Legal provisions related to insolvency under Corporation Act
Is small Pty ltd has been subjected to problems related to insolvency as provided by the Corporation Act
Does Ravi has the right to appoint a liquidator and what are the options which the law makes available to the Administrator
Whether an organization operating in Australia has a problem related to insolvency or not can be analyzed under the provisions of section 95A of the Act.
- It has been expressly stated by the section that a corporation is only regarded as solvent when it is able to pay the debts as and when they have been incurred by it.
- Any organization which is not regarded as solvent is to be considered as insolvent.
Under the provisos of section 435A the administrator has to carry out the duties which have been imposed on it by taking into consideration the existence of the company as far as possible. Only where the company is insolvent the administrator may seek for the winding up of the company.
According to the rules provided section 436E of the Act the administrator has to call a first meeting with the company creditors followed by a second meeting
Section 438A of the Act deals with rules regarding how an administrator may carryout its functions. The financial position, business and property of the business has to be investigated into by the administrator as soon as appointment has been carried out. It is up to him to lawfully decide under this section that what actions should be taken in relation to the best interest of the creditors. The administrator may indulge into deciding making a deed of company arrangements, whether he should bring the process of administration to an end and whether he should take a decision to wind up the company.
Section 437A provides for a role of administrator and under this section the administrator will be able to carry out any function which could be carry out by the company or its creditors.
It has been provided under the rules of section 439A of the Act that when an administrator has been appointed he must provide notice of appointment to the creditors and also within the convening period convene meetings.
The scenario stipulates that the Ravi’s company Small Pty Ltd is not performing good business recently and has incurred $210000 as debt. In this situation the company only has assets available worth $95000. This evidently provides that of the rules of section 95A are applied it will show that the company is insolvent. This is because the company is not been able to pay off the debt as and when incurred by it. Thus there is an insolvency situation.
Ravi being a secured creditor under section 436C of the Act can appoint an administrator to the company.
Duties of administrator under Corporation Act
Under the provisions of section 436E of the Act it is the duty of the administrator to call a first meeting and a second meeting with the creditors. It is also the duty of the administrator to inform all the creditors of Small Pty ltd about his appointment and also ensure that the meeting are carried out within time.
Under section 438A of the Act the administrator in context has to lawfully decide under this section that what actions should be taken in relation to the best interest of the creditors. The administrator may indulge in making a deed of company arrangements, bring the process of administration to an end and take a decision to wind up the company. Further under section 435 the administrator has to administrator has to carry out the duties which have been imposed on it by taking into consideration the existence of the company as far as possible. Only where the company is insolvent the administrator may seek for the winding up of the company. In this situation small Pty ltd is actually insolvent and thus the administrator has to sought for a winding up order for the interest of the creditors.
Conclusion
As the company is adjudged insolent it can be wound up by the administrator in the best interest of the shareholders.
Whether the principles of separate legal entity make Ravi entitled to the invested $90000
What amount will eventually be received by the creditors?
Under the provisions of section 119 of the Act it has been stated that on the very day of registration a company is formed as a body corporate.
There are a few cases which may help to resolve the issue at context. These cases are as follows
- Salomon v A Salomon & Co Ltd [1897] AC 22
In this case a unanimous ruling had been made by the house of lords affirming the doctrine of corporate personality which had been present in the Companies Act 1862. The primary notion of the case was that the creditors of the company do not have the right to sue the shareholders of the company with respect to the outstanding debts. Mr Aron Salomon had sold his business to the company in context. He was the majority shareholders of the company and the company had purchased the business at an excessive price for its value. He also got £10,000 in debentures in the company by giving it a loan. The company was not able to make profit and was liquidated. The liquidator claimed that the company was a fraud and the corporate veil should be lifted. The court held that under the Act the company was a separate legal person and the defendant has the right to claim the debentures as they were issued lawfully.
- Macaura v Northern Assurance Co Ltd [1925] AC 619
In this case the principles of Salomon v A Salomon & Co Ltd have been discussed and reaffirmed. The claimant tried to make a claim in this case form the insurance company in his own name. The court stated that the insurance was with the company not the claimant.
However in case of fraud the court may lift the corporate veil. In the case of Gilford Motor Co Ltd v Horne [1933] Ch 935 the courts stated that the corporate veil can be pierced with the company is formed to get over a legal regulation.
Under section 471C of the CA it is stated that the secured creditors are not affected by the winding up of the company.
Application
The situation states that Ravi has sold his business at excessive price for its value to Small pty ltd and gave a secured loan to the company. The facts are totally similar to what happed in the case of Salomon v A Salomon & Co Ltd. Thus the court will make Ravi entitled to $90000 provided as a secured loan. Small pty ltd is a separate legal entity as per section 119 of the CA and Macaura v Northern Assurance Co Ltd.
However in the given situation it has been stated that the company was formed to avoid a legal obligation and as per Gilford Motor Co Ltd v Horne the court will pierce the corporate veil. Here the Ravi will be personally liable. However Ravi has not made the company to avoid a legal obligation as he had not been guilty under the laws of contamination.
In case Ravi gets 90000 than the other creditors will get only 5000 which would make them get 5000/120000 (210000-90000) = 0.04 per dollar
Conclusion
In the given situation Ravi can claim the money as per the Solomon case even in that case the business was sold to the company for an inflated price. Ravi has further not made the company to valid legal obligation as he had not been guilty under the laws of contamination
References
Corporation Act 2001 (Cth)
Gilford Motor Co Ltd v Horne [1933] Ch 935
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v A Salomon & Co Ltd [1897] AC 22
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