The Consequences of Poor Management: A Study of the Queensland Nickel Company

The assignment discusses the importance of proper management and insolvency procedures for companies in Australia, particularly in light of the Queensland Nickel company's assets being frozen due to insolvent trade practices. The Australian Securities and Investments Commission (ASIC) plays a crucial role in monitoring and regulating company operations to prevent insolvent trading and ensure transparency. The assignment also outlines three key procedures for dealing with insolvency: liquidation, receivership, and administration. Additionally, it references various case laws, legislation, and scholarly articles to support its arguments.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................2
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9

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Introduction
A company becomes insolvent when it becomes incapable of paying debts. The liabilities of
the company become bigger than the assets of the company, which makes the company
incapable to pay the debts to its creditors, further making it incompetent to fulfill the basic
requirements that are indispensible for carrying on the operations of the company. Several
circumstances in a company indicate the signs of insolvency. Such circumstances entail
maximum borrowing of the company when the company has reached the limit of the bank
overdraft and it is unable to borrow without providing personal guarantees. the suppliers of the
company refuses to supply credits and the company lacks adequate assets to obtain a secured
short-term loan.
Another instance that indicates the company is about to become insolvent is when the
organization is unable to pay off its lenders, which further acts as a threat, and entitles the
company to legal proceedings. While the company becomes insolvent, it becomes unable to
make payments to its employees and workers as well. The following are the two tests, which
determines the insolvency of the company:
a) Balance sheet test- this indicates that the amount of liabilities of the company is more
than the amount of assets of the company. the liabilities includes the uncertain and future
liabilities of the company as well;
b) Cash-flow test- this test determines whether the company be able to pay off its debts in
future by all it means. If the company is in a condition that disables the company to pay
off its debts in present as well as in the future, it can be said to be insolvent;

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After the company is declared as insolvent, it becomes imperative for the company to take
necessary measures to deal with the situation reinstate the company to the position as it was prior
to such insolvency. The directors have significant role to play when it comes to the insolvency of
the company. They are required to act wisely and with diligence to deal with the situation and
take measures that is in the best interest of the company and its members (Asic.gov.au. 2017).
The directors are required to concentrate on the financial status of the organization for which it is
important that Cash liquidity ratio is subjected to strict mentoring and placed under surveillance.
The directors must not allow the company to incur any further debts and until it becomes feasible
for the company to refinance, restructure or obtain equity funding for recapitalizing the
company, the company may appoint either a liquidator or a voluntary administration.
Voluntary administration enables a company to resolve the future direction of the company
where a responsible person is appointed who exercises control over the company with a view to
prevent the company and its business. In the case FPJ Group Pty Ltd (in liq) (“Hussain’s
case”) [2016] FCA 392, it was held that the person appointed shall be responsible for conducting
the business operations in a way that produces better results and provides better return to the
creditors of the company. A liquidator shall take control of the company to wind up the affairs of
the company in a fair and orderly manner, thus ensuring benefits of the creditors
(Asic.gov.au.2017).
The directors of a company are required to act in a manner that is in the best interest of the
company. The Corporation Act 2001 (Cth) (CA) has stipulated several statutory provisions that
must be followed by the directors of the company. In the event of non-compliance of such
statutory rules, the statute penalizes the directors to the extent of exclusion of the
director/directors from the board of the company. Under section, 588 G of the Corporation Act it

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is imperative that the directors of the company are not engaged in any form of trade that is
detrimental to the company or results in insolvency of the company. The directors of the
company are responsible for paying off the liabilities of the company when the company
becomes insolvent.
In Carrello as liquidator of Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s
case”) [2016] WASC145, the liquidator brought legal action against the directors of the company
and the its parent company for engaging in insolvent trading under section 588G and 588V of
the CA 2001(cth) respectively. Although the liquidator failed to establish the claim that the
company failed to pay off its debts but the company was imposed with a fine of $1.06 million for
being engaged in insolvent trade.
Although the company is entitled to penalties for being engaged in any insolvent trading,
this, committing a breach of section 588H, the company may defend itself if it succeeds in
establishing the following factors:
a) The company establishes its solvency post its involvement in insolvent trade activity with
another company;
b) The company adduces evidence of solvency prior, while and after it was engaged with
the other company in insolvent trade activities;
c) The board of the company implemented effective measures to avert any further debts;
d) The company considers any reasonable person to determine whether he would have
taken same decisions with respect to the same matters;

