Law 1: Australian Company Insolvency, Directors, and ASIC's Role

This report provides a detailed analysis of company insolvency in Australia, examining the legal definition, signs of insolvency, and the roles and responsibilities of company directors. It explores the duties of directors in preventing insolvent trading, as outlined in the Corporations Act 2001, and the potential liabilities they face. The report also covers the different types of interventions, including voluntary and involuntary administration, and the role of ASIC in the insolvency process, including deregistration. Furthermore, it provides insolvency statistics in Australia, and discusses the shortcomings of Australian insolvency law, suggesting recommendations for improvement, such as a focus on long-term planning and restructuring. The report concludes by emphasizing the critical role directors play in insolvency procedures and the importance of protecting the interests of creditors and stakeholders.

Running Head: Law 1
Law

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Introduction:
Legal definition of insolvency states that company is considered insolvent, when total of the
liabilities of the company exceeds the total of the assets of the company. According to section
95A of the Corporation Act 2001, person or organization is solvent if it is possible for that
person to pay all the debts at the time when they become due and payable, and person or
organization is insolvent if they are not solvent (Corporation Act, 2001).
This paper contains detailed discussion on company’s insolvency, and also the role of the
directors and ASIC in insolvency process. In this statistics related to insolvency of the Australian
companies is stated and observance in this context. Subsequently, this paper states the
conclusion.
Discussion:
As stated above, insolvency is the situation when organization is not able to pay its debts and
assets of the organization are not enough to pay its liabilities. This can be understood through
case law Bell Group Ltd (in liquidation) v Westpac Banking Corporation & Others. In this
case, court held that primary method for determining the solvency of the organization is the
determination of the company’s asset and liabilities. Following are some important aspects of
insolvency:
Signs which reflect company’s insolvency:
ASIC issues regulatory guide 217 in 2010, which named as Duty to Prevent Insolvent Trading:
Guide for Directors. As per this guide following are some signs of the company insolvency
which must be determined by the directors of the company at former stage:
 Company incurred loss in trading, and also face issues related to cash flow.
 It becomes difficult for the organization to sell their stock or raising funds.

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 With the current financier, organization is negotiating the new limit.
 Legal actions against the company are commenced by the creditors and other
stakeholders of the company.
Reasonable measures considered by Board of directors:
Directors of the company are under obligation to ensure that reasonable measures have been
taken if any above stated sign reflect the insolvency. Some of these measures are stated below:
 Any further debt must not be incurred by the directors of the company unless any chances
of restructuring and refinancing of the business occurred, and funding in the form of the
equity is available for recapitalizing the business operations.
 Directors of the company must appoint voluntary liquidators and administrators.
 Directors are under obligation to ensure that interest of the creditors and other
stakeholders of the company are protected in case company become insolvent or there is
any risk related to insolvency.
 Directors must not engage in any trading with outsiders, if company becomes insolvent or
there is any risk related to insolvency.
Director’s liability in case of insolvency:
Various duties are imposed on directors in case company becomes insolvent, such as duty to
prevent any trading in the company when company becomes insolvent. This duty is imposed by
Section 588G of the corporation Act 2001. As per this section, directors of the company are
under obligation to prevent the insolvent trading, and this section is applicable on the directors of
the company and on those also who were only acting as the director of the company but in actual
they are not appointed as director of the company. This can be understood through case law

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Hawkins v Bank of China. In this case, Court stated that the list of deemed debts and specified
the situation when they occurred.
Section 588G further stated that duty is imposed on director of the company from preventing the
company to incurred further debt in case:
 Organization is insolvent at that time when debt is incurred.
 There is risk of insolvency on organization, if organization incurred that debt or series of
debts which includes that debt also.
 Sufficient grounds are present which reflect the insolvency of the company in case debt
is incurred by the company. This can be understood through case law Kenna & Brown
Pty Ltd v Kenna. In this case Court stated that objective assessment must be conducted
by the directors for determining the insolvency.
Contravention under this section is divided into two categories that are:
 In case directors of the company fail to compile section 588G which means director, fails
to prevent the debt incurred by the company in that situation also when sufficient grounds
are present and reflect that there is risk of insolvency, then such directors are liable under
civil provision.
 Directors of the company held liable under criminal provisions if director fails to prevent
the company from incurring debt because of any dishonest reason, and sufficient grounds
are present which clearly reflect that company is already insolvent or becomes insolvent
(Corporation Act, 2001).
In case a director of the company fails to compile with Section 588G then following are the
consequences of such failure (AICD, n.d.):

