LAW205 Commercial Law: Analyzing Options for Secured Creditors

This case study examines the insolvency of Darwin Soil and Water Testing Pty Ltd, focusing on the rights of Ravi, the sole shareholder and director, who is also a secured creditor. The company faces insolvency due to a loss of its primary contract, leading Ravi to appoint an administrator. The analysis explores the administrator's options under the Corporations Act 2001, including returning control to the directors, approving a Deed of Company Arrangement (DOCA), or commencing winding up proceedings. The study applies relevant sections of the Act, particularly concerning the rights of secured creditors and the implications of a DOCA. The conclusion supports the execution of a DOCA, allowing Ravi to potentially recover his loan. The analysis determines the distribution of remaining assets to unsecured creditors after satisfying Ravi's secured claim, referencing the Bluenergy Group Limited case to support the legal arguments. The document also includes a calculation of payment to unsecured creditors.

Running head: COMMERCIAL AND CORPORATION LAW
COMMERCIAL AND CORPORATION LAW
Name of the Student
Name of the University
Author Note

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Issue
Ravi is the sole shareholder and director of a Pty Ltd company. The company deals with
water contamination testing. Ravi lent the company $90,000. Though the company was initially
performing well the primary contractor (Department of Defence) started employing internal
personnel for the samepurpose. By 2017 the company was on the verge of insolvency and being
aware of the same Ravi appointed an administrator. The total valued assets of the company
amounted to $95,000 and the debts of the company amounted to $210,000 including the $90,000
owed to Ravi as a secured creditor. The issue here is to determine the options available to the
administrator and if Ravi is entitled to recover the money owed to him. The payment to the
unsecured debtors in case Ravi does recover his money must also be determined.
Rule
As per Section 436A of the Corporations Act, 2001 provides for the appointment of an
administrator in case the company is or will become insolvent. Section 436C of the Corporations
Act, 2001 lays down provisions for the appointment of an Administrator by a person who may
enforce a secured securities interest against the company(Hanrahan, Ramsay and Stapledon
2013).
Section 436DA (2) of the Corporations Act, 2001 mandates that the Administrator so
appointed by virtue of Section 436A, 436B or 436C must make a declaration stating the
relationships and the indemnities owed by or to the company(Hannigan 2015). Failure to comply
with the provision to make such a declaration would be an offence under the act.

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An appointed administrator also has the responsibility to hold the first creditors meeting.
The purpose and time for the first meeting of creditors is defined under Section 436E(Armourand
Ringe 2013). The section states that this meeting must be held within 8 days from the
appointment of the administrator and the administrator must give the creditors 5 business days
notice before such a meeting is held. The primary purpose of the meeting is to determine if a
committee of inspection needs to be appointed and if so the composition of members of the
committee. The creditors also have the power to remove the administrator if they feel the need
for replacement and would have the rightto appoint an appropriate arbitrator.
Section 437A of the Corporations Act, 2001 defines the role of an administrator. By
virtue of the powers conferred under this section the administrator assumes complete control
over the affairs of the company(McLaughlin and McLaughlin 2013). This section gives the
administrator the power to continue with the company’s transactions if possible and also has the
power to dispose off a part or the entire business and has the right to dispose all related
properties. When the company is under the administration process the administrator may
exercise any power or right which the company would have if it were not under administration.
Section 437D of the act dictates that when a company has entered into the administration
process the only person authorized to transact on behalf of the company is the administrator. The
administrator can enter into contracts on behalf of the company. In case any other individual
transacts on behalf of the company it would be considered a void transaction.
Once appointed an administrator has three options which it may employ to formulate a
solution for the creditors. These are (Ferran and Ho 2014):

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(a) To end the administration process and revert the administration back in the hands of the
board of directors.
(b) The approval of a deed for the company to repay its debt as far as practicable in order to
release the company from its debts.
(c) To commence winding up procedures on behalf of the company by the appointment of a
liquidator.
In case the Administrator opts for the approval of a deed which provides for the
repayment of all debts owed to the company the debts of the company are extinguished. This
deed is known as a Deed ofCompany Arrangement (DOCA). The deed also defines the
repayment modes to other creditors. However, in case of such a deed the rights of a secure
creditor would not be affected unless the secured creditor voted during the approval of the
DOCA this follows the provisions of Section 444D (1). This position has also been reiterated
inthe matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement)
(administrator appointed) [2015] NSWSC 977(Harris 2017).
Thus in a case where a secured creditor has not voted for the approval of a DOCA his
claims against the company would not be extinguished and thus the company would be liable to
repay the debt owed to such a creditor(McKendrick 2014).
Application
In the given set of circumstances Ravi was aware that his company would be going into
liquidation and thus he appointed an Administrator. This appointment was thus by virtue of the
provisions of Section 436C of the Corporations Act, 2001 as Ravi was a secured creditor who
appointed the administrator. This could also be construed as an administration process invoked

