EVALUATION OF CORPORATE INSOLVENCY LAW IN AUSTRALIA


 


ABSTRACT


The continuous existence of a company is necessary in order to make the economy of a country more stable. Inevitable for every state to have a sound, transparent and flexible corporate insolvency law that will reflect the changes in national and international market development. Corporate insolvency encompassed a series of important steps, process, and procedures in order to give insolvency an effect.  Insolvency reforms therefore must be always a goal for every state. The paper objectively identifies the dilemmas of the current corporate insolvency law with emphasis given on aspects of directorship, receivership, schemes of arrangement, voluntary administration and liquidation. For the directors, the author discovered that sanctions must be given to intentional failure to acknowledge signs of insolvency. In receivership, there must be regulations on the extent of control and the reporting framework. A closed-loop involvement must take place in deciding for the most suitable scheme of arrangement. The degree of the power of directors must be scrutinized in lieu of voluntary administration. Pooling mechanisms for unsecured creditors is addressed in area of liquidation. 


 


INTRODUCTION


            The importance of a continuous existence of a company is necessary in order to make the economy of a country more stable. The government is task to avail and implement different kinds of means in order to make the economic life in Australia more stable. Furthermore, the knowledge of a corporation that the government has plans to make and help corporations in the happening of bankruptcy will enable it to be more capable of things, which are necessary as to its success. The more pressing consideration will be on receivership, schemes of arrangement, voluntary administration, and liquidation and the provisions for directorship. 


The corporation insolvency law of Australia encompassed a series of important steps, process, and procedures in order to give insolvency an effect. The concept of having an insolvency law in Australia allows the applicability of seeking the effect of equitable distribution of the insolvent’s property among his creditors, and to discharge the debtor from his liabilities; so that he can start afresh with the property set to him as exempt. The applicability of the following procedures is also included in the provisions of Corporation Insolvency law; these are the receivership, schemes of arrangement, voluntary administration, and liquidation.


Hence, it can be inferred that giving corporations the autonomy to realign their insolvency laws with that of Australian Securities and Investment Commission (ASIC) as well as the international system of corporate insolvency law thereby make necessary insolvency law reforms. It has been noted that the recent collapse of major investment banks in the US will impose challenges to insolvency provisions in Australia in corporate and national levels, and in making corporate insolvency law more efficient, there could be a requirement to study in-depth the restrictions on trade, commerce and investment in national negotiations. How corporations could achieve greater flexibility into insolvency proceedings, remove pointless regulatory burdens and modernize the legal frameworks for the purpose of reflecting the market developments are at the core of discussion.


            This analysis will use the research process wherein views and relation of selected authorities are taken into consideration. Thematic content analysis will be adapted and will be applied on the four scenarios we are taking into account. The process of which will enable the writer to acquire a series of references in order to give his arguments a more comprehensive background as to the subject matter. The author will outline laws and other related statutes in order to have a substantial argument, since the focus of this paper is the law itself. The author will likewise cite prevailing jurisprudences decided by the Courts of the land. The jurisprudences provided in this paper are necessary in order to give the readers an actual illustration of the matter.


            The scope of this paper will be on the general concept of the Corporation Insolvency Law of Australia. The focus of this paper will look into the matters that will make the paper more encompassing.  The said topics mentioned above are covered. However, the limits of this paper will be on the evaluation of the author as to the implementation and effectiveness of the said law. The author will also discuss the incentives and disincentives given to stockholders in terms of their participation to the insolvency. Hence, the actual coverage of this paper will focus on the evaluation and analysis of the author regarding the assessment of the current insolvency law as well as the standing provisions about receivership, schemes of arrangement, voluntary administration, and liquidation.


            The paper will be presented in a sequential matter, and will be problem-oriented in nature. That is, the author will attempt to objectively identify the dilemmas of the current corporate insolvency law with emphasis given on aspects of directorship, receivership, schemes of arrangement, voluntary administration and liquidation. The author will first give his own hypotheses regarding the matter and then cite the number of authorities in supporting his claim. The evaluation will be next, taking into consideration, prevailing jurisprudence and other laws. A conclusion will end this paper, summarizing the key points discussed.


 


CONCEPTUAL FRAMEWORK


            According to Mr. Chris Pearce, Parliamentary Secretary to the Treasury, Australia’s corporate insolvency regime is a critical element in the economic infrastructure. Indeed, insolvency laws underpin the system of financial and contractual relationships which enable trade and commerce necessary for the existence, survival and functioning of Australia’s economy. There is the requirement to conform to well-deigned insolvency law embedded on predictable, transparent and affordable means of implementation. Insolvency law and processes complements not just the behaviours of the directors but also the employees and creditors and debtors during the life of the company.


