Ch 19 Answer guides – Receivership and administration

Exercise 19.4 – RCL receives a demand for payment

19.4 Rail Constructions Ltd “RCL” purchases $2 million worth of timber

from Quick Timber Ltd (“QTL”). After using the timber in installing tracks
on a new project, RCL is unhappy to observe that the wood components have
warped dramatically, such that RCL will have to re-lay the entire length of
track. As a result, RCL refuses to pay QTL for the timber. In due course,
QTL sends RCL a letter demanding payment of “$2 million, plus compound
interest at 8% per year” that RCL owes it. (The letter was addressed to “Rail
Contracting Pty Ltd”.) RCL is of the view that the entire lot of wood is
defective, and if anything, QTL should have to pay RCL for the massive
expense that RCL is going to incur (way more than $2 million) in re-laying
the damaged track. Advise RCL in relation the demand for repayment it has
received, and in particular the consequences if RCL fails to respond.

Answer:

RCL needs to consider if this letter amounts to a statutory demand for payment. If
it does then RCL needs to respond – either pay, or, dispute payment. Is this letter a
valid statutory demand? If RCL can find any issue on which the letter does not
meet the requirements under the Corps Act then it will not be a valid statutory
demand.

If a valid statutory demand is given to a company pursuant to section 459E of the

Corporations Act 2001 (Cth) and the company fails to pay, then in a subsequent
winding up application the court will presume the company is insolvent providing
creditor with a useful tactic.

To be valid under section 459E of the Corporations Act 2001 (Cth) the notice of
demand must;

 Relate to a debt of more than $2000

 Be in writing signed by the person claiming the money
 Be accompanied by an affidavit confirming the amount claimed is correct
 Demand payment within 21 days of the notice
 Served at the registered office of the company

There are difficulties with the letter sent by QTL as far as 459E of the Corporations
Act 2001 (Cth) is concerned as it is addressed using the incorrect name of the
debtor and it is not stated that that it was accompanied by an affidavit or provide
for payment within 21 days and it has not been established it was served at the
company’s registered office.
 Assuming a valid statutory demand has been given, if there is a genuine dispute in
relation to quality of the timber this is a potential basis to have the notice set aside
pursuant to section 459J Corporations Act 2001 (Cth).

Exercise 19.5 – Landlordly wants to evict Garbage Scramble Pty Ltd

The tenant is in voluntary administration. The moratorium effect kicks in. During the
administration, except with the permission of a court, Landlordly Pty Ltd cannot evict
Garbage Scramble Pty Ltd from the premises, Corporations Act 2001 (Cth) section
440B, or enforce Oscar and Shankar’s liability under the guarantee Corporations Act
2001 (Cth) section 440J.

Exercise 19.6 – The bank wants to appoint seize equipment when Going for
Broke Pty Ltd defaults on its loan

It depends … the first question is whether the bank’s security interest covers a
substantial part of GFB’ assets. The second question is whether the bank acts in time.

The Corporations Act 2001 s 441A says that a secured creditor holding a security
interest over substantial assets of the company can enforce their security interest
within 13 days after notice of the Voluntary Administrator’s appointment is given.

Other secured creditors must wait until the company is out of administration,
Corporations Act 2001 (Cth) sections 440B and 441B unless they obtain a court
order.

If the bank’s security interest covered all the assets of Going for Broke Pty Ltd the
bank could enforce its security interest within 13 days after notice of the Voluntary
Administrator’s appointment is given.

Exercise 19.7 – Virginia needs advice about the voluntary administrator

appointed to Infinitude loans Ltd. She is a secured creditor.

What it means when a company appoints a voluntary administrator

Voluntary administration is a way for an insolvent company to have a moratorium or

safety zone from creditors’ claims while a decision is made about its future. It
involves the appointment of a voluntary administrator.
Section 435A sets out the goals of the voluntary administration to maximise the
chances that a company in difficulty will trade out, or otherwise to maximise the
return for its stakeholders.

During the voluntary administration the effects of the administration include,

company

 directors losing their right to exercise powers of officers of the company,

 the administrator becoming the only one who can deal with company property,
 proceedings against the company not being allowed to be begun or proceeded
with except with leave of the court,
 director’s guarantees not being allowed to be enforced except with leave of the
court, and
 special rules applying in relation to enforcement of security interests by
secured creditors.

Whether Virginia can enforce his security interest

Virginia’s position as whether he can enforce his security will depend on the extent of
company’s assets effected by Virginia’s security interest.

Pursuant to the Corporations Act 2001 (Cth) section 441A a secured creditor holding
a security interest over substantial assets of the company can enforce their security
interest within 13 days after notice of the Voluntary Administrator’s appointment is
given. Other secured creditors must wait until the company is out of administration,
Corporations Act 2001 (Cth) sections 440B and 441B unless they obtain a court order.

What is the procedure for a voluntary administration (i.e. are there meetings
and what happens at these meetings?

Pursuant to the Corporations Act 2001 (Cth) section 436E (2)* the administrator must
hold a meeting of creditors within 8 business days of the administration commencing
and pursuant to Corporations Act 2001 (Cth) section 439A the administrator must
report back to a second meeting of creditors within 20 to 25 days.

(*Note: Paragraph 13.3.6 of the text incorrectly refers to section 435C)

What are the possible outcomes of a voluntary administration?

At the second meeting of creditors the creditors will vote on three options namely:

1. Agree to enter into a deed or arrangement (typical clauses in a deed of arrangement

include: an extinguishment of some, a proportion of, or all of the company’s debts;
restricting the power of directors; and an order for priority of payments of the
company’s debts;

2. Agree to have the company wound up

3. Return control to its board of directors.