SHAREHOLDER DISPUTES-The consideration of the practical implications of buying out another party and a when winding up may be preferred.

Shareholder disputes considerations

Shareholder disputes often arise in private companies where there is a breakdown in relationships between shareholders. Often these disputes arise from assertions of oppression of a minority shareholder and the court is asked to exercise its broad discretion to make orders under S233 of the Corporations Act 2001 either wind up the company or to order a buy- out.

The question as to whether or not a buy-out order is practicable or would only give rise to further complications and potential forensic challenges to and for the party in obtaining meaningful relief needs to be considered.

The general principles were summarised in Re Hollen Australia Pty Ltd, Robson J:

(1) Generally, the purpose of granting a remedy under s 232 is to bring an end to the oppression and to fairly compensate the person oppressed.

(2) Typically, the oppression can be ended and the oppressee properly compensated by the oppressor being ordered to acquire the oppressee’s shares at a fair value.

(3) Generally, the order should seek to put the company back on the rails and avoid the causes of conflict and oppression.

(4) Winding up is a remedy of last resort.

(5) Winding up a profitable and operating company is an extreme step and requires a strong case to be make.

(6) In choosing a remedy under s 233 the Court is exercising a discretion.

(7) In exercising that discretion, the Court should keep in mind the above principles.

(8) Bearing in mind those principles, circumstances may dictate that the most appropriate remedy to bring an end to oppression and to fairly compensate the person oppressed is a winding up.” (emphasis added).

 

In the recent decision of Snell v Glatis (No 2) [2020] NSWCA 166, the primary judge found oppression of the applicant shareholder and ordered that $66 million be paid within 30 days without any evidence as to Mr Snell’s capacity to raise those funds.

The primary judge relied on the absence of any evidence of hardship and the fact that compulsory buy-out was the plaintiffs’ preferred remedy. Her Honour expressly appreciated that “finding the sums sought by the plaintiffs to buyout their shares may well not be easy”, but nonetheless ordered a compulsory buy-out on the basis that it was the appropriate relief in order to prevent oppression in the future.

The Court granted the appeal and ordered the winding up of the Company.

Relevantly, the companies’ main assets in this matter were tenanted property and loans which may be more or less readily realised by a liquidator. The relevant companies were for the large part not actively conducting a business, but rather collecting rents on leased property and repayments of secured and unsecured loans, and the Court considered that winding up was a realistic means of securing to the plaintiffs their share of the value of the companies which would also prevent ongoing oppression.

 

The case highlights the fact that the context in which the particular company or companies operate together with their structure and history will always be relevant to the fashioning of appropriate discretionary relief and the usual view that winding up is a last resort (particularly for trading and solvent companies do not mean that that remedy should not be considered, in an appropriate case, even if neither party in fact seeks it.

If you are a shareholder of a company and have a dispute with other shareholders, and want assistance and advice to resolve the dispute, please contact us:

Insolvency reforms to support small business

Insolvency reforms to support small business

On 24 September 2020, Federal Treasurer the Hon Josh Frydenberg MP along with the Michael Sukkar MP, Minister for Housing and Assistant Treasurer, announced significant reforms to Australia’s corporate insolvency laws as part of the Federal Government’s economic recovery plan.

The reforms are said to be the most significant reforms to Australia’s insolvency framework in 30 years and draws on key features from US Chapter 11 style Bankruptcies.

The reforms will cover around 76% of Companies subject to insolvencies today, 98% of whom who have less than 20 employees.

THREE key elements of the proposed insolvency reforms:

  1. A new formal debt restructuring process for small businesses (with liabilities of less than $1 million) to provide a faster, less complex and cost-effective mechanism to restructure their existing debts.
  2. A new, simplified liquidation pathway for small businesses (with liabilities of less than $1 million) to allow faster and lower-cost liquidation, resulting in increased returns for creditors and employees.
  3. Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business.

Brief Overview and Summary of the Proposed Reforms

Who Will Be Able to Use the New Processes?

An Incorporated business (Pty Ltd company) with liabilities of less than $1 million.

*We note that the reforms do not currently appear to foreshadow changes to the personal insolvency regime (Bankruptcy laws).

When Will the New Processes Be Available for Small Business?

From 1 January 2021 (subject to the drafting and passing of legislation)

How is the New Formal Debt Restructuring Process Said to Operate?