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 Compensation order can be passed by the Court, and this order states that director is held
liable towards the company at personal level to pay the compensation, and amount of
compensation is the amount of loss suffered by the company (Section 588J and 1317H).
 Section 1317G states that pecuniary order can be passed by the Court and such order
includes the amount up to $200000. This can be understood through case law ASIC v
Plymin (No 1).
 Disqualification order under section 206 of the Act can be passed by the Court, and as per
this order director of the company is disqualified to manage the company.
 If director of the company is held liable under criminal provisions then Court can order
fine up to 2,000 penalty units or imprisonment for five years (Corporation Act, 2001).
Alternative ways:
In case reasonable grounds are present which reflects the risk of insolvency then directors can
choose different ways and some of these ways are stated below:
 Professional advice can be sought by the directors of the company.
 Invitation can be send to the secured creditors of the company for the purpose of
appointing receiver.
 It is the duty of director to cease the trading, and prevent the company in incurring further
debt.
 Administrator can be appointed by the board under section 436A of the Act (Corporation
Act, 2001).
Difference between voluntary and involuntary intervention:
Voluntary intervention is the method through which company can goes under reorganization. As
per this method, external administrator is appointed by the directors and secured creditors of the

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company. Administrator appointed under this method is known as voluntary administrator.
Voluntary administrator conduct investigation related to the affairs of the company and after this
investigation he/she will send report to the creditors. This report states the clear views of the
administrator on matter whether creditors choose deed of the company arrangement, liquidation,
and returned the company to the directors. Voluntary administrator was appointed by the director
when directors have sufficient ground to believe that there was risk of insolvency or company
was already insolvent.
Involuntary intervention is the method under which charge holder, liquidator, or provisional
liquidator appoints the administrator. The main difference between two methods is stated below:
 Under voluntary administrator directors of the company are allowed to exercise similar
control, but in involuntary method there is no control exercised by the directors of the
company.
 Voluntary administration provides option to the company to restructure their business,
but involuntary administration is considered as the level when there is no hope of
business restructuring (Quilan, 2005).
Other option:
Member’s winding up is the option available to the company in case company does not want to
choose the creditor’s winding up option. As per this option, special resolution is passed by the
members of the company for the purpose of appointing the liquidator (ASIC, n.d.). Section 495
of the Act states that, company appointed liquidator by passing special resolution in the general
meeting. Liquidator is appointed for winding up all the operations and affairs of the company
and to discharge all the liabilities of the company.

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Section 495 of the Act further states that if any vacancy occurred in the office of the liquidator
because of the death, resignation, and any other matter then members reappoint the liquidator in
the general meeting for the purpose of filling the vacancy. For this section general meeting is
held by the contributory or in case there are two or more liquidators then by those liquidators
(Corporation Act, 2001).
Insolvency Statistics in Australia:
ASIC issued statistics of the last quarter of the 2016/17, and it states the increased % of the
companies which opt for external administration and that increase is up to 28%. Results also
show number of States in which liquidation % is increased such as in Western Australia up to
127.9%, Victoria up to 34.7% and New South Wales up to 13.1%, , and on national level it
increased up to 25%.
Percentage related to those companies under which administrator are appointed by the directors
of the company is increase up to 35.9%, but in Victoria this rate is goes up to 57.8%, Queensland
up to 28.6% and New South Wales up to 14.4% (ASIC, n.d.).
Insolvency issue:
In Australia, insolvency law does not considered long term gains of the companies, and it also
fails in considering the assets, goodwill, competitiveness, and reasons of premature closure and
liquidation. Law related to insolvency does not state any provisions which provide emphasis on
restructuring of the business and any other method through which company return to profitability
and protect the interest of creditors.

