Six to Eight Involuntary Interventions in the Event of Company Insolvency

The insolvency of a company is when it is unable to pay its debts as they become due. There are several methods that can be used to address insolvency, including liquidation, receivership, deed of company arrangement (DOCA), and schemes of arrangement. Liquidation involves the winding up of the company's affairs and the distribution of its assets among creditors, while receivership involves the appointment of a receiver to manage the company's assets on behalf of a secured creditor. DOCA and schemes of arrangement are voluntary restructuring tools that allow a company to restructure its debts and continue trading. The Australian Securities and Investment Commission (ASIC) plays a significant role in regulating insolvency and ensuring that directors are aware of their duties and liabilities when a company becomes insolvent.

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Cover Sheet
Name of the Student
Student ID
Word Count

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Contents
Insolvency of a company.............................................................................................................................3
Introduction.................................................................................................................................................3
Insolvency...................................................................................................................................................3
Conclusion...................................................................................................................................................6
Reference List.............................................................................................................................................7
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Insolvency of a company
Introduction
In Australia, it is the Corporation Act 2001 that guides and regulates ‘Insolvency of a company’.
Insolvency is no where defined but absence of solvency is considered to be the most precise
definition of Insolvency. Now, the question arises is what is solvency of a company. It is
submitted that a company is said to be solvent when it has the capacity to pay all of its liability
and debt whenever the same fell due. (Swaab, 2009)
The basic aim for the enactment of the insolvent law in Australia is to bring out a balance of
interest of creditors, debtor, and public at large. The Insolvency laws try to lay down a fair
procedure so that the assets of the company can be distributed equitably and equally. The
procedure of insolvency must be such so that the debts so arises can be paid without much delay
and adequate. Both the creditors and debtors of the company must be involved in the procedure
of insole in order to bring fairness in the matter.
It is now important to understand the concepts and law behind insolvency.
Insolvency
What is insolvency is the main question that needs to be target first?
Section 95A of the Act tries to explain the true meaning of Insolvency.
As per section 95 A, sub section 1 , a company is solvent when it has the ability to pay all of its
debts when the same become payable. As per sub section 2 of section 95A, any organization or a
person is considered to be insolvent when the same is not solvent in nature. In Sutherland v
Hanson Construction Materials Pty Ltd (2009), the Supreme Court of New South Wales has
submitted that what is solvent can be determined as per the cash flows of the company. (Latimer,
2012)
Thus, the two main elements that must be looked into in order to determine the insolvency of the
company are:
i. Debts - That the company is at the obligation to pay its dues;
ii. Due and Payable - That the financial position of the company is not such that it is
able to pay its debts when the same became dues and payable.
It is thus submitted that the contrary of solvent results in insolvency of any
organization/individual.
In recent times the insolvency of the companies has been tremendous in nature. The rate with
which the insolvency of the companies is increasing is tremendous. Around 10,000 companies
go into administration every year. In around April 2011, there were around 9747 companies that
went into insolvency. Compared with the previous five years, the increase is approximately
16%.. compared with 2010, there is an increase of 6%. The secured creditors ahs appointed 1356
in 2011 which is 73% increase from the last five years. In 2011, the first seven months saw 5852
administrations. In June 211, there were around 1027 insolvencies that took place. There were
around 240 companies that went into court liquidation, 3835 in creditor’s voluntary liquidation,
1219 in receivership and 1332 in voluntary administration. (Insolvency, 2016)
Thus, the rate with which the insolvency of the courts is increasing is tremendous.
Once it is established that a company is insolvent then what is the actions that must be taken by
the company.