  • The proposal adopts a ‘debtor in possession’ model. That means that the business can keep trading under the control of its owners/Directors, who is said to know the business best.
  • Directors of a small business facing financial distress approaches a Small Business Restructuring Practitioner.
  • The Small Business Restructuring Practitioner’s role is to:
    • Help determine if the company is eligible for the new debt restructuring process
    • Support the company to develop a plan and review its financial affairs
    • Certify the plan to creditors
    • Manage disbursements once the plan is in place
  • If the Small Business Restructuring Practitioner advises that the new debt restructuring process is the most appropriate option Company, the practitioner proposes a flat fee for the practitioner’s work in helping the business develop a restructuring plan.
  • The company Directors decide to accept the advice and pass a company resolution to appoint the Small Business Restructuring Practitioner.
  • Notably, it is proposed that all current employee entitlements must be paid before a plan can be put to creditors.
  • On commencement, unsecured and some secured creditors are prohibited from taking actions against the company, personal guarantees cannot be enforced against the Director(s) (or one of their relatives), and a protection from ipso facto clauses (that allow creditors to terminate contracts because of an insolvency event) apply (with the same protections applying as during voluntary administration).

 

  • 20 business-day period commences:
    • The Directors work with the practitioner to develop a plan to restructure the company’s debts and provide supporting documents for creditor consideration.
    • During this time, the Directors continue to control the business and can trade in the ordinary course of business.
    • The practitioner develops a remuneration proposal to cover their management of the plan once in place, which will operate as a percentage fee of disbursements made under the plan.
    • The practitioner certifies whether they consider the business can meet the proposed repayments and has properly disclosed its affairs.
    • The practitioner sends the plan and supporting documents to creditors.
  • 15 business-day period commences:
    • Creditors have 15 business days to vote on the plan, including the proposed remuneration for the practitioner.
    • If more than 50 per cent of creditors by value approve the plan, it is approved and binds all unsecured creditors.
    • Secured creditors are bound by the plan only to the extent their debt exceeds the realisable value of their security interest.
    • Related-party creditors are not entitled to vote.
    • If the plan is approved, the business continues and the practitioner administers the plan by making distributions to creditors according to the terms of the plan.
    • If voted down by creditors (being if more than 50 per cent of creditors by value do not approve the plan), the process ends and the Directors may opt to go into Voluntary Administration or to use the new simplified liquidation pathway proposed by the reforms.

How is the New Simplified Liquidation Pathway Said to Operate?

  • The simplified liquidation process will retain the general framework of the existing liquidation process with modifications to reduce time and cost associated with existing processes.
  • Time and cost savings with the new simplified liquidation pathway are said to be achieved through:
    • reduced investigative requirements,
    • reduced requirements to call meetings, and
    • reduced reporting functions.
  • Under the new simplified liquidation pathway, Directors appoint a liquidator who will:
    • Take control of the company.
    • Realise the company’s remaining assets for distribution to creditors.
    • Investigate and report to creditors about the company’s affairs and inquire into the failure of the company.
  • Key modifications to the existing liquidation process include:
    • Reduced circumstances in which a liquidator can seek to clawback an unfair preference payment from a creditor that is not related to the company.
    • Only requiring the liquidator to report to ASIC (under section 533) on potential misconduct where there are reasonable grounds to believe that misconduct has occurred.
    • Removing requirements to call creditor meetings and the ability to form committees of inspection.
    • Simplifying the dividend process and the proof of debt process.
  • The rights of secured creditors and the statutory rules as to the payment of priority creditors such as employees will not be modified.

Who Will Administer the New Processes?

A new class of Insolvency practitioner called a “Small Business Restructuring Practitioner” whose practice will be limited to the new simplified restructuring processes only.

  • Registered liquidators will also be able to manage the new process.
  • Significantly, we note that a Small Business Restructuring Practitioner will not take on personal liability for a company or manage its day to day affairs.
  • It is unclear what the requirements will be to qualify as a Small Business Restructuring Practitioner.

What Other Reforms Are Proposed?

  • Temporary insolvency relief for eligible companies waiting to access the new restructuring process.
  • When a company announces its intention to access one of the new processes, they will be entitled to benefit from the existing temporary insolvency relief for up to 3 months until the process commences.
  • Temporarily waiving fees associated with registration as a registered liquidator for approximately 2 years until 30 June 2022.
  • Making changes to allow for more flexibility in the registration of insolvency practitioners.
  • Making the key parts of the process set out in the Corporations Act 2001 ‘technology neutral’ so that external administrations can be carried out more efficiently.

As experienced insolvency and restructuring lawyers, Rostron Carlyle Rojas Lawyers look forward to reviewing the draft legislation along with any further clarification from the Federal Government on the technical details of the proposed insolvency reforms. That being said, the reforms to our corporate insolvency laws are certainly well overdue.

If you have felt the effects of the pandemic on your company or require assistance or clarification in relation to the current temporary relief for financially distressed companies, now is the time to get advice on how to structure your company’s affairs.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:

QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

JobKeeper 2.0 Changes Effective 28 September 2020

New JobKeeper

The Federal Government’s JobKeeper Payment Scheme, which was announced in March 2020, is one of the most significant business stimulus packages offered by the Government in response to the COVID-19 pandemic. The scheme aims to keep Australians employed, in their pre-pandemic role with their employer.

