Australian insolvency law

Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals.

The aim of the legislative provisions is to provide:[2] A company, partnership, or trust with multiple trustees, is legally insolvent if it is not able to pay its their debts, as and when they become due and payable.

[5] A popular way for a creditor to prove that a company is insolvent is to serve a statutory demand pursuant to section 459E of the Corporations Act.

[2] Issuing and serving a statutory demand is a relatively simple and inexpensive process when compared against proving actual financial insolvency.

Statutory demands are regulated by Part 5.4, Divisions 2 and 3 of the Corporations Act, and the Courts require that the regime be strictly adhered to.

Failure to do so within 21 days (unless an extension is granted) will mean that insolvency of the debtor is presumed and the creditor may use that presumption in order to make a winding-up application to the Court.

There are a number of cases in Australia which have decided what a defect in a demand which will cause substantial injustice is.

[23] Some examples of this are: There are also cases in Australia which have decided that certain defects in the demand do not cause substantial injustice.

[29] Some examples are: If a company fails to satisfy a statutory demand, or have it set aside, then it is presumed to be insolvent.

Any balance which may remain after paying the costs and expenses of winding-up is then distributed among the members according to their respective rights and interests.

The process is initiated by a special resolution of the company,[42] and the creditors have no direct involvement and are repaid in full.

The directors are required to give a declaration as to the solvency of the company which must be filed with the Australian Securities and Investments Commission (ASIC).

The process normally occurs where the board of directors has determined that the company is insolvent and then recommended to the members that it be wound up.

Compulsory liquidation is a statutory procedure which enables a person to apply to the Court for an order that the affairs of a company be wound-up.

The liquidator is required to act honestly, fairly and impartially at all times, and must avoid any conflicts of interest.

But: Any property of the company which is disposed of after the deemed commencement of winding-up (other than by the liquidator in the exercise of his or her powers) is void unless validated by the Court.

[48] A secured creditor will not normally make a claim in the liquidation unless there is a shortfall in the collateral provided by the insolvent company.

The priority of unsecured claims to the assets of the company in a liquidation is regulated by section 556 of the Corporations Act.

Alternatively, less commonly, the deed of company arrangement sometimes simply operates as a way to maximise the benefits of the creditors over the short term.

The Corporations Act permits a great deal flexibility in relation to the deed of company arrangement.

The main aim of a deed of company arrangement is to try and produce a better outcome for all parties than would result upon a liquidation.

[66] The aim of the division is to protect "the interests of unsecured creditors which might otherwise be prejudiced by a company disposing of assets or incurring liabilities or entering into unrealistic loans shortly before winding up".

These include that:[68] If a transaction is held to constitute an unfair preference, the recipient will be required to repay the benefit received from the company to the liquidator for general distribution to all creditors.

This will be the case where transactions were entered into by the company for the purpose of defeating, delaying or interfering with the rights of creditors during the 10 years prior to the relation back day.

The Court may not make an order against a party where it would materially prejudice a right or interest of a person who is able to bring themselves within the protective provision.

Where the directors or officers have been guilty of either insolvent trading or misfeasance, this may provide the basis for financial claims against them, which the liquidator can use to swell the assets available for distribution to the creditors.

If a director removes or misuses company property, this would ordinarily be a breach of their duty of good faith, and may render the transaction voidable.

Accordingly, the liquidator may attempt to recover the property from the director, who is deemed to hold it on constructive trust for the company.

[79] A person who contravenes duties set out in sections 180-183 of the Corporations Act may also be made subject to a civil penalty order of up to A$200,000 upon the application of ASIC.

[citation needed] Officers of a company who breach sections 180-183 of the Corporations Act may also be criminally liable if:[81]