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There are many other countries in which focus is shifted on restructuring of business and not on
the liquidation. There are some recommendations which can be included in the insolvency law of
Australia:
 Law must focus on the long term planning’s while decided liquidation.
 Protection of employees and workers at the time of liquidation of the company.
 Provisions which provide various options through which funds for restructuring the
business can be raised (ASIC, n.d.).
ASIC ROLE:
Company can deregistered by ASIC, if sufficient grounds are present which state that trading is
ceased by the company and fees and penalties are overdue, and these sufficient grounds are
stated below:
 If company fails to pay its annual fee within the time period of 12 months from the date
on which fee becomes due.
 Compliance notice is issued to the company, and company fails to submit the response of
that notice and also the related documents within 18 months.
 Processing related to winding up is initiated and no liquidator is appointed (ASIC, n.d.).
Observation:
Various legislations and case laws clear the picture that provisions of corporate act 2001 related
to insolvency mainly give emphasis on company’s liquidation. These provisions do not consider
the restructuring of the business or any other measures through which liquidation can be avoided.

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Burden for paying the liquidator cost is also imposed on companies which put extra pressure on
companies and also reduce the ability of company to discharge the debts of the creditor. In Ascot
Community Sports Club Incorporated (in liquidation), court stated that liquidator has right to
claim their cost from the company, and company was liable to pay the cost. Court further stated
if liquidator incurred any other cost then also company was liable to pay it.
Conclusion:
After considering the above facts it is clear that directors play very important role in insolvency
procedure, and it is completely in the hands of directors to ensure the interest of the creditors and
other stakeholders of the company. In this paper all the issues and their measures related to
insolvency are discussed and these issues and measures are supported by the legislations and
case laws.
References:
AICD. Insolvent trading. Available at:
http://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/
pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx. Accessed on 21st August 2017.
Ascot Community Sports Club Incorporated (in liquidation) [2014] QSC 258.

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ASIC v Plymin (No 1) (2003) 175 FLR 124; 21 ACLC 700; 46, ACSR 126; [2003] VSC 123 at
777 (ACLC).
ASIC, ( 2010). Duty to prevent insolvent trading: Guide for directors. Available at:
http://download.asic.gov.au/media/1241384/rg217-29july2010.pdf. Accessed on 21st August
2017.
ASIC. ASIC initiated deregistration of company. Available at: http://www.asic.gov.au/for-
business/closing-your-company/deregistration/asic-initiated-deregistration-of-company/
#ReasonsforDereg. Accessed on 21st August 2017.
ASIC. Corporate insolvencies: June quarter 2017. Available at:
http://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf.
Accessed on 21st August 2017.
ASIC. Types of Insolvency. Available at:
http://asic.gov.au/regulatory-resources/insolvency/types-of-insolvency/. Accessed on 21st August
2017.
Bell Group Ltd (in liq) v Westpac Banking Corporation & Ors [No 9] [2008] WASC 239 (Bell).
Corporation Act 2001- Section 1317G.
Corporation Act 2001- Section 1317H.
Corporation Act 2001- Section 206.
Corporation Act 2001- Section 436A.
Corporation Act 2001- Section 495.
Corporation Act 2001- Section 588G.
Corporation Act 2001- Section 588J.
Corporation Act 2001- Section 95.
Gupta, N. Insolvency laws in Australia. Available at:
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
pubs/BriefingBook45p/InsolvencyLaws. Accessed on 21st August 2017.

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Hawkins v Bank of China (1992) 26 NSWLR 562; 10 ACLC, 588; 7 ACSR 349 at 572
(NSWLR).
Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1,183; 32, ACSR 432; [1999] NSWSC 533
[CL s 588G 1994].
Long v. Home Health Services, 43 Wn. App. 729, 734 (1986).
Quinlan, M. (2005). Formal Reorganization in Australia. Available at:
https://www.allens.com.au/pubs/pdf/insol/pap15mar05.pdf. Accessed on 21st August 2017.