The original JobKeeper Payment Scheme saw eligible employers receive fortnightly ‘JobKeeper Payments’ of $1,500 per eligible employee. However, from 28 September 2020, payments will decrease and employer eligibility restrictions will tighten. Further changes will also come into effect on 4 January 2021.

New Payment Rates

A new tiered approach will determine an employee’s JobKeeper Payment rate, generally based on their average hours worked.

Tier 1 rates apply to employees who worked 80 hours or more (including paid leave or paid public holidays) over the 4-week pay period preceding either 1 May 2020 or 1 July 2020. Tier 2 rates apply to those who worked less than 80 hours.

New JobKeeper Payment Rates

As per the original JobKeeper eligibility requirements, employees will be eligible if they:
• Are currently employed by an eligible employer (this includes those who have been stood down or re-hired);
• Were employed by the employer on 1 July 2020;
• Are full-time, part-time, or a casual employee who had been employed on a regular basis for longer than 12 months as at 1 July 2020;
• Are 18 years old, or at least 16 years old if independent;
• Are an Australian citizen, the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia for over 10 years, or a Special Category (Subclass 444) Visa Holder; and
• Are not receiving a JobKeeper Payment from another employer.

The payments are considered taxable income and PAYG income tax must be withheld. It is at the employer’s discretion whether to pay superannuation on any wage increases stemming from the JobKeeper Payment.

New Eligibility Restrictions

Businesses seeking eligibility under the new JobKeeper Payment Scheme will be required to demonstrate an actual decline in turnover of 30% in the September 2020 quarter compared to the same period in 2019 (50% for those with an aggregated turnover of more than $1 billion and 15% for charities and not-for-profits). The further revised JobKeeper Payment Scheme that will come into effect on 4 January 2021 requires reassessment for the December 2020 quarter.

Applications for the JobKeeper Payment Scheme are open and businesses can apply directly via the ATO.

For employers and employees alike, JobKeeper and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic.

If these measures have not been effective in assisting your business, and you are facing solvency issues, you should seek early advice from a qualified insolvency practitioner.

Contact our team of qualified legal advisers today.

Federal Government announce extension to insolvency relief

Federal Government announce extension to insolvency relief

On 7 September 2020, Federal Treasurer the Hon Josh Frydenberg MP along with the Hon Christian Porter MP, Attorney General, Minister for Industrial Relations announced in a joint media release that the regulatory relief for businesses that have been impacted by the Coronavirus crisis will be extended to 31 December 2020. This will come as welcome news to directors of impacted businesses, as the temporary relief measures will further extend the moratoriums against personal liability of directors for trading whilst insolvent.

The Federal Government, claim that the measures will help prevent a further wave of failures before businesses have had the opportunity to recover from the effects of the pandemic. In their statement, their Honours say that, “as the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”

As insolvency and restructuring lawyers, Rostron Carlyle Rojas Lawyers have seen how this regulatory relief can be utilised to protect directors in re-arranging their company’s affairs. The temporary relief measures are extraordinary and unlikely to be replicated once the world moves back to business-as-usual. If you have felt the effects of the pandemic on your business, now is the time to get advice on how to structure your company’s affairs.

Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:
QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]

Help! I can’t pay my debts: Understanding your insolvency options.

Insolvency Options

While social distancing lockdown measures may be easing across Australia, the economic fallout from COVID-19 is in its infancy. Cashflow for many businesses have dried up, and sadly, for many more their coffers will soon be empty. Undeniably, the financial impact of the lockdown measures is (and will be) immense.

For employers and employees alike, the Jobkeeper payment and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic. Getting proper informed advice as to what legal options you may have available to you as an individual, to help you manage your debt, has never been more important.

Many Australians are now (or will soon be) faced with unmanageable debt. The earlier you seek help, the more informed you’ll be and likely to gain control of your situation.

Insolvency -What are my options?

At the outset, it is important to note that you are deemed to be insolvent under the Bankruptcy Act 1966 if you can’t pay your debts when they fall due. A scary concept given the cashflow constraints faced by so many Australians right now.

If you are insolvent, then you are at risk of being made bankrupt by one of your creditors (if the relevant bankruptcy thresholds are met, and the applicable bankruptcy procedures followed). However, you may have other options available to you, that may see you avoid formal bankruptcy (either now or at some time in the foreseeable future).

If you have unmanageable debt, you generally have four formal insolvency options available to you, or, other informal options such as informal negotiations with your creditors. Regardless of which option you are considering, the consequences of the decisions you make now as to how to deal with your creditors, can be severe.

Overview of formal Insolvency options:

1. Temporary debt protection (TDP) – This option provides you with a six-month protection period from being pursued by unsecured creditors. This is a serious step and advice should be obtained prior to being taken as the consequences can be serious.

