Claw314 Corporate Law : Balance Assessment Answers

This is a study of the topic of insolvency of a company leading to its wind up by either the members or the creditors, or alternatively how a company might be saved from liquidation. In this presentation you are required to address the following issues:

What are the different avenues available to the company, in particular to the directors, if the company is presumed to be insolvent?

What are the statistics on insolvency regarding Australian companies?

Answer:

An insolvent company fails in paying their debts when the payment is due. There are three common procedures for corporate insolvency, which includes voluntary administration, receivership and liquidation. A company does not become insolvent in a single day; there are signs which often present as the possibility of a company being insolvent. There are always signs present which show that the company is facing financial difficulties (ASIC, 2014a). Some of the signs which indicate towards financial difficulty include poor cash flow, continued losses, creditors not being paid even out of their usual terms, lack of cash flow, debts continuously rising, absence of business plan, suppliers putting the company on Cash on Delivery terms, dishonouring cheques or issuing post dated cheques, problems in collecting debts or selling stocks, inability in raising funds from the shareholders, unrecoverable loans to associated parties, overdue taxes and superannuation liabilities, problems in getting finance, expecting that the next big contact would save the company, disputes in board or with suppliers, and overdraft limit being reached (ASIC, 2016).

In case the directors of the company suspect that the company is facing financial difficulties, there is a need to attain legal and accounting advice at the earliest, so that the chances of the company’s survival are increased. Amongst the leading reasons for a company not being saved in time includes the lack of seeking professional advice in timely manner. By appointing an insolvency practitioner, the solvency review of the company can be conducted, who could outline the options which are available for the company. These held in making informed decisions regarding the future of the company. When it is clear that the company is insolvent, it is of utmost importance that no further debts are incurred (ASIC, 2014b).

ASIC issues quarterly results whereby the insolvency statistics for each quarter are presented. As per the statistics of June 2017 quarter, there was an increase by 28% in the companies which entered external administration in comparison to the statistics for the last quarter. In comparison to the previous quarter, where the value showed 1,717, for this quarter, the appointments totalled at 2,198. However, the quarterly total in comparison to the 2016 June quarter was lower by 3.6%, as the value for last year stood at 2,283. The court liquidations for the June 2017 quarter stood at 634, the creditors’ voluntary liquidations stood at 1,098, the receiverships showed 156 and the voluntary administrations contributed to 309. The statistics given by the ASIC also have been given state wise where the increase in states has been compared with one another. This figured showed that in most of the states, the court liquidation appointments were raised, and the figure was up by 25.5% nationally, along with the rise in the director initiated winding up, which saw a rise by 35.9%. Similarly, the receiverships were raised by 45.8% and the appointments of the voluntary administrators saw a rise by 4.4% (ASIC, 2017a).

There are a range of topical insolvency issues for the companies in the nation. These include the reporting requirements/ obligation which have been imposed over the auditors of the companies to the ASIC. The one relating to security issues includes the attacks on charges as voidable transactions and the registration of charges (Quinlan, Fleming and Popkin, 2004). The payment by the third party, or the one made pursuant to a letter of credit or bank guarantee, could at times lead to an unfair preference, which is a key topical insolvency issue for the companies, particularly the ones operating in financial sector. The duties and the liabilities for the directors of the company, along with the element of unconscionability are some other topical issues (Allens, 2004).

References

ASIC. (2010) Duty to prevent insolvent trading: Guide for directors. [Online] ASIC. Available from: https://download.asic.gov.au/media/1241384/rg217-29july2010.pdf [Accessed on: 04/09/17]

ASIC. (2014a) Insolvency. [Online] ASIC. Available from: https://asic.gov.au/regulatory-resources/insolvency/ [Accessed on: 04/09/17]

 ASIC. (2017b) Liquidation: A guide for employees. [Online] ASIC. Available from: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/liquidation-a-guide-for-employees/ [Accessed on: 04/09/17]

Australian Institute of Company Directors. (2014) Insolvent trading. [Online] Australian Institute of Company Directors. Available from: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx [Accessed on: 04/09/17]

Piper Alderman. (2014) Welcome to this edition of Insolvency Update, looking at topical and important issues in relation to insolvency and bankruptcy law. [Online] Piper Alderman. Available from: https://www.piperalderman.com.au/__files/f/6391/Insolvency%200814.pdf [Accessed on: 04/09/17]

Quinlan, M., Fleming, S., and Popkin, M. (2004) You Oughta Know Topical Insolvency Issues of which Bankers Should be Aware. [Online] Allens. Available from: https://www.allens.com.au/pubs/pdf/insol/pap2dec04.pdf [Accessed on: 04/09/17]