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At this stage, the role of a director is very important. It is necessary to understand the actions and
proactively that is required of the directors in insolvency.
As per section 124 of the Act, a company is an artificial legal person but has the capacity to enter
into contracts, sue and be sued, purchase assets etc. However, a company does not have a mind
to think and thus it acts through its officers. As per section 198E (1) of the Act, the company
director is the person who mainly manages and controls the affairs of the company. (Bottomley,
2016)
Thus, when any company is insolvent or on the verge of insolvency then there are various action
that are expected from the director because he is the main authorized person who commands the
acts of the company. The prime acts of the director include, firstly, he must make sure that no
further liability or debt is incurred by the company; secondly, if there are no chances that
restructuring of the company can be done, or there is availability of refinance or equity funding,
then, the director must either appoint a liquidator or a voluntary administrator; thirdly, as per
section 588G of the Act, it is necessary that there must be no trading when the company is
insolvent by the company director; fourthly, every Director must ensure that all the specific and
general laws must be comply with; fifthly, every duty and power of the director must be
complying with utmost care and diligence; sixthly, the financial position of the company must be
clear and in the knowledge of the director; seventhly, as per section 182 and 183 the position and
information of the company must be used by the director in order to bring benefit to himself;
eighthly, that the books and records of the company must be properly maintained by the director;
(ASIC, 2017)
It is thus very important that every action of the director must be carried out keeping in mind the
interest of the stakeholders, employees and the creditors. The acts of the director must be in the
best interest of the company and in good faith.
Now, if the company still becomes insolvent then there are few liabilities that are faced by the
company director in all manners.
When a company becomes insolvent then there are series of consequences and penalties that are
faced by the directors of the company, firstly, there are civil penalties which includes, firstly, a
director may face pecuniary penalties of an amount up to $200,000; secondly, the creditors may
initiate compensation proceedings against the directors; thirdly, ASIC and the liquidator are also
authorized to commence compensation proceedings; fourthly, the compensation proceedings
many a time results in the bankruptcy of the director which ultimately results in the
disqualification of the director. Also, there are criminal penalties which includes, firstly, if
insolvent trading is incurred and the major reason for insolvent trading is found to dishonesty on
the part of the director then such director may be fined for an amount up to $220,000. He may
also be send to jail for five years or both; secondly, the director can be disqualified from his post.
(ASIC, 2017)
So, a company director must be very diligent while carrying out his actions so that no insolvent
trading is incurred. Now, once a company is found to be insolvent then what are the various
avenues that are available to such insolvent company? What are the options that are available to
the director if the company is presumed to be insolvent?

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The company director is the main officer of the company who is assigned with the tasks of
managing the affairs of the company. If the company is unable to pay its debt when become due
then it is considered to be insolvent in nature. In such cases, the first question that comes in the
mid of the directors is the next step that should be taken in order to protect the interest of the
shareholders, creditors and investors of the company.
There are mainly three avenues in front of the company director to choose from. The same are:
Firstly, Voluntary administration and it is the quickest method that can be availed by an
insolvent company in order to decide the future course of the company. In Voluntary
administration, administer is appointed who is a qualified person and is independent in his
operations. It is necessary to seek the written consent of the liquidator who agrees to act as a
voluntary administrator. He takes the full control of the company and the main tasks of the
voluntary administered are to conduct his actions in such manner so that the company can be
saved or the business of the company can be protected. If there is no scope of protecting the
company or its business then the next target of the administrator should be manage the company
affairs in such manner so that maximum advantage can be provided to the creditors. This can be
done with the help of formulating Deed of Company arrangement. (Hanrahan Et al, 2017)
Secondly, Liquidation and when the company is insolvent and the only option that is left is the
wound up of the company, then, the most beneficial way is to liquidate the company. The
director calls a meeting of the members wherein voting for the winding of the company is carried
on and there is an appointment of a qualified and independent person who acts as the liquidator
of the company. He takes the control of the company and carries the conduct of the company in
such manner so that maximum benefits can be attained by the creditors of the company. Now
there are voluntary and involuntary interventions by different parties concerned by the potential
insolvency of the company. The same are of two kinds a) Voluntary or Creditor’s Voluntary
Liquidation and carried when the business is insolvent and requires cease trading then Creditor’s
Voluntary Liquidation is carried out. The members and directors pass a resolution for winding up
and appoint a liquidator. The liquidator sells out all the company assets and repays the secured
creditors; b) A creditor can seek the help of the court for involuntary wining up of the company.
The court may appoint a liquidator (IMF, 2012)
Thirdly, Receivership wherein the secured creditor appoints a receiver who holds security over
the assets of the company. He sells the assets in order to repay the liabilities of the secured
creditor. (Hanrahan Et al, 2017)
However, It is submitted that apart from being liquidated, there are two best methods that can be
attained when the company is declared insolvent. The same are firstly, Deed of Company
Arrangement (DOCA), wherein a contract that is established amid the creditors and the company
are called DOCA. At the second creditors meeting approval of the creditors is required. The deed
is binding upon the shareholders, company, unsecured creditors and directors of the company.
The deed is binding upon only those secured creditors who voted in favor of the DOCA at the
meeting. If the DOCA is approved by majority creditors then there is no need for any approval
from the court. As soon as DOCA is executed, there is termination of the voluntary
administration; secondly, Schemes of arrangement wherein restructuring tool and is applicable
regardless whether the company is insolvent or solvent. It is a kind of proposal which is laid
down wherein the stakeholders compromise their rights. This proposal requires the confirmation
of the creditors and by the time the confirmation comes the pre existing management controls the
company. In order for the scheme to work, it is necessary that the same must be confirmed by at

