+ The new Corporations Amendment (Insolvency) Act 2007

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The new Corporations Amendment (Insolvency) Act 2007

  The College of Law

CPE Mini Intensive 2008

Presented at Level 7, St James Centre,

111 Elizabeth Street

SYDNEY NSW 2000

On

17 March 2008 

Prepared and presented by

Leigh Adams of Leigh Adams Lawyers

The new Corporations Amendment (Insolvency) Act 2007

The Corporations Amendment (Insolvency) Act 2007 began operation on 31 December 2007.

It reviews insolvency law in four major areas. The first area relates to improving outcomes for creditors. The second relates to deterring   misconduct by company officers. The third relates to improving the regulation of insolvency practitioners. The fourth relates to fine-tuning of voluntary administrations.

The amending Act is 131 pages and the explanatory memorandum is 135 pages. Accordingly, we will only discuss changes to the Creditors’ voluntary winding up procedure in this summary.

Creditors’ voluntary winding up

Directors of insolvent companies must carefully consider the options for external administration because they are under a legal obligation to cause an insolvent company to cease trading. If they fail to do so, then they may be held personally liable for the company’s debts. One of the options available to directors of insolvent companies is to initiate a creditors’ voluntary winding up.

Part 5.5 of the Corporations Act sets out the procedure for a creditors’ voluntary winding up. Following a resolution by directors, a meeting of members is called to place the company into liquidation. A meeting of creditors must also be held, and that had to be on the same day or the day after the meeting of members. The meeting of creditors may replace the liquidator. Section 497 provided that notices of meeting for the members’ and creditors’ meetings must be sent simultaneously.

Under subsection 497(2), creditors had to be provided with seven days notice before the meeting of creditors. The combination of the notice and timing requirements for the creditors’ meeting meant that the meeting of members could not be called to resolve that an insolvent company be placed in liquidation until a week or so after the initial directors’ resolution.

On the other hand, voluntary administrations may be entered into directly from a directors’ resolution. For that reason, it is often used as an indirect route to a creditors’ voluntary winding up, even when it is clear that a company has no option but to be wound up. That is because the longer timeframe for entering into a creditors’ voluntary winding up may expose directors to potential liability for insolvent trading and possible personal liability for taxation liabilities of the company.

Using the voluntary administration procedure in cases where there is clearly no option but to ultimately wind up the company may result in unnecessary costs due to the investigative, reporting and meeting requirements of Part 5.3A of the Corporations Act.

Accordingly, the process for commencing a creditors’ voluntary liquidation is now streamlined, and modelled on the process for putting a company into voluntary administration. However, the requirement for a meeting of members to put the company in liquidation is retained to protect members. Granting directors the power to put a company into liquidation could disadvantage members as it is difficult to halt a winding up once it commences.

To effect this change, the requirement to hold the members’ meeting and the creditors’ meeting on the same day is relaxed. The required timing (changes to section 499) for the creditors’ meeting is extended to 11 days after the day of the members’ meeting. The extension of this time period will mean that in circumstances where a meeting of members can be called directly after the directors’ meeting (by using the facility for members to consent to short notice under section 249H of the Corporations Act) an insolvent company may be placed into a creditors’ voluntary winding up almost immediately.

The requirement to convene the creditors’ meeting within 11 days after the day of the meeting at which the resolution for voluntary winding up is proposed will align the timing of the creditors meeting in a creditors’ voluntary liquidation with the first meeting in voluntary administration. The amendments make provision for creditors appointing a different person as liquidator at the creditors’ meeting. The liquidator’s powers will be restricted until after the creditors’ meeting is held, to protect the interests of creditors. These amendments are dealt with generally in section 497.

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