*Caution – while creditors may be unable to enforce recovery of unsecured debts from you if you choose this option, they are still able to commence or continue legal action, including to obtain judgment against you. Creditors just won’t be able to enforce that judgment via bankruptcy for six months. Secured creditors on the other hand, can continue recovery of their secured debt. By lodging a temporary debt protection form (formally called a declaration of intention to lodge a Debtors Petition) you are committing an act of bankruptcy and importantly, some debts are not covered by TDP.

2. Bankruptcy – Last for three years and one day and at the end of this period, you are released from most of your debts. Although bankruptcy releases an individual of their debts (or most of their debts), owed at the time of the bankruptcy, there are serious consequences of bankruptcy and you should seek advice if you are considering self-declaring bankruptcy by way of a Debtors Petition.

Consequences of bankruptcy may include impacts on your ability to get credit, restrictions on overseas travel or gaining some types of employment or hold certain licences (such as a builder’s licence). Further, bankruptcy details, such as a bankrupt’s name, address, date of birth and occupation are available to the public via a Government database known as the National Personal Insolvency Index (“NPII”) permanently and usually on databases of credit reference agencies.

3. Debt Agreements – a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time (which you can afford) in final and full satisfaction of the full balance(s) outstanding. These payments are made to your Debt Agreement Administrator, who then distributes the funds to your creditors. Once the agreed payments are made, and the agreement comes to an end, your debts are discharged.

*Caution – There are eligibility criteria for Debt Agreements, for example, you can’t propose a Debt Agreement to your creditors if you owe more than $118,063.40 in unsecured debt, or your after-tax income is more than $88,547.55, or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a Debt Agreement and will still need to be repaid. Additionally, entering into a Debt Agreement may effect your ability to get credit and may appear on the NPII or other public register for a period of time.

4. Personal Insolvency Agreements (PIA’s) – similar to a Debt Agreement and is a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time. However, a PIA involves a trustee taking control of your property and making offers to your creditors on your behalf.

*Caution – There are serious consequences involved in a PIA and by entering into a PIA with your creditors, you are committing an act of Bankruptcy. A PIA may be suitable if you do not qualify for a Debt Agreement, for example if your after-tax income is more than $88,547.55 or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a PIA and will still need to be repaid. Additionally, entering into a PIA will affect your ability to get credit and will appear on the NPII permanently.

If you are considering one of the above four formal insolvency options, it is important that you seek advice as to which option may be best suited to your individual circumstances.

Informal Insolvency options:

Information options that may assist in avoiding one of the four formal scenarios outlined above, include working with your professional advisors (such as an accountant or lawyer), to informally negotiate with your creditors. An experienced practitioner may be able to help you negotiate:

  • More time to pay; Reduced payment amounts;
  • Moratoriums or standstill agreements;
  • Variations (or hardship variations) to your credit contracts;
  • Lower interest rates; and/or
  • Waiver of penalties.

While many people successfully negotiate with creditors themselves, there can be benefits in utilising a professional advisor. One not so subtle benefit of using a lawyer being that you are demonstrating to your creditors that you are seeking advice and that you are serious about reaching a resolution. Quite often, creditors respond more favourably to a letter coming from a lawyer, than for example an email sent from your personal account.

While creditors may seem sympathetic now, that position is likely to change, and change quickly in the coming months. It is therefore becoming increasingly important for individuals who are facing financial difficulties now, to properly inform themselves as to what their legal options are in dealing with their creditors.

Should you require assistance in reviewing your solvency position or would like to discuss what insolvency options may be best suited to your individual needs, please contact our office on 07 3009 8444.

Update to ATO Director Penalty Notices (DPN) and what this means for you as a Director

Director Penalty Notices

In September 2019, our article – What is a director penalty notice and what does it mean for you as a director?, touched on when a director(s) may become personally liable for two types of tax debts of a limited company namely, Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities.

(Below is a Director’s Penalty Notice 101 to get you up to speed with Director penalty notices before you read the update).

Director’s Penalty Notice 101 Infograhic

Director Penalty Notice 101-infographic

Fast forward to 2020, and the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) has been passed to include penalties for unpaid Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax (LCT). The Bill provides that any assessed net amount or GST instalment will necessarily include any applicable LCT and WET.

The new provisions to include director penalties for GST apply from 1 April 2020.

So how does the Bill affect you under the Director Penalty Notice regime and what can you do about it?

1. SGC and PAYG (Pay As You Go) Liabilities

With respect to Super Guarantee Charge (SGC) liabilities, for a director penalty to be eligible to be remitted without payment, the unpaid amounts of superannuation must have been reported by lodgement of the SGC statement by the due date.

For the Pay As You Go amounts that a company must withhold from wage payments made to employees for remission to the ATO (Australian Tax Office), the PAYG withholding must be reported within 3 months of the due date for a director penalty to be eligible to be remitted without payment.

