Liability is limited by a Scheme approved under Professional Standards Legislation.
This form of administration is considered when the company is insolvent or likely to become insolvent.
The objects of Part 5.3A is to “enable the debtor company to start a fresh by permitting the extinguishment of claims pursuant to a statutory process and thereby allowing companies to put the financial past behind them and to continue to trade successfully”
The directors of the company commence the process by invoking section 436A of Part 5.3A of the Corporations Act. The benefits for the directors and creditors of the company are that:
- The directors lose control and management of the day to day affairs of the company and transfers that control and management to the Administrator;
- The Administrator controls the company’s business, property and affairs;
- It restricts creditors from attacking the company and allows the Administrator to formulate a proposal which will be put to the creditors concerning the future of the company;
- It offers protection to directors from personal liability;
- Winding up of the company cannot occur during the administration unless leave of the court has been obtained;
- Creditors and not directors are given the power to decide the fate of the company;
- The administration process is not lengthy hence creditors are not disadvantaged from waiting long periods to take action against the company if a resolution of the company’s affairs are not viable;
- It limits the need for sanctions of the Court if the company’s proposal to creditors is accepted and once accepted such a Deed of Company Arrangement binds all creditors with provable debts.
Winding Up - Voluntary & Compulsory
Voluntary winding up is available to the company’s members. This form of winding up is not applicable in circumstances where directors are issued with DPN. The reason is that a members’ voluntary winding up is only available if the company is solvent.
A creditor’s voluntary winding up does not require a declaration of solvency by the company’s directors. This form of winding up may only occur in one of two ways:
1. “through directors determining that their company is insolvent and that it should be wound up;
2. through a members’ voluntary winding up being initiated and the liquidator forming the opinion that the company is in fact insolvent”
Compulsory winding up is procedure enabling a person to apply to the court for an order that the affairs of a company be wound up. Broadly speaking, a company can be compulsorily wound up in insolvency on one of five grounds of the Corporations Act:
1. Section 459A - where a company is proved to be insolvent after an application is made to the court by a creditor under section 459P;
2. Section 459B - where an application is made to the court under sections 232, 462 or 464 of the Corporations Act and the court determines that the company is insolvent;
3. Sections 446A(1)(a) and 446A(6) - where creditors of a company subject to voluntary administration resolve that it be wound up;
4. Sections 446A(1)(b), 444B(2)(a) and 446A(6) - where a company fails to execute the instrument providing for a deed of company arrangement within 21 days of the meeting of creditors after the creditors resolved to accept the deed; and
5. Sections 446A(1)(c), 445E and 446A(6) - where creditors of a company resolve that the deed of company arrangement be terminated.
As illustrated, directors of a company can obtain substantial benefits from voluntary administration under Part 5.3A. It s advisable to seek expert legal advice well in advance, that is as soon as a director receives a DPN. Failure to act promptly may mean that the only option available to the company is compulsory winding up. The consequence of this form of winding up is that all the benefits afforded by Part 5.3A are no longer available.
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