Suggested answer to end of chapter problems, and Examiner s tips - by Christopher Symes

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1 to end of chapter problems, and Examiner s tips - by Christopher Symes 2012 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. Chapter 8 Voluntary Administration Example problems Problem 1 Laura was appointed administrator of Cloudy Blue Skies Printing Pty Ltd (Cloudy Blue Skies), a company that produces printed postcards and digital images and messages for the tourism industry, on 23 March The appointment followed a meeting of the company s directors where by resolution they agreed to appoint Laura, although the minutes of the meeting merely record the resolution and do not record any details of the consideration of solvency. Laura is a registered liquidator who has been doing mostly liquidation work and she last did a voluntary administration 10 years ago. Her sister, Ella, is a freelance photographer who has worked very closely with the company and it was her suggestion that they appoint Laura. Is Laura validly appointed? An administrator may be appointed by the company as the directors can appoint administrators under s 436A. This requires a properly documented resolution of the company s board to the effect that the company is insolvent or is likely to become insolvent at some future time, and that an administrator should be appointed. The facts suggest that the Cloudy Blue Skies board has held the meeting although there is no mention of the consideration of insolvency. Administrators are required to be independent: s 436DA. As soon as practicable after being appointed an administrator must make a declaration of relevant relationships as described by s 60 and a declaration of indemnities. The administrator must then give a copy of the declaration to as many of the company s creditors as is reasonably practicable. This declaration is a written declaration stating that the administrator has or has had in the preceding 24 months a relationship with the company, an associate of the company, a former liquidator or a person who is entitled to enforce a charge on the whole or substantially the whole of the company s property: s 60. The definition of Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 1

2 associate is taken from ss and s 15 contains a general description. Ella, as a sister to Laura and a contractor of Cloudy Blue Skies, is too remote to be considered an associate and while Laura will need to complete a declaration and provide a copy to creditors she is likely to lack the independence to continue. Problem 2 The first meeting of creditors is held on 28 March. Laura is extremely busy with her liquidation appointments and cannot find the time to hold an initial meeting of Cloudy Blue Skies creditors. Will this result in any problems for the future of Cloudy Blue Skies? After appointment the administrator must convene a creditors meeting within eight business days after the administration begins: s 436E(2). This meeting, which must be notified in writing to as many creditors as is reasonably practicable (s 436E(3)(a)), and appropriately advertised (s 436E(3)(b)), is for the purpose of appointing a committee of creditors (s 436E(1)) and allowing creditors an opportunity to appoint some other person as administrator: s 436E(4). Laura has not complied with the provisions of s 436E and although it may be argued that the powers of the court to make orders in relation to Pt 5.3A are very wide she may not be assisted here: s 447A(1). Despite such width the court should order the administration to end: s 447A(2)(b) and such application could be taken by ASIC: s 447A(4)(e). Problem 3 Assuming the administration is able to continue, Cloudy Blue Skies has provided a security interest over its assets and undertakings to Grange Finance Ltd (Grange). Grange is unaware of Laura s appointment until its Chief Executive Officer receives written notice on 28 March. Advise Grange of its options. Section 440B provides in a table the restrictions on third parties during the administration of a company. A third party cannot enforce property rights except with the written consent of the administrator or leave of the court. The term enforce is defined in s 9 in relation to Pt 5.3A, and includes the appointment of a receiver over property of the company. Exceptions to this Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 2

3 provision are contained in ss 441A, 441B and 441C. The courts too can limit the powers of a secured party: see s 441D. The holder of a security interest over the whole or substantially the whole of the property of the company can act to enforce its security interest before or during a decision period: s 441A(1)(a), (b). The decision period is defined in s 9 to be a time period beginning on the day when notice is given to the secured party under s 450A(3), or if notice is not required under that section, on the day the administration begins (s 435C(1)(a)), and ending at the end of the thirteenth business day after that day. If the chargee over the whole or substantially the whole of the property of the company does not act to enforce the charge during this decision period, the chargee will be unable to enforce its charge until the end of the administration, unless the administrator consents in writing or the court gives leave: s 440B. In this scenario Grange holds a security interest over all the assets and undertakings of Cloudy Blue Skies. If it is a holder over the whole or substantially the whole of the property of the company for the purposes of Pt 5.3A, Grange thus will have 13 business days in which to decide to enforce its security under s 441A(1)(b). Grange should be advised to exercise the option if it does not want to be bound to a DoCA or wait until the end of the administration (which may be the execution of the DoCA or as otherwise allowed in s 435C(1)(b), (2). Problem 4 Assuming the administration proceeds, what can Laura do, as she has discovered the affairs of the company are very complicated. She is no position to be able to hold a second creditors meeting. She has almost formed the view that a DoCA could be implemented by Cloudy Blue Skies but she is hampered. April is traditionally a quiet month in the travel industry and she needs to hold meetings with several key players in the field, who are also creditors of Cloudy Blue Skies. These key players are all presently overseas attending travel fairs and will be returning to Australia in May. Upon their return Laura believes she would be in a position to hold a second creditors meeting. Advise Laura. The administrator must form an opinion about the execution of a DoCA, the ending of the administration and the winding up of the company: s 438(b). These opinions and other information must then be conveyed to creditors at a Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 3

