Insolvency and Restructuring in Australia: Legal Process Report

This report examines the landscape of insolvency and restructuring in Australia, focusing on the legal framework established by the Corporations Act. It delves into the implications of insolvency for various stakeholders, including shareholders, creditors, and employees, and analyzes the roles and responsibilities of company directors, including their fiduciary and statutory duties. The report also explores the different types of winding up, including compulsory and voluntary winding up, and discusses the role of the Australian Securities and Investment Commission (ASIC) in managing insolvent companies. Furthermore, it addresses the legal liabilities of directors, the protection of employee entitlements, and the mechanisms for restructuring companies, such as voluntary administration. The report references relevant articles and case law to provide a comprehensive understanding of the legal processes and challenges associated with insolvency and restructuring in the Australian context.

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Introduction
Article Title : Insolvency and restructuring of companies In Australia and the legal process.
https://www.herbertsmithfreehills.com/doing-business-in-australia/content/restructuring-and-
insolvency
This is an Article written on the Daily Herald on 23rd march 2019 on insolvency and
restructuring of companies in Australia and the legal processes involved in the determination of
the outcomes. Ten years after most countries faced economic downturn due to the global
financial crisis of 2208, most companies in Australia did not show immediate effect. This was
particularly due to the strong growth and performance of the Australian mining and petroleum
sector that had seen high demand from the Chinese market (Baer, et al 2016). However, the
Australian Securities and Investment commission (ASIC) shows that a number of companies
have gone into insolvency.
Effects of Insolvency and Restruction to stakeholders
Last year more than 1000 companies went into insolvent administration and the situation
is expected to worsen. The effect of insolvency is still significant to both shareholders and
creditors. Of the more than 1000 companies that went ionto insolvent, ASIC reports that more
than 95% did not pay dividends to their creditors with the rest paying a dividend of 0 to 10 cents
par dollar owned. This is a reflection of the experience of unsecured creditors during insolvency
and liquidation. Despite this significant impact on unsecured shareholders and creditors, the
Australian law or the reforming insolvency law does not appear to improve the outcomes
(Greenfield, Maguire, Spencer and Lenz, 2017).

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Australian Insolvenct Act Part 5.3A
The Australian insolvency regime is guided by the Corporations Act Part 5.3A. The Act
permits the company to appoint an administrator on the basis that the company is insolvent and is
likely to remain so. Once the administrator is appointed, an automatic stay will begin to operate
under section 440D of the Act. However, there are no restrictions on third parties of creditors to
exercise their rights to terminate the order under executory contracts such as the one that exists
under section 365 (e) (1). The role of the company’s directors in insolvency is to appoint an
administrator. However, upon exercising the termination of contracts rights by the creditors and
shareholders, it makes it more difficult to reconstruct the company again and return it to
solvency. This area requires massive reform in the Australian insolvency laws (Kashyap, and
Parihar, 2019). As it applies to directors, the Australian law imposes a duty to directors to
prevent debt incurring by the company while it is insolvent. A breach relating to this may lead to
personal liabilities held on the directors for losses suffered during liquidation by creditors.
Directors Legal Liabilities
This is the lifting of the corporate veil in breach of duty leads to personal risk to the
directors if the company is insolvent. The rights of other shareholders such as employees are
protected as a commitment by the government described as Protecting Workers Entitlement
package. The employees are put under a scheme funded by the Australian government known as
General Employee Entitlements and Redundancy Scheme (GEERS). This can also be managed
by ASIC in case of winding down or liquidation (McGowan, and Andrews, 2016). ASIC has
also been given power to place abandoned companies into liquidation under section 489EA
where they believe that the company is not operating well and to protect the public interest.

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References
Baer, G., Umbach-Spahn, B., Mason, R., O'Flynn, K., Willems, M., Klissouras, C., Fukuoka, S.,
De Moor, B., Khandge, A., Sullivan, J. and Treshchev, S., 2016. Insolvency and Restructuring
International.
Greenfield, D., Maguire, P., Spencer, D. and Lenz, K., 2017. When Insolvency and Restructuring
Law Supercedes Contract. Alta. L. Rev., 55, p.349.
Kashyap, A.K. and Parihar, K., 2019. Corporate Insolvency Laws in Singapore: Restructuring
and Reforms. In Corporate Insolvency Law and Bankruptcy Reforms in the Global Economy (pp.
191-214). IGI Global.
McGowan, M.A. and Andrews, D., 2016. Insolvency Regimes And Productivity Growth.