Ch 20 Answer guides – Liquidation

Exercise 20.5 – The directors of Hedonia Ships Lts place the company into
voluntary liquidation

Can the liquidator commence an action against the directors for breaches of s
588G of the Corporations Act? Explain. 

o To bring an action against the directors for breach of section 588G of

the Corporations Act 2001 (Cth) the liquidator will need to show:

 Stefan, Taichi, Siobhan and Felicia were directors when the debt was incurred
 At the time the debt was incurred the company was insolvent or would
become insolvent by incurring the debt or the were reasonable grounds to
suspect the company was insolvent or would become insolvent by incurring
the debt.
 Stefan, Taichi, Siobhan and Felicia were aware there were grounds for
suspecting or a reasonable person in their position would be aware.

Insolvent trading liability only arises when the company is being wound up in
insolvency, pursuant to s588E of the Corporations Act 2001 (Cth). As a liquidator
has been appointed, the liquidator is entitled the bring an action for compensation
against the directors under s588M of the Corporations Act 2001 (Cth). Otherwise
contravention is a civil penalty proceeding pursuant to s1317E of the Corporations
Act 2001 (Cth).
Accordingly, this is a good opportunity to revisit the principles of liability for
insolvent trading discussed in Chapter 16, to see whether there are prospects of
establishing the three elements to liability:
 The person was a director when the debt was incurred
 At the time the debt was incurred the company was insolvent or would
become insolvent by incurring the debt or the were reasonable grounds to
suspect the company was insolvent or would become insolvent by incurring
the debt.
 The director was aware there were grounds for suspecting or a reasonable
person in the director’s position would be aware.

Does the liquidator have the power under Part 5.7B, Div 2 of the Corporations
Act to recover the Mercedes and the $50,000 Taichi transferred away from the
company?

Part 5.7B, Div 2 of the Corporations Act covers the voidable transactions in a
winding up. These are transactions that were entered into before the company was
wound up. Such transactions are voidable because the liquidator can go to the court
and ask for an order to ‘undo’ the transactions under s 588FF of the Corporations Act
2001 (Cth). There are seven types of voidable transactions (and 2 types of void
transactions).

If the liquidator is looking to recover the company’s property from a director, then
consider the types of transactions that would permit this type of order. The liquidator
should consider the general unreasonable director related transaction pursuant to
section 588FDA of the Corporations Act 2001 (Cth). 

On the facts, the liquidator has reasonable prospects of recovering the Mercedes from
Taichi. With respect timing the liquidator will need to show transfer of the luxury
motor vehicle took place within four years of the relation back date, that is the date
the application for winding up was lodged or the date the winding up is deemed to
have begun.
If the liquidator is looking to recover the company’s funds from a third party creditor,
then consider the types of transactions that would permit this type of order. The
liquidator should consider the general unfair preference transaction pursuant to
section 588FA of the Corporations Act 2001 (Cth).
On the facts, the liquidator has reasonable prospects of recovering the $50,000 from
the Bank as an unfair preference, if the bank received a payment while the company
was insolvent, if this payment amounts to more than it would have received in a
winding up. With respect timing the liquidator will need to show the payment took
place within 6 months of the relation back date, that is the date the application for
winding up was lodged or the date the winding up is deemed to have begun.
However, creditors also have access to a defence to insolvent transactions. When a
creditor faces a demand from the liquidator for repayment of the money or return of
the property, s 588FG of the Corporations Act 2001 (Cth) provides the creditor with
the “good faith” defence:
 they were a party to the transaction and acted in good faith,
 they had no reasonable grounds for suspecting the company was insolvent, and
 they had given valuable consideration under the transaction.
The facts do not provide any information as to the bank’s involvement – the
repayment seems to have been made by the company in usual circumstances,
suggesting that the Bank received the payment on good faith.

Did the directors have the right to pay the dividend in early May 2019? Explain.
 
The Corporations Act section 254T provides that a company can pay a dividend if the
“balance sheet solvency test” is met, that is the company’s assets exceed its liabilities
before the dividend is paid and the difference sufficient to pay the dividend, the
payment of the dividend is fair and reasonable to the company’s shareholders as a
whole and the payment of the dividend must not prejudice the company’s ability to
pay its creditors.

At the very least the facts suggest the payment of the dividend prejudiced the ability
of Hedonia to pay its creditors so there are reasonable prospects of establishing the
dividend should not have been paid.
Exercise 20.6 – Maidstone Pty Ltd and the statutory demand and liquidation

Explain the “statutory demand procedure” to Mica and explain how Maidstone
can use this process in its dispute with Leonardo. 

If a valid statutory demand to 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

The claim that 20% of the sheets were cracked suggests that Maidstone and Leonardo
have a dispute about the amount owing.  Even if Maidstone issues a notice of demand
to Leonardo, Leonardo may apply to the court to set aside a Statutory demand issued
by Maidstone pursuant to section 459H Corporations Act 2001 (Cth). 

Beryl has had a change of heart about the whole quarry business, believing that
it is destructive to the environment. Is she able to initiate Maidstone’s
liquidation? 

There are two types of winding up:

1. voluntary winding up, which can be:
o a members’ voluntary winding up, or
o a creditors’ voluntary winding up.
2. compulsory winding up, which can be:
o ordered by a court because the company is proved to be insolvent, or
o for other reasons.
Figure 19.1 summarises these processes.
The winding up of a solvent company may arise where the members decide that
the company has served its purpose. The process for a members’ voluntary
winding up is as follows.
1. The directors must declare in writing that the company is able to pay its debts in
full within 12 months of winding up (s 494 of the Corporations Act 2001 (Cth)).
2. A special resolution must be passed by the members (more than 75 per cent must
agree) (s 491).
3. The members appoint a liquidator (s 495).
 As Beryl is a minority shareholder, her voting power on its own is not sufficient to
pass a special resolution, which requires 75%. If the majority of members do not
agree with her, Beryl cannot initiate a voluntary winding up. 
The grounds for a compulsory winding up other than insolvency are contained in
ss 461 to 464 of the Corporations Act and were discussed in chapter 12, for
example: 
 the directors have put their own interests before the interest of the
company, or the affairs of the company have been conducted in an
oppressive manner, or
 the court believes it is just and equitable to wind up the company.

Whilst a single member, regardless of voting power, can apply to the court
for a compulsory winding up, there are very few facts to support a finding
as to the company being managed in a way that is unfair, or oppressive, or
against the members interests. 

If Beryl is successful in liquidating Maidstone, does this mean Leonardo never

has to pay any debt owed to Maidstone?

It is useful to consider the rights of outsiders who deal with a company when a
company is in liquidation. 
Leonardo owes the company money. The liquidator now has the power to take
custody and control of the company’s assets (s474 of the Corporations Act 2001
(Cth)), which would include to call in the company’s receivables, and to bring any
actions in the company’s name pursuant to s477 of the Corporations Act 2001 (Cth).
To the extent that Leonardo may also have a claim against the company (as creditor or
other claim), note that outsiders cannot take proceedings against the company or its
property (s 471B of the Corporations Act 2001 (Cth)) and any unsecured creditors
cannot take action to recover their deb
To demonstrate to the liquidator that they are owed money, a creditor needs to
complete a proof of debt form. It must be lodged with the liquidator.