Case Study: Company and Corporation Law - Creditor Rights

This case study analyzes a scenario involving a company facing financial difficulties. The assignment addresses several key issues, including the actions an administrator can take under the Corporations Act 2001, specifically focusing on declarations, asset assessments, and creditor meetings. It examines whether the company is insolvent and the options available to the administrator, such as executing a deed of company arrangement or winding up the company. The case also delves into the doctrine of separate legal entity and its implications for a secured creditor, Ravi, who invested in the company, referencing cases like Salomon v Salomon & Co. The analysis determines Ravi's entitlement to recover his investment and calculates the amount unsecured creditors are likely to receive, considering the company's assets, debts, and the priority of secured creditors. The study concludes with a detailed breakdown of creditor entitlements and the application of relevant legal principles.

Running Head: COMPANY AND CORPORATION LAW
COMPANY AND CORPORATION LAW
Name of the Student:
Name of the University:
Author Note

1COMPANY AND CORPORATION LAW
Issue 1:
The first issue that exist in the given scenario are:
 To determine what actions can be taken by the administrators appointed by Ravi
Rule:
For the purpose of analyzing the first issue that has been identified in this given scenario, it is
important todiscuss the relevant provisions of the Corporations Act that are relevant in this
scenario. It has been provided in section 436DA(2) of the Corporations Act 2001 (Cth) that an
administrator who is duly appointed by the provisions as provided in section 436A, 436B or 436
C is required to make declarations about the indemnities and the relationships owed to or by the
company1. The administrator is required to give a notice to the creditors of the company five
days prior to holding the meeting (Yogaratna and Xynas 2017). For the purpose of assessing
whether the company is insolvent the administrator must refer to section 95a of the Corporations
Act2. It has been specifically provided in the section that a person can be considered to be
insolent, if such person fails to pay all the debts acquired by such person at the time when they
become due. It can be stated in accordance with section 435 A of the CA that an administrator of
a business can manage the property and affairs of a company:
 In a way which give maximum chances to the company for continuing its existence
 In a way which will eventually result in the immediate winding up of the company, if it
is found that such winding up of the company would create better return for the
credtors of the company3.
1Corporations Act 2001 (Cth) s 436DA(2)
2Corporations Act 2001 (Cth) s 95a
3Corporations Act 2001 (Cth) s 435

2COMPANY AND CORPORATION LAW
It has been provided in section 436E that administrators of companies are required to hold
meetings of creditors and the purpose and time of conducting such meetings have been clearly
illustrated in the aforementioned section. In accordance with this section it can be stated that the
purpose of holding a meeting of the creditors is determine whether a committee needs to be
appointed for the inspection of the debts owed by the company to the creditors. The time period
of holding the meeting has been specified to be eight days since the appointment of such
director. Further in relation to section 439 A it can be stated that a company administrator must
convene a meeting with the creditors of a company during the time period when the company is
in administration within the convening period as provided in subsection 5 of the aforementioned
act. It can be stated that the meeting with the creditors must be held within 5 days after the end of
the convening period.
Finally it has been provided in section 438A(a) that once a company enters into administration,
the administrator of the business is required to investigate the operations of the company, the
property of the company and its financial position. It has been further provided in subsection
438A(b) of the aforementioned actthat an administrator is required to make a decision in regards
to governance of the business by assessing the following options4:
 to execute a deed of arrangement(DOCA) by assessing whether it would be in the best
interest of the creditors of the company
 to end the process of administration if it is found to be in the best interest of the
creditors
 To liquidate and wind up the company if it is found in the best interest of the creditors.
Application
4Corporations Act 2001 (Cth) s438

3COMPANY AND CORPORATION LAW
Thus by analyzing the facts of the case, it can be stated that in this case the administrator
appointed by Ravi must declare the debts and the indemnities and which are owed by the
company to the creditors as provided in section 436 DA(2). The administrator must make
assessments about the assets and the and the debts owed y the company to its creditors as
provided in section 438A(a). The administrator must assess whether the company in
consideration is insolvent by applying the section 95(a) of the Corporations Act. It is evident in
this scenario that the company has does not have the assets to pay the creditors. The company
has assets worth 95, 000 dollars where as it owes 210,000 dollars to the creditors. The
administrator must subsequently hold meetings with the creditors in accordance with sections
436E and 439A(6) to decide its future course of actions. Finally it can be stated in accordance
with section 438A(b)that an administrator in this given scenario that the administrator can either:
 Either execute a deed of company arrangement
 End the process of administration
 Wind up the company
Conclusion
Thus in this given scenario the administrator can thus execute DOCA, liquidate the company or
end the process of administration.
Issue two
The second issue that exists in this scenario is whether Ravi is entitled to recover the 90,000
dollars that he invested in the company.
Rule:

