Insolvency 

A person or a company is considered insolvent when they are unable to pay debts when they are due. When confronted with such an inability, the company has several options available as per the law.

The most commonly opted for options for a company are: 

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1. Liquidation

2. Receivership 

3. Voluntary administration

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Restructuring & turnaround management

When referring to restructuring, the law means the act of reorganizing the structure of a company for a specific purpose. The structures can include the change in ownership, operational changes, change in legal identification of the company, or all of the above. The most common reasons for restructuring are to increase profits, mergers and acquisitions and insolvency.

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Directors Duties in Common Law and under corporations Act in Australia 

 

Under Section 180 and 183 of Corporations Act 2001 (Cth)

Chapter 2D of the Corporations Act 2001 (Cth) provides the general duties of a company's director and officeholder. Section 180, in particular, sets down a director’s obligation to carry out duties and exercise power with due diligence and care. This duty to exercise power with care and due diligence attracts the application of the business judgment rule. Read together, this section requires a director to:
 

• Make decisions within their powers in good faith and for a proper purpose

• Refrain from having a personal interest in the subject matter of the decision

• Inform themselves about the subject matter of the decision to the extent that is considered reasonably appropriate 

• Make the decisions keeping the corporation's best interest in mind.

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Further, section 183 adds on to such general duties of the director by prohibiting them from improperly using information obtained, due to their role in the corporation, to gain any advantage for themselves or someone else or cause detriment to the corporation.

Any contradictions of such duties attract a civil penalty as per section 1317E of the Corporations Act 2001 (Cth). 

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Director can be criminally liable under Section 184 of Corporations Act 2001 (Cth)

Another important section guiding a director's duties is Section 184 of the Corporations Act 2001 (Cth).
As per this section, if a director of a corporation recklessly or intentionally fails to exercise power and discharge duties in good faith or the best interest of the corporation or for a proper purpose, then sich director attracts criminal liability.

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Under Section 588G Corporations Act 2001 (Cth)

Section 588G imposes a duty on the director of a corporation to prevent trading while insolvent. This section applies when it if found that:

• The company was insolvent at the time of trading or became insolvent by incurring debt or several debts, and

• At the time of incurring debt, there were reasonable grounds for suspecting that the company was insolvent, and

• The director failed to prevent trading or incurring of debt.

A failure to comply with this section can attract civil and criminal liability.

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​Summary of the directors duties under corporations Act 2001 (Cth) 

​The Directors of a company essentially control how the company operates in all aspects, from the entry to the executive personnel. The role of a director varies slightly with each company as different types of business dealings have a different set of requirements. These requirements would generally be set out in a company’s constitution, outlining specific needs from their directors.

Directors Duties under the Corporations Act 2001(Cth)

The responsibility of being appointed as a Director of a company also has a range of duties and obligations prescribed by the Corporations Act.

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Firstly, there are four main duties:

1. Care and diligence – Require a director to act with a reasonable degree of care and diligence expected in that role (s 180).

2. Good faith – Require a director to act in good faith and the best interests of the company (s 181).

3. Not to improperly use information – Prohibits a director from improperly using information gained in the course of their director’s duties, to benefit themselves or someone else, to the detriment of the company (s 182).

4. Not to improperly use position – Prohibits a director from improperly using their position, to benefit themselves or someone else, to the detriment of the company (s 183)

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Secondly, there are other major duties covered by the Act:

1. Insolvent trading – Require a director to ensure that the company is solvent while trading and can pay it’s debts when due and payable(s 588G).

2. Financial record keeping and reporting obligations – Require a director to ensure that the company’s financial records and reporting obligations are all met (s 344).

3. Disclosure of director’s conflicting interests – Require a director to ensure that they disclose any possible conflicting interests they hold (s 191, 208, 205G).

4. Lodging obligations with ASIC (s 188).

5. Continuous disclosure – Applies to listed companies regrading market information (s 674).

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Liquidator's duties and obligations

under Sectoin 506(3) Corporations Act 2001 (Cth)

The liquidator must pay the debts of the company and adjust the rights of the contributories among themselves.