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least 75% in form of creditor’s value and at least 50% in number in each class of creditors. The
class of creditors is those whose rights are affected by the scheme. This approval scheme must be
approved by the court so that it becomes effective. The main outcome of the scheme is that the
company is still floating but with the compromises that are made part of the scheme. (Australia,
2016)
Thus, the insolvency of the company is not a good thing for all the parties that are associated
with the company. Apart from winding up, DOCA and scheme of arrangements are the two
methods with which the company can be remain floating.
ASIC is Australian Securities and Investment Commission with main aim to regulate the
financial services, markets and corporate in Australia. When the company is insolvent the ASIC
also plays a significant role. The same are firstly, when a company is declared insolvent and
there is compensation proceeding to be initiated, then, ASIC is authorized to initiate proceedings
in favor of the creditors who have lost their money; secondly, several programme are run by
ASIV to make the directors aware of the consensuses, rights, liabilities and duties that must be
performed by the directors in case of insolvency; thirdly, directors are prosecuted by ASIC who
are found to be involved in insolvent trading; fourthly, it has the task of registration of the
liquidators and the administrators there by giving authenticity to the process of insolvency;
fifthly, lays down proper procedural framework in case a company is found to be insolvent.
Thus, ASIC plays a significant role when there is insolvency. (ASIC, 2017)
Conclusion
It is thus concluded that a company when is not able to pay its debt when they become payable
results in the insolvency of the company. Once a company is insolvent it lays down several
responsibilities on the shoulders of the directors which if not performed by them results in
raising several liabilities upon them. It is thus very important that instead of looking for options
after the company insolvency, it is necessary that steps should be taken so that a company does
not become insolvent at the first place itself.

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Reference List
Books/Articles/Journals
ASIC (2017) Directors - What are my duties as a director?.
Bottomley, S, (2016). The Constitutional Corporation: Rethinking Corporate Governance.
Routledge.
Hanrahan Et al, (2017) Commercial applications of company law (2017)18th Edn.
IMF (2012) Australia: Insurance Core Principles—Detailed Assessment of Observance,
International Monetary Fund, 21-Nov-2012.
Latimer, P (2012). Australian Business Law 2012. CCH Australia Limited, 2012.
Case laws
Sutherland v Hanson Construction Materials Pty Ltd (2009),
Online Material
Australia (2016) Restructuring and Insolvency (Online) Available at:
https://gettingthedealthrough.com/area/35/jurisdiction/5/shareholder-activism-engagement-
israel/. Accessed on 14th September 2017.
ASIC (2017) Directors - Consequences of insolvent trading (Online) Available at:
http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-
consequences-of-insolvent-trading/. Accessed on 14th September 2017.
ASIC (2017) our role (Online) Available at: http://asic.gov.au/about-asic/what-we-do/our-role/.
Accessed on 14th September 2017.
Insolvency (2016) (Online) Available at: http://www.rebuildnow.com.au/insolvency-statistics/.
Accessed on 14th September 2017.
Swaab (2009) Australia: An Introduction To Insolvency Law - Part One (Online) Available at:
http://www.mondaq.com/australia/x/79816/Insolvency+Bankruptcy/An+Introduction+To+Insolv
ency+Law+Part+One. Accessed on 14th September 2017.