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e) The directors may take help of professionals to establish that they were mentally,
physically or economically viable which prevented them from making rational decisions
in the best interest of the company.;
f) The directors must establish that they have relied on the opinions of a competent person
and have been acting as per their opinion;
When the liabilities of the company are more than its assets, the company becomes unable to
pay off its debts to the creditors with the assets of the company, the company winds up under
such circumstances. When a company winds up, the assets of the company are sold off for the
purpose of paying off its liabilities and debts and shuts down the company. A company could be
wound up in two ways: Voluntary winding up and involuntary winding up of the company.
Voluntary winding up of the company takes place when the members of the company
agree to shut down the company or wind it up. Involuntary winding up of the company, as the
name suggests, is contrary to the voluntary procedure of winding up of the company. A
voluntary winding up of the company is also known as Creditor’s voluntary liquidation and in
this form of liquidation, the members and the directors of the company are allowed to select the
liquidator who would sell of the assets and distribute the funds among the creditors as mentioned
under the CA 2001 (Cth).
In case of involuntary winding up, a creditor may initiate the liquidation by applying
before the court for the winding order. Unlike voluntary liquidation, the creditors will choose the
liquidator in involuntary liquidation. A creditor may initiate voluntary liquidation of the
company when a company becomes solvent whereas in case of involuntary liquidation process, it
can take place even when the company is solvent. It is often observed that when the creditors

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initiates involuntary liquidation, the creditors becomes entitled to claim any form of misconduct
that the creditors had faced or have observed within the company.
The primary issue that arises in the liquidation process is that the process is expensive to
such an extent that the directors shall have to use their personal assets to complete the liquidation
process. Under such circumstances, the directors are largely affected owing to the fact that they
are also liable to pay of the liabilities and losses suffered by the company which may have an
adverse effect on their career. If any debtor is engaged in any fraudulent trading, it is considered
as punishable by law under section 1317E of the Act. The debtors are often subjected to
disqualification under section 206 A of the Corporations Act 2001 (Cth).
As discussed above that while the company becomes insolvent it may resort to voluntary
administration, which is evident from several polls that have been conducted in the country. The
polls indicate that there has been an incline in the insolvency rate of the Australian companies. It
further reveals that most of the companies that have become insolvent have resorted to voluntary
administration, which is evident from the statistical data of April 2017. The data reveals that an
average of 5% increase in the insolvency of the companies who have appointed voluntary
administrators. The secured creditors including banks are reported to have appointed an average
of 1355 workers in April 2017, which has increased within a decade. The statistical data has been
obtained from the official report of Australian Investment and the Security Commission
(AISC).
There had been various issues, which leads to insolvency of a company in Australia
amongst which the most common reason for such insolvency is inadequate cash flow in the
company accounts as stipulated by the ASIC. The inadequate cash flow disables the company to

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fulfill the demands and requirements of the creditors, which further results in winding up of the
company. A company is required to consider the early warnings that indicate that the company
may become subjected to insolvency if not checked on the right time (Brown 2016). A company
indicates signs of insolvency if the organization lacks proper management skills which results in
irrational and poor ways of dealing with the business operations of the company.
Any reasonable person would not act in the way such company acts with respect to the
poor management of the company business. Any company that lacks proper managing
arrangements, it is evident that it would suffer significant loss. However, in Australia, most of
the companies end up in court because of the fact that most of the companies are found to be
engaged in the insolvent trade practices. It is evident from the Queensland Nickel company that
assets worth more than 200 million were frozen because the company had been engaged in some
insolvent trade practices ((Asic.gov.au. 2017).
The Australian Investment and the Security Commission (ASIC), that governs the
financial transactions of companies in Australia, is responsible for monitoring that every
company is maintaining transparent business operations. The ASIC is also accountable for
managing the flow of capital in the business organizations and monitor whether any corporation
has been engaged in any conduct that is contrary to the statutory provisions of the CA Act
2001(Cth). Any company that is found to be in breach of the statutory provisions shall be
subjected to the stipulated penalty. The ASIC plays the role of a regulator between the market or
society and any company that is about to become insolvent or has already become insolvent.
The authority governs the corporations in enhancing and improving the internal
operations of the organization by stipulating necessary statutory provisions, which enable the

