Insolvency Administration

79033 Spring 2023

Tutorial question Week 4

Anne.Wardell@uts.edu.au

UTS CRICOS 00099F

IRAC is a method used to answer
legal problems
Application of IRAC
Issue
Albert’s company has been served with a statutory demand for a debt of $4,090
to the local church choir. The 21-day time limit to satisfy has expired, therefore
a presumption of insolvency will apply. The creditor can now seek to wind up
Albert’s company.
One option he is considering is selling the Geelong factory site to his family
company for less than its full market value.
You are asked to advise Albert about his options, liabilities and what factors
might influence the ultimate outcome of any decision he takes. Your advice
should also consider what Eastpac Bank is likely to do if anything?
Application of IRAC
Rules – Statutory demand
• Pt 5.4 Div 2 Statutory demand
• S 459E requirements
• S 459F period for compliance
Application of IRAC
Rules – winding up order
• Pt 5.4 Div 4 Application for order to wind up company
• S 459P who may apply
• S 459Q failure to comply with statutory demand
• S 459R period to determine application
• S 459S company may not oppose on certain grounds
• Reg 5.4.01AAA statutory minimum
Application of IRAC
Rules - alternatives
• Pt 5.3A VA with view to DOCA
• S 436A appoint administrator
• S 440A limitation on winding up
• S 444B Execution of DOCA
• Pt 5.3B Restructuring plan
• Not available because debts over $1 million
Application of IRAC
Rules – actions of Eastbank
Private appointment of receiver pursuant to General Security Agreement (GSA).
General law applies as contractual arrangement. Once receiver appointed
Corporations Act applies.
• Pt 5.2 Receivers and other controllers
• S 420 powers of receiver
• S 420C power to carry on business
Application of IRAC
Rules – sale to family company
• Statutory duties and powers of directors ss 180 to 182 including to act in
good faith.
• Section 588FB uncommercial transaction
• Section 588FDA unreasonable director related transaction
Application of IRAC
Application – statutory demand and winding up
Albert has failed to comply with the statutory demand within the 21-day time
limit required by s 459F which is 21 days, see definition of statutory period.
Section 459G states that an application to set aside the demand can only be
made within the 21-day time period. Therefore, Albert cannot seek to set aside
the demand. This is a strict time limit, and the court will not grant an extension.
The church can now proceed to apply for a winding up order under s 459P and
459Q.
Section 459S sets out that the company cannot oppose the application on
certain grounds which include a ground it could have relied on under s 459G.
Application of IRAC
Application – statutory demand
The only ground available is solvency. We do not have sufficient information to
make an assessment as to the solvency of the company.
Given the small amount of the debt the best option for Albert would be to pay
the debt in full. The creditor would not be able to continue to apply for the
winding up order.
Another option is for Albert to pay part of the debt and bring the debt under the
statutory minimum, reg 5.4.01AAA, to apply for a winding up order. The current
statutory minimum is $4,000.
Application of IRAC
Application – alternatives
• Albert could consider appointing an administrator under s 436A with a view to
entering a DOCA. He would need to form a belief that the company is
insolvent.
• If an administrator is appointed the court will usually adjourn a winding up
application until after the creditors meeting, s 440A. Note that is the
appointment of an administrator is simply to frustrate the winding up
proceedings the court may not grant an adjournment. The court will consider
what is in the best interests of the creditors.
• This option would seem an expensive one given the amount of the debt.
Application of IRAC
Application – alternatives
• Pt 5.3B Restructuring plan is not available because debts over $1 million
Application of IRAC
Application – Eastbank
Eastbank has the power to appoint a receiver under the GSA. This is a
contractual right under the GSA.
The facts do not state that he is in default under his loan so Eastbank would
need some act of default before appointing a receiver. The powers of the
receiver are set out in s 420 CA.
It is unlikely at this stage that they would appoint a receiver.
Albert and his wife have provided personal guarantees which would be
enforced in the event that the security against the company was not sufficient.
Application of IRAC
Application – sale to family company
• I would advise Albert against selling the company to his family for less than
market value.
• If the court winds up the company, then the liquidator would be able to
overturn the transaction based on either s 588FB uncommercial transaction
or s 588FDA unreasonable director related transaction.
• Albert may also be in breach of his statutory duties as a director as this
would not be acting in good faith in relation to the company.
Application of IRAC
Conclusion
Albert should pay the debt in full. Alternatively, he can pay part of the debt
which would have the effect of bringing the debt under the statutory minimum.