If the SGC statement was not reported by the due date, or the PAYG withholding was not reported within 3 months of the due date, the ATO can issue a ‘lockdown’ Director Penalty Notice and a director can only avoid liability under the DPN (Director Penalty Notice) by arranging for those liabilities to be paid. Appointing a liquidator or voluntary administrator to a company will not avoid liability for lockdown Director Penalty Notice amounts, and the ATO can:

• Issue lockdown DPNs after a company is placed in liquidation or voluntary administration; and
• If necessary, base lockdown DPNs on estimates of a company’s superannuation or PAYG liability.

However, if the SGC was reported by the due date and the PAYG withholding was reported within 3 months of the due date, then a director can avoid personal liability by appointing a liquidator or voluntary administrator to a company. This must be done either before a DPN is issued or within 21 days of the date of the DPN.

2. (Goods and Services Tax) GST Liabilities

With respect to GST liabilities, if a company has failed to pay Goods and Services Tax and also failed to lodge its Business Activity Statements (BAS) within three months of being due, the directors will automatically become personally liable for unpaid GST. Accordingly, the ATO (Australian Tax Office) may issue a lockdown Director Penalty Notice for the Goods and Services Tax liability.

However, if a director is in the position where:

1. the company has failed to pay GST (Goods and Services Tax);
2. the ATO has issued a 21 day Director Penalty Notice; but
3. the company lodged its BAS within three months of the due date,

the director will have 21 days from the date of the notice to exercise one of three options to avoid personal liability. The options are:

1. paying the GST to the ATO;
2. placing the company into liquidation; or
3. placing the company in voluntary administration.

Exercising one of the above options within 21 days will allow a director to avoid personal liability and the debt remains with the company.

What you should watch out for

Ideally, to avoid DPN liability, a company or its director(s) must pay PAYG, superannuation, GST, Wine Equalisation Tax and LCT liabilities on time.

If you are a new director be wary that you can be made liable for historic GST, PAYG and SGC where these remain unpaid 30 days after your appointment. Therefore, when being newly appointed as a director, be careful to ensure you are not inheriting those liabilities.

Summary of notice periods to avoid liability

Summary of notice periods to avoid liability ATO Director Penalty Notices 2020

Coronavirus

In consideration of the current impacts of COVID-19 (Coronavirus), it is unclear whether the ATO will extend the due dates discussed above.

However, the Coronavirus Economic Response Package Omnibus Bill 2020, now Act No 22 of 2020 following its assent on 24 March 2020, may exempt those affected by COVID-19 from these obligations.

Schedule 8 of the Coronavirus Economic Response Package Omnibus Bill 2020 provides flexibility by establishing temporary means through which individuals who are unable to meet their obligations under the Corporations Act or the Corporations Regulations (due to COVID-19) can access regulatory relief for a maximum of six months. In particular, the Treasurer may determine:
• Exemptions from obligations; and
• Modifications of obligations to enable compliance.

As the Coronavirus situation continues to rapidly evolve, the aforesaid due dates may be subject to change, notwithstanding the new Coronavirus legislation. As always, we will continue to keep you updated. If you require any further information on this in the meantime, do not hesitate to contact us.

The Advantages of Holding a Deed Of Company Arrangement (DOCA)

DOCA- Deed Of Company Arrangement

A Deed of Company Arrangement, or DOCA, is an arrangement between a company that has entered into administration and the company’s creditors.

DOCAs are a form of company restructuring provided for under Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) the other alternatives being liquidation and returning the company to the directors.

DOCA – The Administration Process

Phase 1 – Appointment of a voluntary administrator

A decision to appoint a voluntary administrator for a company is made by either:

  • The directors (by resolution of the board and in writing); or
  • A secured creditor (with a security interest in all or substantially all of the company’s property); or
  • A liquidator/provisional liquidator.

The period of voluntary administration commences on the appointment of the voluntary administrator.


Phase 2 – 1st Meeting of Creditors
The voluntary administration must convene the first meeting of creditors within eight (8) business days of being appointed (unless the court allows for an extension of time).
At least five business days’ notice of the meeting must be given to creditors.
Creditors are entitled to vote at this meeting to:

  • Replace the administrator
    Where a creditor intends to replace the administrator, they must approach a registered liquidator before the meeting and get a written consent from that person that they would be prepared to act as voluntary administrator.
  • Create a committee of inspection
    Creditors may elect members to same to assist and advise the voluntary administrator, monitor the voluntary administrator, approve certain steps in the administration, and give directions to same. Note: the voluntary administrator must have regard to but is not always required to comply with such directions.

Phase 3- Investigation and Report
The voluntary administrator investigates and reports to creditors on alternatives.

Phase 4 – 2nd Creditors Meeting
The 2nd creditors meeting must be convened within 25 business days after being appointed (or 30 business days were the appointment is around Christmas/Easter), unless the court allows an extension of time.
At least five business days’ notice of the meeting must be provided to creditors.
Creditors are entitled to vote at this meeting to:

  1. Return the company to the control of the directors
  2. Accept a Deed of Company arrangement.
    Note: the DOCA must be signed by the company within 15 business days following the meeting unless the court allows for an extension of time
  3. Place the company into liquidation effective immediately. (Administrator becomes company liquidator).