            Corporations Act 2001 refers to the Commonwealth’s laws in dealing with business entities in Australia at both federal and interstate levels. The Act focuses mainly on Australian companies as well as the laws relating to other entities including partnerships and management investment schemes. An inquiry made in 2002 covers the terms of references such as appointment, removal and functions of administrators and liquidators; duties of directors, rights of creditors; costs of external administrations; treatment if employee entitlements; reporting and consequences of suspected breaches of the Corporations Act 2001; compliance with, effectiveness of deeds of company arrangement; and whether special provision should be made regarding the use of phoenix companies. In 2005, there are reform packages proposals regarding the Australian Insolvency Law. The reform is intended for regulating the behaviours of the directors who are involved in Phoenix activities. Following the submissions, the Corporations Amendment (Insolvency) Act 2007 came about. The amended law extends to improving outcomes for creditors, deterring corporate misconduct, improving regulation for insolvency practitioners and fine tuning voluntary administration.


 


THE EVIDENCE


            Several reports and papers about statutes and case laws regarding corporate insolvency law emerge, pushing efforts to amend the Corporations Act 2001. The Working Party Report in 1997, for instance, covers that of the remuneration provisions of insolvency practitioners as well as the current system for registration and appointment. The report also challenges the response procedures to complaints concerning the conduct of corporate insolvency administrations. In addition, in May 2000, a report by states that the law reform option for the insolvency law for corporate groups must be center on two primary issues as liability to external creditors and intra-group indebtness.


            Other initiatives for corporate insolvency law amendment are Part 5.8A, the Corporations Amendment Bill 2002, CAMAC review and CLERP 8. The first initiative is a part of the Corporations Act itself which prohibits the entry into one or more agreements with the intention of preventing or reducing the amount of employee entitlements that may be recovered. The Bill was drawn from the proposal of the Senate Economics Committee to consider the retrieve certain payments to directors in corporate insolvencies. The Corporations and Markets Advisory Committee (CAMAC) considers the members’ schemes of arrangement, claiming that arrangements are increasingly becoming an instrument for reconstructuring corporate control. Finally, the Corporate Law Economic Reform Program (CLERP) 8 intends to establish the necessity for an international uniform code of legislation, assisting the practical aspects of cross-border insolvencies.


 


PROBATIVE VALUE / DISCUSSIONS


Directorship


            For the purpose of promoting an efficient financial industry, the directors of the corporations under insolvency or anticipated insolvency must be regulated deliberately. The powers and duties of directors and the basis for sanctioning related especially in sections 180-184 of the Act must be given balance upon notably the section that states the core duties of directors. Such duties and powers must be aligned with breach issues in broader context, and then eventually aligned to specific penalties or sanctions.  Submissions pointed out that the powers and duties of directors must have objective intent inherent into it and must not provide for subconsciously abusing the power and judicial authority. Directors, who at all cause must perform at the best interest of the corporation, should have detailed powers, duties and responsibilities that will not excuse him/her in committing mistakes leading to the insolvency of the company. Directors are held liable when s/he chose to engage in insolvent trading. In lieu with this, the Act should cover sanctions on the intentional failure to acknowledge signs of insolvency as well as the necessary expertise and competence of a reliable director appropriate to make economically sound decisions during threats of insolvency, therefore relinquishing affairs if directors failed to do so.  


Receivership


            Under receivership, the Act outlines the remuneration for the repayment of certain debts, prioritizing those payable to debenture holders, and including employee entitlements. Nonetheless, the priority is given to property subject to a floating charge. As such, receivership is expected to incur costs for external administration whereby the appointing creditor determines remuneration. Receivership requires the protection of the rights of creditors as well as employee superannuation. Equitable receivership must be always achieved with respect to enforcing security. Since the receiver acts in behalf of the creditors, the receiver’s conduct must be also protected must the influences that the directors might invoke. If a receiver will consider responsibilities to that of a manager, a receiver monitoring process must be regulated, including the extent of control and the reporting framework. Although receivership is generally regarded as corporate rescue schema, it could also be considered as debt collection strategy.     


