Everyone loves a bargain – accordingly, there is a lot of interest when liquidators and other insolvency practitioners put a business up for sale. Purchasers jostle like shoppers in the Myer stocktake sale, trying to position themselves as the perfect purchaser. At the same time they try to convey their concern about the value of the business or assets – everyone expects a discount for a distressed business.
On 14 September 2010, the Senate Economics References Committee (Committee) released a report recommending reforms to Australia’s current insolvency regime (Report) in the following key areas:
- the regulation of the insolvency regime
- the registration of insolvency practitioners, and
- the remuneration of insolvency practitioners.
Implications
If the recommendations contained in the Report are enacted in legislation, stakeholders may be affected in the following ways:
The Government has reintroduced the Corporations Amendment (Sons of Gwalia) Bill 2010 into Parliament to give effect to the Government's decision to reverse the High Court's decision in Sons of Gwalia v Margaretic.
On 13 October 2010 ASIC released the National Insolvent Trading Program (NITP) Report, which sets out key messages, promoting greater director responsibility by encouraging directors to remain properly and fully informed about a company’s financial affairs, and to be aware of the implications of insolvent trading; and to seek (timely) professional advice from accountants, lawyers and insolvency practitioners.
After consulting over 1500 companies displaying solvency concerns, ASIC has identified several possible insolvency indicators including:
Law clerk, Myles Engelen, discusses the decision of the Supreme Court of New South Wales, in McGrath & Anor re HIH Insurance Ltd approving a proposal to use excess assets of some members of the group to fund claims by the group members.
On 24 November 2009, ASIC released Consultation Paper 124 which provides guidance for directors on their duty to prevent insolvent trading which is imposed by section 588G of the Corporations Act 2001.
The economic climate over the past two years has seen a growing number of corporate insolvencies. There is also evidence that directors, and particularly directors of small to medium size enterprises, do not fully understand their duty to prevent insolvent trading.
Key Points: The fact that you're a very big company doesn't mean you needn't follow the legal rules for the execution of documents.
Background
A large insurance company claimed to be a creditor of Ungul, a property developer. Ungul was in voluntary administration.
A meeting of Ungul's creditors was called for 11 June. The insurance company's solicitors contacted the administrator and said that:
Every director of an Australian company is under a legal duty to prevent the company incurring a debt when the company is insolvent (or where that debt will cause the company to become insolvent).
The Australian Securities and Investments Commission's (ASIC) new Regulatory Guide sets out four key principles which directors should follow to meet their obligation to prevent insolvent trading.
The Regulatory Guide also sets out ASIC's approach to assessing whether a director has breached their duty.
Background
Section 588G of the Corporations Act 2001 (Cth) imposes a positive duty on directors of a company to prevent insolvent trading. Due to the economic downturn, the Australian Securities and Investments Commission (ASIC) believed the market, which includes directors and professional advisors, would benefit from clarification as to what factors ASIC considers prior to commencing an investigation into insolvent trading.