Deeds of Company Arrangement

DOCAs are conceived as a flexible, simple, and expedient scheme of arrangement and is regarded as the most common mechanism for company restructuring of distressed entities.

What is a holding DOCA?

A “holding DOCA” is not a term provided for in the Act, however the Australian Securities and Investment Commission – Regulatory Guide 82 provides the following description of a Holding DOCA (Deed Of Company Arrangement):

“holding DOCAs are typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding DOCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors”

What are the benefits of a Holding DOCA?

Holding DOCAs can be an effective tool for companies facing solvency difficulties to deal with creditors while avoiding the hardships of liquidation. Key benefits include:

The terms of a holding DOCA can be highly flexible.

  • Holding DOCAs may provide for a successful restoration of a company to solvency;
  • The holding DOCA may enable the company’s business to continue from which suppliers may benefit;
  • It may provide a greater return to creditors than if the company is wound up; and
  • The restructuring of the company’s debts may result in higher return to unsecured creditors.

Are “Holding DOCAs” valid?

While holding DOCAs are not a long-term solution to an organisation’s solvency issues, they can be an effective and valid means to allowing a company to avoid liquidation.

Case example: Mighty River International Limited v Hughes and anor (as deed administrators of Mesa Minerals Ltd)

In this matter, the High Court considered the validity of holding DOCAs as a means to continuing an administration. Ultimately, the Court determined that the use of a ‘holding’ DOCA could be valid in certain circumstances.

Background:
Mesa Minerals Limited (subject to deed of company arrangement) (“Mesa”) is a listed mining company. Mighty River International Limited (“Mighty River”) was a shareholder and a creditor of Mesa.

The directors of Mesa entered into a resolution to appoint voluntary administrators (“Vas”) to Mesa. The VAs subsequently issued a report to creditors under s 439A of the Act which recommended that is was not in the best interests of creditors to end administrator or to enter the company into liquidation.

The VAs recommended that creditors resolve to execute a DOCA which:

  • did not exclude the possibility of winding up Mesa in the future where this arrangement is ultimately determined to be in creditors’ best interests; and
  • allowed the VAs an opportunity to explore a restructuring and/or recapitalisation of Mesa which may provide a more beneficial outcome for creditors as opposed to an immediate winding up.

Terms of the Holding DOCA

A DOCA was entered into which contained terms providing as follows:

  • An ongoing moratorium on creditors’ claims during which no creditors could pursue claims against Mesa.
  • Contemplated that VAs would further investigate any claims that Mesa had against third parties; and seek proposals for restructuring with a view to having Mesa’s shares continue trading on the ASX (with report on possible variations to the company structure to be provided to creditors within six months).
  • Subject to variation of the DOCA, there would be no property available for distribution to creditors.

Challenge to Validity of Terms of the Deed Of Company Arrangement (DOCA)

Mighty River challenged the DOCA on the following three grounds:

  1. The terms of the DOCA were contrary to the objective and provisions of Part 5.3A of the Act specifically by aiming to circumvent the requirement in s439A(6) for a Court order to extend the period during which the second creditors’ meeting must be convened.
  2. The DOCA failed to identity property available for distribution to creditors contrary to the provisions under s444A(4) of the Act.
  3. The DOCA was void since the VAs failed to form the opinion required by s438A(b) of the Act being that the DOCA was in the best interest of company creditors (and the then existing provisions of s439A(4) accompanying reports and statements to set out required opinion – now repealed provision).

The decIsion
While their Honours disapproved of the term ‘holding’ DOCA since the term does not appear in the Act and obscures proper analysis of the terms for validity, they nonetheless held the ‘holding’ DOCA was properly constituted and valid under Part 5.3A of the Act and fulfilled the formal requirements of same.

Their Honours also found that an instrument conferring and creating genuine rights and duties is permitted to incidentally extend time for VAs investigations pending a subsequent variation to the DOCA.
It was also held that the moratorium on creditors’ claims was not contrary to the objectives of the Act since:

  1. The DOCA increased the chance for company survival or otherwise provided a greater return to creditors than one that would result from the immediate liquidation of the company.
  2. Preceding the enactment of Part 5.3A of the Act, moratorium-only schemes of arrangement were considered valid and by consideration of the purpose of DOCAs (intended to provide greater flexibility to management of company affairs) DOCAs with similar moratorium terms were also permissible.
  3. The interests of creditors are not compromised by extending the prescribed period of time within which the administrator is to convene a meeting of creditors to make decisions about the affairs of a company

With respect to the failure to specify any property for distribution to creditors, it was held that s 444A(4)(b) of the Act required a DOCA to specify the property, if any, to be available to pay creditors’ claims and that the intended flexibility of DOCAs would be undermined should the provision for distribution of property (even of nominal value) be required.
The Court also noted that there are numerous examples of DOCAs that involve no property of the company being made available for distribution, yet they continue to be consistent with the intended flexibility of approach to DOCAs. Such examples include:

  1. A deed of company arrangement may provide for a debt for equity swap.
  2. Creditors’ claims may be replaced with rights as beneficiaries of a creditors’ trust, with the trust funded by third parties.
  3. Shares transfers may bolster a DOCA where shares of the company’s members are transferred to creditors.
  4. The inclusion of a deed of moratorium, which allows the company to trade out of solvency difficulties.