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under Section 436A of the act as Ravi being the sole shareholder and director had initiated the
proceedings on behalf of the company(Gullifer and Payne 2015).
The administrator made the necessary declaration under Section 436DA (2) that the
company had assets worth $95,000 and it owed $210,000 (this debt included the $90,000 owed
to Ravi as a secured creditor).
Following this situation it may be inferred that the administrator could employ any of the
various options available to him to determine the company’s future. These options are(McQueen
2016):
 To deliver the company into the hands of the board of directors if the administrator
deems it sufficiently capable of handling its own affairs. In this case it would not be
prudent to deliver the company back to the directors as they have not been competent
enough to manage the affairs of the company sufficiently so far.
 Approval of a Deed of Company Arrangement. This is a more viable mode of
administration for the company as at the present predicament its primary focus is on
extinguishing its present debts.
 Appointment of a liquidator and commencement of winding up proceedings. The
company would lose its existence if such a procedure is undertaken and that is not the
ultimate aim of the administration process thus this would not be in the best interests of
the company.
An administration process is different from a liquidation process to the extent that in
case of administration the company may still have a viable future whereas liquidation would
always amount to the end of the company’s existence. In this scenario the company primarily

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needs to extinguish its debts and thus approving a DOCA would be the most viable situation to
go about it(Bronitt 2013).
In this situation the judgment delivered in Bluenergy Group Limited (subject to a
Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977 would apply
and following Section 444D (1) Ravi’s right to recover his money would survive even after the
DOCA has been executed (Morrissy 2016).Thus his claim against the company would be for the
full amount of $90,000. Applying this to the present circumstances, the company owes a total
debt of $210,000 and has assets worth $95,000 and is liable to reimburse Ravi as the only
secured creditor. Thus, $90,000 from the total assets as a repayment of the amount lent to the
company by Ravi. The unsecured creditors would thus have the remaining $5000 distributed
amongst them as full and final settlement of their claims(Chia and Ramsay 2015). The company
would thus be unable to meet its debts sufficiently.
Conclusion
The appointed administrator would have three options available to him to provide relief
to the creditors. These are namely, handover of the companies affairs back to the management
(the board of directors), formulation and execution of a Deed of Company Arrangements which
would address all debts owed by the company or commencement of liquidation proceedings by
appointment of an official liquidator as per the provisions of the act. In this scenario execution of
a DOCA would be the best recourse to solve the company’s problem without negating its
existence.
Ravi being the sole shareholder and secured creditor of the company would have the right
to recover the entire amount given by him to the company. This follows Section 444D (1) which

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protects his claims from being extinguished even after the execution of a DOCA. However, this
right would be extinguished if Ravi had exercised his voting rights during the approval and
execution of the DOCA.
In case Ravi is successful in getting back the amount owed to him by the company then
the unsecured creditors of the company would have to accept the remaining $5000 as full and
final settlement of their claims. This amount would be distributed among them at a agreed upon
rate.
Calculation
Payment to Unsecured Creditors:
Particulars Amount ($)
Unsecured Debts 1,20,000
Secured Debts 90,000
Total Debt 2,10,000
Total Assets 95,000
Less: Secured debts 90,000
Unsecured creditors pay 5,000

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Reference list:
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Armour, J. and Ringe, W.G., 2013. European company Law 1999-2010: renaissance and
crisis. Law Ukr.: Legal J., p.144.
McLaughlin, S. and McLaughlin, S., 2013. Unlocking company law.Routledge.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Harris, J., 2017. Class Warfare in Debt Restructuring: Does Australia Need Cross-Class Cram
down for Creditors' Schemes of Arrangement. U. Queensland LJ, 36, p.73.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury
Publishing.
McQueen, R., 2016. A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920. Routledge.
Bronitt, S.H., 2013. Policing Corruption and Corporations in Australia: Towards a New National
Agenda.
Morrissy, S., 2016. Benefit corporations: A sophisticated and worthy reform. Governance
Directions, 68(1), p.24.

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Chia, H.X. and Ramsay, I., 2015.Section 1322 as a Response to the Complexity of the
Corporations Act 2001 (Cth).