4COMPANY AND CORPORATION LAW
In this given scenario the doctrine of separate legal entity of a corporation is relevant. The
doctrine of separate legal entity had been established in the case of Salomon v Salomon &Co
[1897] AC225. In this case Salomon had been operating as a sole trader. However he formed a
company to provide his sons with a share to five of the sons in the company. He had established
the company with his wife and his five adult children. The company after being incorporated
allotted 20,000 shares to Salomon for transfer of the assets of his business to the company. It can
be stated that the remainder of the purchase price was owed to Salomon by the company. The
remaining purchasing price that was owed to the company as a loan made Salomon a secured
creditor of the company. Thus in this Salomon had acted as a secured creditor as well as the
holder of majority of the shares. However, shortly after the business was sold off it suffered a
loss and went into liquidation. The liquidator claimed that Salomon could not recover the debts
from the company as he was in charge of the operations of the company. It had been held by the
House of Lords in this case that Salomon was entitled to recover the debts owed to the company
as he was a secured creditor of the company and the company had a separate legal entity. Thus in
this case the principle of the Corporate Veil had been established.
The case Macaura v Northern Assurance Co Ltd [1925] AC 619 was a land mark and Unique
case in which the owners of the company requested to lift the corporate veil. The House of Lords
in this case held that the insurers were not liable to pay by the contract as the timber was burnt in
the fire did not belong to Mr. Macaura who had held the insurance policy. The Salomon v
Salmon case had also been applied in this case to determine the separate legal entity of the
company.
5Salomon v Salomon &Co [1897] AC22
Macaura v Northern Assurance Co Ltd [1925] AC 619

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Another case which dealt with the same issue is the case of Lee v Lee’s Air Farming Ltd
[1960] UKPC 336. In this case it had been held by the Privy council that the company formed by
Lee was a separate legal entity which was distinct from its founder by the application of the
Salomon case. Therefore in regards to the facts of the case, it had been held by the Privy Council
that it was perfectly reasonable for Lee to claim compensation as he had a contract of
employment with the company he owned.
The doctrine of separate legal entity has also been illustrated in section 119 of the Corporations
Act 2001. In this section of the CA it has been clearly specified that a company starts to exist as
a body corporate at the beginning of the day it gets registered (Yogaratnam and Xynas 2017).
The company’s name is the name specified in the certificate of registration.However, as held in
the Gilford Motor Company Ltd v. Horne, the courts have the right to pierce the corporate veil if
the court feels fraud or misconduct is being perpetrated behind the veil. In this case Horne had
setup a company in the name of his wife for the purpose of soliciting customers from the Gilford
Company, which he was restricted to do by the employment contract between him and the
Gilford company.
Application
Thus by analyzing the facts of the case, it becomes evident that the case is similar to the case of
Salomon’s. In this given scenario, Ravi had established the company by transferring the assets of
his business to the company. Therefore by the application of the principle of the Salomon’s case,
it can be stated that Ravi in this given scenario acted as the secured creditor of the company. He
had lent the company a sum of 90,000 dollars which was required for the registration, purchase
and the set-up costs of the company. In this given scenario, it has been provided thatRavi had
6Lee v Lee’s Air Farming Ltd [1960] UKPC 33

6COMPANY AND CORPORATION LAW
sold his business to the company at an inflated price.However as opposed to the case of Gilford
Motor v Horne, in this case the company was not used as a mask for the purpose of carrying on
the business which otherwise would not have been permitted. Therefore, the corporate veil of the
company cannot be lifted in this case. Thus, Ravi would be entitled to recover the money.
Conclusion
Thus, to conclude it can be stated that Ravi will be entitled to recover the entire amount which he
owed to the business.
Issue 3:
The third issue which has been highlighted in the scenario is how much will the unsecured
creditors is entitled to get.
Rule:
It can be stated that in relation to section 471 C that the rights of the secured creditor does not get
affected even in case of winding up of the company.
Application
As established before Ravi is a secured creditor of the company he is entitled to receive the
entire amount of 90,000 that he lent to the business. The company has assets worth 95,000
whereas it owed its creditors 210,000. Thus in this case, it evident that the unsecured creditors
will get the remaining amount after deducting the secure loan lent by Ravi to the company from
the total assets of the company. They are entitled to get:
Particulars Amount $
Total Debt 210000

7COMPANY AND CORPORATION LAW
Total Assets 95000
Total secured debts 90000
Amount left after paying secured
debt 5000
Remaining unsecured debt 120000
Amount to be received by unsecured creditors
per $ 0.04
Conclusion
Thus to conclude, it can be said that the creditors will be entitled to get 0.04 per
dollar

8COMPANY AND CORPORATION LAW
Reference List:
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Salomon v Salomon &Co [1897] AC22
Macaura v Northern Assurance Co Ltd [1925] AC 619
Corporations Act 2001 (Cth)
Yogaratnam, J and Xynas, L. (2017).Corporations Law: In Principle, 10th Edition