Ultimately, the ‘holding’ DOCA was upheld as valid.

How can we help?
If you are a company director or major creditor of a company suffering solvency issues, you may be able to access the benefits of a holding DOCA for the short term operation and administration of your organisation.

Contact our Insolvency team today to discuss your options.

ACT NOW and ACT FAST and contact us on
QLD
07 3009 8444
[email protected]

NSW
(02) 9307 8900 or send us an email to [email protected]

 

 

Company Liquidation – Are you staring down that financial gun barrel?

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Are you a company struggling to pay your debts? Are you considering turning it all in? If so, a creditor’s voluntary liquidation (CVL) is a process that will allow a company’s shareholders to voluntarily wind up the company.

So, what is CVL?

A CVL is the winding up a company by a special resolution of the company’s shareholders to appoint a liquidator, usually when the company is (or may be) insolvent.

What does the liquidator do?

Upon the winding up of a company, a liquidator has several duties, including but not limited to:

  • assessing and realising the company’s assets for distribution amongst the company’s creditors;
  • conducting investigations of the following matters:
  • when the company became insolvent and whether any debts were incurred after that date;
  • whether the director committed any offences;
  • whether there are any payments to particular creditors that are preferential and other transactions that may be recoverable; and
  • providing reports to creditors and obtaining relevant approvals from creditors; such as approval for their recommendations and costs to be paid from recoveries made in the liquidation;
  • providing reports to the Australian Securities and Investments Commission (ASIC) regarding any misconduct of a director prior to liquidation.

Once the liquidator has completed their investigations and realised that all assets can reasonably be obtained and sold, it will then lodge the necessary documents with ASIC to deregister the company.

What are the effects of a liquidation?

The consequences of liquidation include:

  • the management and control of the company vesting in the liquidator;
  • creditors of the company losing the ability to commence a claim for monies owed;
  • in most cases, the dissolution of the company.

What are the Director’s Duties and Obligations of an Insolvent Company?

Upon the appointment of a liquidator, a director (and any officers of a company) must:

  1. deliver to the liquidator all books and records that relate to the company (other than those to which an officer is entitled to retain);
  2. give the liquidator information about the company’s business, property, affairs and financial circumstances;
  3. provide the liquidator with any further information or documents it requests; and
  4. attend meetings of the company’s creditors or members as the liquidator reasonably requires.

The duties and obligations of a director of an insolvent company are contained in the Corporations Act 2001 (Cth) (Act). Notably, the powers of a director cease on the appointment of a liquidator, and the liquidator takes control of the company’s operations.

So, what happens when a director is operating a company while insolvent?

If a director allows a company to incur debts while insolvent prior to entering into CVL, the director may become personally liable for those debts.

Also, if a claim is made against a director alleging that the company was trading whilst insolvent, and as a consequence the creditor(s) suffered a loss, the director may be held personally liable when the company goes into liquidation.

Subsequently, if the liquidator determines a breach of the Act by a director, they will lodge a report with ASIC. ASIC will review the matter and if deemed appropriate, take action to prosecute the director, including potentially disqualifying a director from managing a corporation.

What happens if a director has provided a Personal Guarantee?

A personal guarantee is a document signed by a director that guarantees the debt incurred by the company. A director who has provided a personal guarantee will be liable for the company’s debt or commitment if the company does not meet its obligations.

If the company becomes insolvent, and the company’s assets are unable to meet the debts, then the focus will turn towards any personal guarantees the director/s has provided.

What now?

If you are a company struggling to pay your debts and thinking of turning it all in, call Rostron Carlyle Rojas Lawyers to discuss. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts. 

This article is written by way of general comment and any reader wishing to act on information contained in this article should first contact Rostron Carlyle Rojas Lawyers for properly considered legal advice which takes into account your specific situation.

Cabinet Speech – Sunday 22 March 2020

cabinet stimulus package

The Cabinet met again on Sunday 22 March 2020 to announce a further stimulus package along with changes to regulation of corporations under the Corporations Act.

