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Law of Investments and Financial Markets

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Added on  2021-05-31

Law of Investments and Financial Markets

   Added on 2021-05-31

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Question 1Creditors’ Ranking upon LiquidationThe Corporations Act determines which group of creditors is paid first when the company is facing insolvent liquidation. The secured creditors are rank higher than the unsecuredin priority of payment; for example, banks. It is because the unsecured creditors have no security over the company assets. If there are enough funds left in the company after paying the liquidators fees and the priority creditors such as employees and the secured creditors, the remaining money will be distributed to unsecured creditors inform of dividend. Therefore, upon the liquidation, Fruitopia will have to pay her creditors according to the priorities for dividends in liquidation set under Section 556 of the Corporations Act 2001 (Quo 2007, p.124). Section 556 lists the priorities for dividends in a liquidation, which also comprises of the entitlement of the employee’s priorities. Rent arrears are categorized under liquidator fees and expenses because they are part of the administration costs and expenses. Liquidator fees and expenses are rank first according Section 556 listing, which makes the Landlord (Pennyless Ltd Company) to be paid first. The second ranked creditors are the employees’ unpaid wages. The employees have a statutory priority to be paid with respect outstanding entitlements after the payments of liquidation costs and expenses and liquidation fees. Therefore, the last creditor to bepaid will be the unsecured loan from the bank. Unfair PreferencesAn Unfair preference is the payment or transfer of assets that give a creditor an upper hand over other creditors. Such payments can be recovered by the appointed liquidators. The 2
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recovered funds can then be distributed equally among the creditors. Some of the elements of an unfair preferences claim include:The debt, which is the subject of the transaction must be unsecured.The company was insolvent when the transaction took place or became insolvent as a result of entering into the transaction.The creditor got a better return that it would have not received if the transaction could have not taken place.Referring to the above claims, it is evident that the company was insolvent at the tme of transaction. Corporation insolvency is the inability to be able to pay its debts when they are due. Fruitopia Pty Ltd was facing difficulties in paying its employees wages and the debts of its suppliers, and was uncertain of paying its employees their holiday pay entitles due to insufficientfunds (Varzaly 2015, p.292). Therefore, it means that the transaction took place during insolvency. Considering such situation, it is right to say that the $100,000 that was deposited by Fruitopia Pty Ltd into the company’s bank account to reduce the debt owed to the bank was unfair preference payment. InsolvencyAny director who operates an insolvent company has breached the directors, duties as described under the Corporations Act 2001 (s 588G) (Varzaly 2015, p.303). Some of the corporation common insolvency includes receivership, liquidation, and administration. A director could be personally liable to insolvency if he or she led the company into bankruptcy and personal insolvency agreements (Quo 2007, p.130). Other than that, a director may become responsible for breaching his or her duties if: He or she was the director when the company incurred a debt.3
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