The point at which a company becomes insolvent is not always clear. The Courts will consider “various indicia of insolvency”, including the company’s ability to raise further capital and access to alternative finance. In some situations, a director or related entity may be willing and able to contribute funds to the company to allow it to pay its debts. This can affect whether a company is viewed as solvent or not. Once insolvency is reasonably suspected, directors must prevent the company from incurring further debts or risk being held personally liable for the debts incurred.
Update: Re CMI Industrial Pty Ltd (In Liq); Byrnes & Ors v CMI Limited [2015] QSC 96
Receivers do not have to distribute profits from the sale of inventory acquired by them during their appointment to priority creditors.
The question of whether priority creditors have a statutory entitlement to receivers’ inventory trading profit has largely been left unanswered until the decision handed down by Justice Mullins on 27 April 2015.
When a company goes into liquidation liquidators will often try to ‘claw back’ uncommercial transactions. The recent case of 640 Elizabeth Street Pty Ltd (in liq) & Ors v Maxcon Pty Ltd [2015] VSC 22 considered whether securing the indebtedness of a third party to avoid potential litigation exposure is an uncommercial transaction.
Background facts
Directors of an insolvent company face a strict duty not to allow their company to trade whilst insolvent. Whilst there are exceptions and defences available for directors, the recent case of Smith v Bone [2015] FCA 319 demonstrates that:
a director will not easily be excused, especially where they fail to seek advice on the company’s solvency in circumstances which would warrant such an enquiry; and that directors should not assume that simply entering into certain arrangements with creditors is enough to prevent them being liable for insolvent trading.
Property acquired by a bankrupt after the date of bankruptcy becomes property that is divisible amongst the bankrupts’ creditors. However, case law supports the conclusion that after-acquired income remains vested in the bankrupt. The question then becomes: what happens to property that is purchased by the bankrupt with after-acquired income? This question was considered in the recent case of De Santis v Aravanis [2014] FCA 1243.
Background
There are circumstances where a liquidator may approach the Court concerned that their position in future proceedings may be weakened if the matters they put before the Court in current proceedings are revealed. In an appropriate case the Court will make a non-publication order to prevent prejudice to the proper administration of justice. The recent case of Australian Securities and Investment Commission v Piggott Wood & Baker (a firm) [2015] FCA 18 examined in what circumstances a non-publication order is necessary.
BACKGROUND
Receivers are often faced with the dilemma of goods in their possession which are not readily identifiable as “property of the corporation” pursuant to section 420 of the Corporations Act 2001 (Cth) (CA). Selling or disposing of assets that are not property of the company may make receivers liable for the loss or conversion of such goods. Therefore, it is important that receivers identify the property of the company correctly.
Liquidators are subject to rights and duties under common law and the Corporations Act 2001 (Cth) (CA).
It is well-known that liquidators must be independent. If there is a reasonable apprehension that Liquidators lack independence, a Court may remove and replace them pursuant to the Corporations Act 2001 (Cth) (CA).
On 7 November 2014, the Treasury released the Insolvency Law Reform Bill 2014 (Bill) exposure draft for public consultation. There are a significant number of legislative changes (the exposure draft is 400 pages) proposed to be made to the Corporations Act 2001, the Bankruptcy Act 1966 and related laws. Submissions are currently sought.