Proposed changes to the Corporations Act will seek to loosen regulation of the insolvency laws. Key changes being:
● The response time for Statutory Demands is to be extended from 21 days to 6 months
● The minimum for corporate insolvency to be raised from $2,000 to $20,000
● The response time for answering a bankruptcy notice will be extended 6 months
● The minimum threshold for personal bankruptcy to be raised from $5,000 to $20,000
● Temporary relief from directors’ personal liability for trading while insolvent
● Treasurer to have an instrument-making power, meaning the Treasurer can make ad hoc decisions on a case by case basis to provide relief to distress corporations

For more details, see the linked Fact Sheet published by the Treasury.

A large economic stimulus package has been announced which allows for those most effected by the effects of COVID-19 to access monies they otherwise may not have been able to. This includes:
● Early access to up to $10,000 of Superannuation entitlement. This is likely to be made available to those who have lost their jobs, SMEs and sole traders.
● Additional monies for Jobseekers through government benefits
● Interest free loans for businesses

For more detail, see the linked Fact Sheet published by the Treasury.

PM Scott Morrison pleaded with Australians to cut off all non-essential travel. He defined essential travel as ‘travel that is essential to your daily life’. This includes travel for work purposes, health purposes and normal daily activities such as shopping for food. There are no strict enforceable measures restricting travel within Australia on a Federal level yet. The Cabinet are simply asking Australians to be pragmatic and understanding that it is not just themselves that they must consider, but also those who they may come into contact with that we also must be mindful of.

Insolvency 101 – What every business owner should know

Insolvency 101

Your introductory guide to insolvency and what to do if you believe you are trading insolvent

Insolvency is the inability to pay bills as they become due. While the term ‘insolvent’ can apply to both companies and individuals, personal insolvency is more commonly referred to as ‘bankruptcy’ and is a vastly different process than company insolvency.

As a company director or owner, you have a legal obligation to run the business a certain way, including ensuring that creditors are paid in full and on time.

Your obligations as director/owner and the potential consequences

Knowingly trading insolvent is an offence and could cause you to become personally liable for the company’s debt. When in doubt, seek help early from financial and legal professionals. The worst thing you can do is to do nothing at all.

If you are the director/owner of an insolvent company, the potential consequences include:

  • Loss of employment for yourself and the employees due to the company’s closure
  • Struggling to secure employment in the future due to your record as the director of an insolvent company
  • Loss of personal assets (including your house) 
  • Monetary fines or, in cases where director duty has been severely breached, criminal charges or jail time
  • Personal insolvency/bankruptcy

Generally speaking, if a company is set up and has been operated correctly, you will not be personally liable for company debts. Exemptions to this are where you have knowingly traded insolvent, you have breached your duty as a director, you gave a personal guarantee in order to secure capital or you have engaged in illegal activity.

The warning signs – how do I know when my company is insolvent?

With the potential consequences at stake, it’s vitally important that as a company director/owner, you know the warning signs of insolvency and understand when it’s time to ask for help.

Insolvency, or at least the path towards insolvency, can include cash flow problems, being unable to pay creditor bills within the outlined payment terms, needing to refinance in order to pay bills or letters from solicitors or debt collectors demanding payment for outstanding invoices.

how do I know when my company is insolvent
How do I know when my company is insolvent?

When you are insolvent

If your company is found to be insolvent, there are several potential outcomes:

  • Voluntary Administration
  • Liquidation
  • Receivership

Voluntary administration

In the instance of voluntary administration, the directors of a company enlist the assistance of insolvency lawyers, rather than being forced into liquidation by an unhappy creditor.

Following an in-depth investigation into the company set-up, financials and operations, a voluntary administrator will recommend either going into liquidation (more on this to come) or coming to an agreement with creditors in which the payment term is extended so as to allow the company to trade out of its insolvency.

Liquidation

Liquidation can be either recommended by a voluntary administrator or forced upon a company by a liquidator, usually acting on behalf of the group of creditors as a whole. 

Liquidation meaning
Liquidation process

A liquidator will collate your assets and liquidate them (that is, to sell the physical asset and turn the asset into cash). These funds will then be dispersed amongst known creditors, paying off as much of the total debt as possible.

At the conclusion of this process, the company will be deregistered and will cease to exist.

Receivership

Receivership is a situation where money is owed to a secured creditor (generally a bank), that creditor can elect a receiver to operate on their behalf. The receiver will either liquidate the company assets or take control of the company operations so as to trade the business in the hope of repaying debts owed.

A key difference between liquidation and receivership is that a liquidator acts on behalf of all creditors, whereas a receiver acts only on behalf of the secured creditor. A receiver will first ensure that money owed to the secured creditor is paid before paying out other creditors.

What now?

Whether you are a company director trying to avoid insolvency or have found your company to be insolvent, the worst thing you can do is to do nothing at all. Contact our insolvency lawyers immediately to discuss your options in a judgement-free consult with the experts. 

The Rostron Carlyle Rojas team of Insolvency Lawyers are the experts on your side. Speak to them today and start the journey out of insolvency. 

Recommended for you:  Insolvency- The Ultimate Guide