Schemes of Arrangement


            In protecting creditors also, the schemes of arrangement must allow the flexibility of a scheme or compromise, especially if it involves a transfer of assets to new entity. As such, there must be also the court’s approval to adjust thresholds regarding schemes of arrangement meetings to address share-splitting activities. Schemes of arrangement are enforced for the protection of the legal procedures and rights of both creditors and debtor companies therefore arrive at necessary actions mutually beneficial to both stakeholders and the employees as well toward appropriate dealing with insolvency as well as to avoid litigation as much as possible. Such a collective action, schemes of arrangement must be objective in every sense of the word despite various economic consequences the process itself may impose. Business prudence as the foundation has schemes imprimatur at its center. Commercial judgment and decision-making of creditors is an imperative then. This points to the requirement of synergy between the Act and the creditors who will basically act for their best interest before the insolvency materializes, and this must be done in wider context involving the roles of ASIC and the court, a process that must override anyone involved.  


Voluntary Administration


            A provision of whether various forms of administration or external administration per se would be plausible in case of corporate insolvency and how it could likely to affect the outcomes of administration must be also addressed. Voluntary administration is a basic right of creditors and so there must be an appropriate voting procedure in order to protect the process from exploitation. Given that administrators have the autonomy in aspects of winding up of affairs of the insolvent corporation, their conduct in relation to the directors must be also regulated so as not to exacerbate the condition of the company as well as its employees and creditors and debtors. Voting on a resolution by voice or poll could be the most plausible way. If all else fails, there must be a detailed entrant involving the court in the process or ASIC for that matter. After considerations of the alternative open to the anticipated insolvent company, a comprehensive reorganization plan must be taken into account. If and only if the administrators exceed the given time to proposed necessary changes, the court’s involvement must be prioritized, ordering the administrator to provide an extensive report of the status of the company and the rationale behind the prolonged assessment. Even so, priority repayment provisions could be also considered as well as the right of indemnity of the administrators whom should always act at the best interest of the creditors.


The loophole is that administrators are appointed by directors depending on their own choose and so there may be the possibility that the directors may influence administrators. Aside from this, the lengthy interface between the directors and the administrators could lead to other otherwise objectionable outcomes thereby lengthening procedures which reduces efficiency and acquires more costs. What we are trying to avoid is the connivance between directors and administrators, curtailing the right of the creditors and employees also hence requiring the presence of two creditors during meetings. As much as possible, the time gap from the appointment of administrators down to deciding the case of the corporation must be given serious consideration. Though benefit of moratorium should be provided with insolvent corporations, the law must not provide for making the situation worse with respect to director’s decision-making and timing of meetings.


Liquidation


            Another form of external administration is liquidation wherein liquidators are commonly appointed by the court. The liquidator’s role is very different of that of the administrator’s; nonetheless, the administrator could act as a liquidator. But under the law, a company undergoing a provisional liquidation, appointing an administrator is prohibited. Liquidators, furthermore, are required to report and provide assistance at the best interest of the creditors, necessitating a provision for proper reporting schemes. The company in liquidation must in return provide for the remuneration of the liquidator. Based on four submissions, however, liquidation must not always be the goal, and that creditor’s voluntary liquidation should be taken into account. An orderly transition to liquidation is also dependent of the considerable time before making a declaration. As for the employees, employee entitlements are prioritized over creditors – secured and unsecured, which should not be the case. As much as possible, the principle of credit must not be sacrificed. So, if the corporate insolvency law strike a balance between the secured creditors and the employees it would be much acceptable. For eligible unsecured creditors, the court must give them the right for pooling determination. Pooling mechanisms in light of liquidation must be also achieve if it means to extend the participation of the company in liquidation and the determination of circumstances giving rise to liquidation are attributable to the actions of the company, but in a manner where the rights of the creditors would not be jeopardized. 


 


CONCLUSION


Corporate insolvency law is critical for the continuous existence, survival and functioning of a state which engages in trading, commerce and investment. Necessary to the recovery of the corporations under anticipated insolvency are sound corporate insolvency provisions. Although it is not a panacea and that all laws have inherent flaws, what makes a law adequate is its flexibility to adapt changes. In the onset, the Corporations Act 2001 governs the corporate insolvency in Australia, and after a series of inquiries and submission it was later changed to what came to be known as Corporations Amendment (Insolvency) Act 2007. A law that extends to providing equally for creditors either secured or unsecured and the employees. The changes were supported by submissions in 1997 and 2000 via a report as well as the Part 5.8A, the Corporations Amendment Bill 2002, CAMAC review and CLERP 8. The provisionary requirements discussed are based on aspects of directorship, receivership, schemes of arrangement, voluntary administration and liquidation.



Credit:ivythesis.typepad.com


0 comments:

Post a Comment

 
Top