Insolvency News September 2008

Changes to the Corporations Act

As readers will be aware there have been some changes to the Corporations Act effective from 1 January 2008. In these troubled economic times, it may be timely to remind readers of some of those changes:

In respect of a voluntary Administration

When a company elects to appoint an Administrator, the first meeting of creditors is to be held within 8 business days of the appointment of the Administrator [previously it was 5 business days]. This meeting is an opportunity for creditors to change the administrator if required. After this meeting the Administrator issues their Report to Creditors.
The second meeting of Creditors is now up to 34 days [instead of the previous 27 days] after the appointment of the Administrator. At this Second meeting the creditors consider the future of the company and resolve to either wind up or accept a Deed of Company Arrangement. The extra time allowed may assist in avoiding adjournments of meetings.
Secured creditors now have up to 13 [previously it was 10] business days from the date the Administrator advises of their appointment.
The new amendments also provide for increased disclosure by Administrators of their costs.

In respect of a voluntary Liquidation

Firstly the directors resolve to wind up the company. Now [and not the previously required 7-14 days after] the shareholders may meet on the same day as the directors and resolve to wind up of the company. Once the shareholders’ resolution is passed, the company is in Voluntary Liquidation.
A week later [ and not on the day before or on the same day as the shareholder’s resolution] , the creditors meet to confirm the appointment of, or alter the appointed, Liquidator.
These amended time frames assist directors who have been served with a Directors Penalty Notice [“DPN”] by the Australian Taxation Office

Directors Penalty Notices [“DPN”]

All directors take note: Do NOT ignore a DPN

A DPN is a notice addressed to a director of a company demanding payment of a withholding type tax e.g PAYG tax. This may result in the director incurring a personal liability for the company’s debts unless you deal with the DPN within 14 days of the date that the DPN was “given” to the director [s.222AOF of the ITAA] by either

paying the debt, or
appoint a Voluntary Administrator or
move for a Voluntary Liquidation
come to an acceptable arrangement with the ATO

Because of the strict timeframe we advise that:

You ensure that you collect your mail diligently. Ensure any DPN from the ATO is brought to your attention immediately
You obtain advice immediately and make a decision about whether you place the company into voluntary liquidation or appoint an administrator.

There is a recent case law to make the time frame of 14 days even more strict than previously construed. Prior to the decision of the Supreme Court in DCT –v- Meredith [2007] NSWCA 354 the 14 days was measured from the date of “giving” the DPN to the Director i.e. serving or 4 days after posting. After the Meredith decision the ATO has issued a statement that the 14 days is now measured from the date the DPN was sent by the ATO.

Be warned!

All the more reason to contact Forum law for speedy advice to deal with your DPN

Statutory Demands and Extensions of Time

In the recent case of Aussie Vic Plant Hire v Esanda Finance Corporation Ltd [2008] HCA 9 the High Court has once again decided that after the expiry date of a statutory demand, extensions cannot be given.

The High Court confirmed that the purpose of part 5.4 of s459 of the Corporations Act is that proceedings are to be resolved without delay.
To support this interpretation the Court noted that Part 5.4 includes a strict time frame of 21 days in which an application can be made to set aside a statutory demand.

The implications of this decision are:

Companies with good reason for having a statutory demand set aside, need to be mindful of expiration dates at all times.
If within the 21 days, a company does not apply to have a statutory demand set aside, it loses its right to apply forever, and the creditors can begin to wind up the company. Except in the instance of leave being granted pursuant to s459S(1), a company cannot rely on any ground that would have been available in an application to set aside the statutory demand, had they applied within the 21 days.
Under s459F(2), upon making an application to set aside a statutory demand, the period for extension is automatically extended until after that application is determined. Note that this is the last automatic extension. However, the court can, at its discretion, extend the period of compliance.
If a company’s application to set aside fails, the automatic extension expires seven days later, as per s 459F(2)(a)(ii)
If a company’s application to set aside is successful, the effect of the statutory demand is suspended.
If a creditor appeals from a decision contrary to its interests, issues regarding extensions need to be carefully considered.
A company cannot allow the time for compliance to expire at any stage unless the company decides that its only opposition to the process is to oppose being wound up. The company will then have to show that it is solvent.

This is a timely reminder:

NOT to ignore statutory demands served on your companies.
to ensure that you receive all mail addressed to your company’s registered office immediately, so as not to miss the 21 day time frame within which to resend to a statutory demand.

Companies in Liquidation and the creditor’s right to sue the directors

In the recent case of Chahwan v. Euphoric Pty. Ltd. [in liquidation] [2008] NSWCA 52, the Court of Appealconsidered the provisions of s.Part 2E1A of the Corporations Act and whether the creditors of a company have standing to bring proceedings against the former directors of a company, when the liquidator has control of the company.

The Court considered whether this creditor applicant had sufficient standing and in particular the requisite “good faith” on the part of the company to bring the proceedings against the directors on behalf of the company. The creditor sought to rely on a statutory derivative action [Pt 2EA of the Act] which is usually reserved for shareholders of a solvent company, who would seek to recoup a debt or property for the company as a whole.

However the Court was of the view in this case that the applicant creditor was pursuing the claim to “further [their] own personal interests [as a creditor] other than as a current or former shareholder of the company rather that the interest of the company as a whole…” [at para 83] and the appeal was dismissed.

In this case, also it should be noted that the proceedings were commenced by the creditor against the wishes of the liquidator. There are provisions in the Act which do allow a creditor to proceed against the former directors and officers of the company for certain breaches of the Act, with the consent of the liquidator.

Come and talk to us to explore whether we may be able to assist you in this area of the law.