• Rights includes status and interests

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under section S533 the Act 

(1)  If it appears to the liquidator of a company, in the course of a winding up of the company, that:

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(a)  a past or present officer or employee, or a member or contributory, of the company may have been guilty of an offence under a law of the Commonwealth or a State or Territory in relation to the company; or

(b)  a person who has taken part in the formation, promotion, administration, management or winding up of the company:

(I))  may have misapplied or retained, or may have become liable or accountable for,              any money or property of the company; or

(ii)  may have been guilty of any negligence, default, breach of duty or breach of trust in relation to  the company; or

(c)  the company may be unable to pay its unsecured creditors more than 50 cents in the dollar;

the liquidator must:

(d)  as soon as practicable, and in any event within 6 months, after it so appears to him or her, lodge a report with respect to the matter and state in the report whether he or she proposes to make an application for an examination or order under section 597; and

(e)  give ASIC such information, and give to it such access to and facilities for inspecting and taking copies of any documents, as ASIC requires.

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Bankruptcy 

Bankruptcy is a legal process where you're declared unable to pay your debts. It can release you from most debts, provide relief and allow you to make a fresh start.

You can enter into voluntary bankruptcy. To do this you need to complete and submit a Bankruptcy Form. It's also possible that someone you owe money to (a creditor) can make you bankrupt through a court process. We refer to this as a sequestration order.

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The person has also several options available as per the law. The most commonly opted for options for a person are:

 

1. Temporary debt protection (TDP)

2. Debt agreements

3. Personal insolvency agreements (PIA)

4. Bankruptcy

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Consequences of bankruptcy 

• You will have a trustee that will manage your bankruptcy

  • You are under an obligation to provide information to your trustee about your circumstances

• Bankruptcy may affect your income, employment and business

  • If your trustee determines you are earning over the income set amount, they'll ask you to pay income contributions[?]. Contributions is the word we often use for compulsory payments from your income.

• Bankruptcy does not release you from all debts

  • Most unsecured debts are covered in bankruptcy - this means you no longer have to repay these debts.

• It affects your ability to travel overseas

  • You must request permission from your trustee to travel overseas. It's an offence to travel overseas without consent in writing. 

• Your name will permanently appear on the National Personal Insolvency Index (NPII)

• Bankruptcy can affect your ability to obtain future credit

• Your trustee may sell your assets

• You may lose the right to take or continue legal action

• Bankruptcy normally lasts for 3 years and 1 day from the day you file your Bankruptcy Form

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Temporary debt protection (TDP)

It provides a 21 day protection period in which unsecured creditors (including sheriffs) can’t take enforcement action to recover money you owe them. This means they can’t garnish your wages, or have the sheriff/bailiff seize your goods.

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You can use this time to:

• seek advice from a free financial counsellor – see Where to find help

• negotiate a payment plan with your creditors. You can do this yourself or authorise someone else to negotiate on your behalf

• consider if any of the formal insolvency options would be right for you – see: What are my options?

 

Once you apply, you cannot apply for temporary debt protection again for 12 months.

• Some goods can still be repossessed such as secure assets

• Some debts are not covered. These include child support, HELP debts, and fines imposed by a court.

• Creditors can use it to bankrupt you. TDP is an ‘act of bankruptcy’ and it can be used to start a petition with the court.

• Creditors can still take some actions

• You are not made bankrupt

• It is not recorded on the public register of personal bankruptcies

 

Debt agreements

A debt agreement is one of two agreement options available. A debt agreement, also known as a Part IX (9), is a legally binding agreement between you and your creditors[?].

A debt agreement can be a flexible way to come to an arrangement to settle debts without becoming bankrupt.

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Personal insolvency agreements (PIA)

A personal insolvency agreement (PIA) is one of two agreement options available. A PIA, also known as a Part X (10), is a legally binding agreement between you and your creditors[?].

A PIA can be a flexible way to come to an arrangement to settle debts without becoming bankrupt.

A personal insolvency agreement involves:

• The appointment of a trustee[?] to take control of your property and make an offer to your creditors.

• The offer may be to pay part or all of your debts by instalments or a lump sum.

• Bankruptcy is a legal process where you're declared unable to pay your debts. It can release you from most debts, provide relief and allow you to make a fresh start.

• You can enter into voluntary bankruptcy. To do this you need to complete and submit a Bankruptcy Form. It's also possible that someone you owe money to (a creditor) can make you bankrupt through a court process. We refer to this as a sequestration order.

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