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company, learn about insolvency and the measures to reinstate its position as it was before
becoming insolvent. It further provides provisions that stipulate the procedures to repay the
creditors while the company becomes insolvent. The ASIC also provides guidance to the other
corporations thus, enabling them to accelerate their progress and improve their competence, This
further leads to improve the capability of the company to become self-reliant and prevents itself
from engaging into any insolvent trading activities.
The other essential features would include three procedures of insolvency includes the following
factors:
a) Liquidation
b) Receivership
c) Administration
Conclusion
Administration refers to the collective corporate rescue procedures that are implemented
for the benefit of all the creditors where the assets of the company are safeguarded by taking a
reasonable and effective creditor action. Receivership is the process where the holder of a
floating charge against the company appoints a receiver or a manger that is responsible for
selling off the assets of the company to pay off the secured debt. As discussed above, liquidation
is the winding up of the company by selling off its assets and paying the creditors.

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Reference List
Asic.gov.au. (2017). Insolvency for directors | ASIC - Australian Securities and Investments
Commission. [online] Available at:
http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/ [Accessed 18 Sep.
2017].
Asic.gov.au. (2017). Winding up a solvent company | ASIC - Australian Securities and
Investments Commission. [online] Available at: http://asic.gov.au/for-business/closing-your-
company/deregistration/winding-up-a-solvent-company/ [Accessed 18 Sep. 2017].
Australia, C.P.A., 2015. Small business survey program: Financial management, insolvency and
fraud.
Blakeley and Australian Music Pty Ltd v Yamaha Music Australia Pty Ltd (“Blakeley’s Case”)
[2016] VSC 231.
Brown, A., 2015. ASIC: From little things, big things grow-lodging and publishing. Australian
Insolvency Journal, 27(1), p.42.
Brown, A., 2016. ASIC: Better communication, insolvent trading and notices to creditors.
Australian Restructuring Insolvency & Turnaround Association Journal, 28(1), p.42.
Carrello as liquidator of Perrinepod Pty Ltd v Perrine Architecture Pty Ltd (“Carrello’s case”)
[2016] WASC145
Coggins, J., Teng, B. and Rameezdeen, R., 2016. Construction insolvency in Australia: reining in
the beast. Construction Economics and Building, 16(3), pp.38-56.
Corporation Act 2001 (Cth)

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Elks, S. and Elks, S. (2017). Clive faces ‘massive mega trial’. [online] Theaustralian.com.au.
Available at: http://www.theaustralian.com.au/news/nation/clive-palmer-faces-court-set-for-one-
massive-mega-trial/news-story/52d0666f855e0d54151da588928cab31 [Accessed 18 Sep. 2017].
Harnahan, P., Ramsey, I. and Stapledon, G. (2017). COMMERCIAL APPLICATION OF
COMPANY LAW. 18th ed. Oxford University Press.
Hussain v CSR Building Projects Limited; in the matter of FPJ Group Pty Ltd (in liq)
(“Hussain’s case”) [2016] FCA 392.
Innes, K., 2016. Australian insolvency law: Cases and materials [Book Review]. Ethos: Official
Publication of the Law Society of the Australian Capital Territory, (240), p.61.
Osborne, M., 2016. Bankruptcy administration in Australia. Australian Restructuring Insolvency
& Turnaround Association Journal, 28(2), p.22.

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