Business Law Assignment: Insolvency, Corporate Law, Creditor Claims

This business law assignment examines two key issues: the implications of insolvency for a company (Small Pty Ltd) and the rights of a secured creditor (Ravi) in such a situation. The first part analyzes the company's insolvency under the Corporations Act, the administrator's role, and the options available, including winding up the company. It applies relevant sections of the Act to determine if insolvency exists and the actions the administrator should take. The second part explores the principles of separate legal entities, using the Salomon v A Salomon & Co Ltd and Macaura v Northern Assurance Co Ltd cases, and considers whether Ravi is entitled to recover his investment. The assignment discusses the impact of these legal principles on creditor claims and the potential for piercing the corporate veil. It concludes with the application of these principles to the given scenario.

Running head: BUSINESS LAWS
Business Laws
Name of the student
Name of the university
Author note

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BUSINESS LAWS
Answer 1
Issue
Is small Pty ltd has been subjected to problems related to insolvency as provided by the
Corporation Act
Does Ravi has the right to appoint a liquidator and what are the options which the law makes
available to the Administrator
Rule
Whether an organization operating in Australia has a problem related to insolvency or not can be
analyzed under the provisions of section 95A of the Act.
 It has been expressly stated by the section that a corporation is only regarded as solvent
when it is able to pay the debts as and when they have been incurred by it.
 Any organization which is not regarded as solvent is to be considered as insolvent1.
Under the provisos of section 435A the administrator has to carry out the duties which have
been imposed on it by taking into consideration the existence of the company as far as possible.
Only where the company is insolvent the administrator may seek for the winding up of the
company2.
According to the rules provided section 436E3 of the Act the administrator has to call a first
meeting with the company creditors followed by a second meeting
1 Corporation Act 2001 (Cth) s 95A
2 Corporation Act 2001 (Cth) s 435A
3 Corporation Act 2001 (Cth) s 436E

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BUSINESS LAWS
Section 438A of the Act deals with rules regarding how an administrator may carryout its
functions. The financial position, business and property of the business has to be investigated
into by the administrator as soon as appointment has been carried out. It is up to him to lawfully
decide under this section that what actions should be taken in relation to the best interest of the
creditors. The administrator may indulge into deciding making a deed of company
arrangements, whether he should bring the process of administration to an end and whether he
should take a decision to wind up the company4.
Section 437A provides for a role of administrator and under this section the administrator will be
able to carry out any function which could be carry out by the company or its creditors5.
It has been provided under the rules of section 439A of the Act that when an administrator has
been appointed he must provide notice of appointment to the creditors and also within the
convening period convene meetings6.
Application
The scenario stipulates that the Ravi’s company Small Pty Ltd is not performing good business
recently and has incurred $210000 as debt. In this situation the company only has assets
available worth $95000. This evidently provides that of the rules of section 95A are applied it
will show that the company is insolvent. This is because the company is not been able to pay off
the debt as and when incurred by it. Thus there is an insolvency situation.
Ravi being a secured creditor under section 436C of the Act can appoint an administrator to the
company.
4 Corporation Act 2001 (Cth) s 438A
5 Corporation Act 2001 (Cth) s 467A
6 Corporation Act 2001 (Cth) s 439A

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BUSINESS LAWS
Under the provisions of section 436E of the Act it is the duty of the administrator to call a first
meeting and a second meeting with the creditors. It is also the duty of the administrator to inform
all the creditors of Small Pty ltd about his appointment and also ensure that the meeting are
carried out within time.
Under section 438A of the Act the administrator in context has to lawfully decide under this
section that what actions should be taken in relation to the best interest of the creditors. The
administrator may indulge in making a deed of company arrangements, bring the process of
administration to an end and take a decision to wind up the company. Further under section 435
the administrator has to administrator has to carry out the duties which have been imposed on it
by taking into consideration the existence of the company as far as possible. Only where the
company is insolvent the administrator may seek for the winding up of the company. In this
situation small Pty ltd is actually insolvent and thus the administrator has to sought for a winding
up order for the interest of the creditors.
Conclusion
As the company is adjudged insolent it can be wound up by the administrator in the best interest
of the shareholders.
Answer 2
Issue 2
Whether the principles of separate legal entity make Ravi entitled to the invested $90000
What amount will eventually be received by the creditors?
Rule

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BUSINESS LAWS
Under the provisions of section 119 of the Act it has been stated that on the very day of
registration a company is formed as a body corporate7.
There are a few cases which may help to resolve the issue at context. These cases are as follows
1. Salomon v A Salomon & Co Ltd [1897] AC 22
In this case a unanimous ruling had been made by the house of lords affirming the
doctrine of corporate personality which had been present in the Companies Act 1862. The
primary notion of the case was that the creditors of the company do not have the right to
sue the shareholders of the company with respect to the outstanding debts. Mr Aron
Salomon had sold his business to the company in context. He was the majority
shareholders of the company and the company had purchased the business at an
excessive price for its value. He also got £10,000 in debentures in the company by
giving it a loan. The company was not able to make profit and was liquidated. The
liquidator claimed that the company was a fraud and the corporate veil should be lifted.
The court held that under the Act the company was a separate legal person and the
defendant has the right to claim the debentures as they were issued lawfully8.
2. Macaura v Northern Assurance Co Ltd [1925] AC 619
In this case the principles of Salomon v A Salomon & Co Ltd have been discussed and
reaffirmed. The claimant tried to make a claim in this case form the insurance company
in his own name. The court stated that the insurance was with the company not the
claimant9.
7 Corporation Act 2001 (Cth) s 119
8 Salomon v A Salomon & Co Ltd [1896] UKHL 1
9 Macaura v Northern Assurance Co Ltd [1925] AC 619

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BUSINESS LAWS
However in case of fraud the court may lift the corporate veil. In the case of Gilford
Motor Co Ltd v Horne [1933] Ch 935 the courts stated that the corporate veil can be
pierced with the company is formed to get over a legal regulation10.
Under section 471C of the CA it is stated that the secured creditors are not affected by
the winding up of the company11.
Application
The situation states that Ravi has sold his business at excessive price for its value to Small pty ltd
and gave a secured loan to the company. The facts are totally similar to what happed in the case
of Salomon v A Salomon & Co Ltd. Thus the court will make Ravi entitled to $90000 provided
as a secured loan. Small pty ltd is a separate legal entity as per section 119 of the CA and
Macaura v Northern Assurance Co Ltd.
However in the given situation it has been stated that the company was formed to avoid a legal
obligation and as per Gilford Motor Co Ltd v Horne the court will pierce the corporate veil. Here
the Ravi will be personally liable. However Ravi has not made the company to avoid a legal
obligation as he had not been guilty under the laws of contamination.
In case Ravi gets 90000 than the other creditors will get only 5000 which would make them get
5000/120000 (210000-90000) = 0.04 per dollar
Conclusion
10 Gilford Motor Co Ltd v Horne [1933] Ch 935
11 Corporation Act 2001 (Cth) s 471C

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BUSINESS LAWS
In the given situation Ravi can claim the money as per the Solomon case even in that case the
business was sold to the company for an inflated price. Ravi has further not made the company to
valid legal obligation as he had not been guilty under the laws of contamination.

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BUSINESS LAWS
References
Corporation Act 2001 (Cth)
Gilford Motor Co Ltd v Horne [1933] Ch 935
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v A Salomon & Co Ltd [1897] AC 22