4 second creditors meeting: s 439A(4). The administrator has 20 business days (unless the administration begins in December or fewer than 25 business days before Good Friday) to convene this meeting: s 439A(5)(a), (b). This period can be extended by the court at its discretion: s 439A(6). At the meeting, the creditors may adjourn the meeting for up to 45 business days if the administrator needs more time: s 439B(2). This time may be extended by the courts: see for example Riviera Group Pty Ltd (2009) 72 ACSR 352. The facts suggest that Laura is unable to form opinions under s 438A by an appropriate date. Normally she has 20 business days beginning on the day when the administration begins (23 March); however, Good Friday falls on 6 April 2012 and so she has 25 business days. She should seek an extension of the convening period from the court before 1 May The length of the extension is at the court s discretion: see, for example Riviera Group Pty Ltd (2009) 72 ACSR 352. Alternatively, Laura could attempt to hold the meeting within five business days after the end of the convening period, that is if 1 May then before 8 May, and seek an adjournment from creditors at that meeting. Problem 5 Ella has lodged a proof of debt with Laura for $5000 relating to photographs she supplied to Cloudy Blue Skies following a trip to the Kimberley region of Western Australia. Laura has accepted this proof of debt and Ella is preparing to go to her first s 439A meeting. Advise Ella of what to expect. The s 439A meeting may decide on executing a DoCA (s 439C(a)), or ending the administration, or winding up the company. Notice must be given at least five business days before the meeting (s 439A(3)) and in writing to as many of the company s creditors as is reasonably practicable: s 439A(3)(a). It must also be published in either a national newspaper or a daily newspaper circulating generally in the relevant jurisdiction: s 439A(3)(b). Various information must be included with the notices: s 439A(4). In particular, if a DoCA is proposed, this information must include a statement setting out details of the proposed deed: s 439A(4)(c). As an unsecured creditor with an accepted proof of debt Ella should receive notice from Laura at least five business days before the meeting. Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 4

5 Voting Laura as administrator is likely to be chairperson at the meeting. As a creditor Ella is able to appoint a proxy to attend and vote at the meeting. A completed proxy should be provided to the administrator before the meeting. The chairperson can be appointed proxy holder. A vote on any resolution at this meeting by creditors stating aloud agreement or disagreement or a vote can be done by a show of hands. A simple majority of those present is enough for the chairperson to decide. A poll can be requested and a resolution is passed if more than half the number of creditors voting in person or by proxy vote in favour and those creditors who are owed more than half of the total debt owed to creditors at the meeting vote in favour. That is, there is a majority in number and value. The chairperson has a casting vote if there is a deadlock on a poll. The chairperson prepares minutes of the meeting and records who was in attendance and this is lodged with ASIC within 14 days of the meeting. Ella will have a vote at the creditors meeting for any of the resolutions and, most importantly, to decide whether Cloudy Blue Skies will execute a DoCA, end the administration or wind up. Ella and the other creditors can vote based on their assessment of the company and its future prospects. If they feel they require further information they can seek to have the meeting adjourned for up to 45 business days. Examiner s tips Students should focus their revision initially on the process of appointment and the creditors meetings. This means that exam questions will often commence with an appointments issue and then follow with questions relating to the first creditors meeting (s 436E) and the second creditors meeting: s 439A. Composing a flowchart is helpful for remembering the stages and here the Corporations Act provisions should be included along with the statutory time frames. The flowchart should show the three ways to appoint an administrator and the three options that creditors have available to them at their crucial meeting. For an example look at page 2, figure 1 of ASIC s Information Sheet 74, Voluntary Administration: A Guide for Creditors. To access this document, go to and click on Publications > Information Sheets > V. It is often the case that voluntary administration exam questions require students to show an understanding of the role and involvement of the courts and so s 447A and its cases deserve attention. Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 5

6 The moratorium is one of the most outstanding features of Pt 5.3A and so the impact of the voluntary administration on creditors enforcing their debts, owners and lessors, secured parties, and members all becomes important. Exam questions are unlikely to be detailed in this area. Finally, as with all external administrations, it is advisable to go to the exam with an understanding of their powers, duties, liabilities and indemnities. Australian Insolvency Law 2 nd edition Ch8 Answers and Tips Page 6