder may prefer to allow the company
to appoint an administrator to avoid unwanted publicity.
(vii) The registered security holder may decide to allow an
administrator to be appointed where there are ongoing
problems with assets which could bring liability on the
registered security holder or the Receiver & Manager.

WHY SHOULD AN UNSECURED CREDITOR SUPPORT A DOCA?
• An administration leading to the execution of a Deed of Company
Arrangement may enable a higher level of dividends to be paid to
unsecured creditors in comparison to the alternatives.
• A DOCA could have taxation advantages over a liquidation. For
example, any tax losses of the company may be able to be
preserved and used, which may ultimately result in a higher return
to creditors.
• The administrator of a company or of a deed of company
arrangement does not have the power to challenge voidable
transactions. So if a creditor has received a preferential payment, it
may choose to support a Deed of Company Arrangement.
• An administrator has the benefit of the statutory moratorium and is
able to carry on the company’s business in an orderly manner
whilst formulating a DOCA. In many cases this can protect the
company’s assets and their value and therefore produce a better
result for unsecured creditors.

QUEENSLAND
Terry van der Velde 07 3310 2007 terry.vandervelde@svp.com.au
Managing Director
David Stimpson 07 3310 2002 david.stimpson@svp.com.au
Executive Director
Terry Rose 07 3310 2099 terry.rose@svp.com.au
Director
Jason Cronan 07 5479 6199 jason.cronan@svp.com.au
Director
Anne Meagher 07 3310 2076 anne.meagher@svp.com.au
Director
NEW SOUTH WALES
Stephen Hathway 02 8986 8905 stephen.hathway@svp.com.au
Executive Director
Joe Atkinson 02 8986 8922 joe.atkinson@svp.com.au
Director
Daniel Quinn 02 4023 0847 daniel.quinn@svp.com.au
Director
Darren Vardy 02 9531 8365 darren.vardy@svp.com.au
Director
Ian Purchas 02 8986 8977 ian.purchas@svp.com.au
Director
Ross Mottershead 02 9531 8365 ross.mottershead@svp.com.au
Director
VICTORIA
Michael Carrafa 03 9669 1111 michael.carrafa@svp.com.au
Executive Director
Richard Cauchi 03 9669 1127 richard.cauchi@svp.com.au
Director
David Lofthouse 03 9669 1129 david.lofthouse@svp.com.au
Director
Peter Gountzos 03 9669 1188 peter.gountzos@svp.com.au
Director
further information

Corporate insolvency handbook

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