LAW 2505 Lecture Notes - Lecture 8: Secured Creditor, Liquigas, Insolvency Practitioner
23 May 2018
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INSOLVENCY PROCESSES
Issue: creditor wants their money back from the Co, but they are unable to pay. What are the Co’s options?
Option 1: Receivership – individual secured creditor appoints someone to sell Co property to pay debt
Option 2: Voluntary administration – multiple creditors, Co chooses to save itself
Option 3: Liquidation – kill the C
*** CONSIDER EACH SEPERATELY
RECEIVERSHIP
* contractual remedy for INDIVIDUAL creditor chasing a debt
Step 1: Part 5.2 CA- Receivership is a form of external administration which involves appointment of an
independent, insolvency practitioner the ‘registered liquidator’ (‘receiver’) with the relevant qualifications
under s 418(1)(d). They take possession of the secured property, sell it, and out of the proceeds, repay the
secured debt owed by the Co- this continues until the purpose, full repayment of debt is fulfilled.
COMMENCEMENT
Step 1: Is the Co in VA or Liq?
• If in VA – look to timing
o If receivership exists before VA, VA can commence with no effect on it s 420C
o If co in VA then there is a moratorium of stay on proceedings, meaning no civil
proceeding can be brought without admin’s written consent or court’s leave s 440D
▪ Unless a secured creditor (in a special position with charge over all or substantially
all of the Co’s property) decided not to partake in the VA, and rather appoints a R
within the 13 day decision period after commencement of VA s 441A
• Advantageous because if they partake in VA, they lose their advanced position
as they are stopped from later appointing a R due to moratorium
• If they choose to appoint, VA and R continue separately, but they need to
communicate. Therefore, it is only possible for both to concurrently exist if R
is over discrete assets
▪ Court may also lift stay where necessary for business or co survival s 435A,
• May lift in situation to stop creditor from gong insolvent themselves-
prevent domino effect
• If in Liq
o As receiver acts as agent of the Co (NOT a secured creditor)- if co goes into Liq, receiver
may only carry on trading with permission if liq- otherwise, agency terminates so Rec is
personally liable for debts of the Co incurred after commencement of the liq s 420C
Step 2: although R can be appointed by the court, in this instance, a secured creditor is seeking to
privately appoint under an instrument
1. (secured Cr) holds a (circulating/ non-circulating) security interest over (assets) of the Co pursuant to
their (‘loan agreement’) their agreement provides for the appointment of a R/ R & Manager if the Co
defaults in their nominated obligations.
2. The ‘event of default’ which triggers express power to appoint is…
a. If a ‘non-circulating’ (formerly fixed charge) security over specific property, EoD will
likely be:
i. Failure to pay debt for X days; failure to pay principal or interest, breach/ failure of
covenant, condition, warranty in deed;
ii. Disposal of Co’s assets without permission of secured party
b. If a non-circulating (formerly floating charge) security over total assets of the co, or
categories of assets (accounts, stock) the Co can still deal with them as they wish.
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i. BUT reduction in stock can trigger conversion of floating charge to fixed, creditor has
right to property
ii. conversion can also be triggered where Co ceases business; changes ownership
3. The Cr, as the appointee, must comply with the following formalities in appointing R
a. file notice with ASIC within 7 days s 427(1) (Form 504)
b. file notice of address within 14 days to ASIC s 427(2) (Form 505)
c. serve notice on Co ASAP
d. advise ATO within 14 days of taking possession
e. No obligation to tell other creditors
4. Commencement occurs on the day the doco is delivered and accepted
Step 3: validity of R’s appointment
• R must be a registered liquidator s 418(1)(d) – natural person with relevant edu req + experience
• Must be independent: disqualified if mortgagee of any Co property; an auditor; director; or
employee of the Co, a related Co, or a Co that is mortgagee s 418(1)
o Receiver, mortgagee, Co, creditors may apply to court for order declaring validity s 418A
o S 419(3) exonerates receiver who assumed control with reasonable elide the appointment was
propose
Step 4: Effect of R on Co
1. Does not affect the Co’s legal personality, or vest Co property in the R (however, appointment
usually triggers conversion of non-circ security interest to circ- revokes power of Co to deal with
secured assets in ordinary course of its business)
2. R does not displace the BoD, however it does affect their ability to exercise management
powers;
a. If Ds don’ like what R is doing- initiate legal proceedings under s 418A in the name of the
Co to challenge the validity of R’s appointment; argue R breached DDs (see below)
b. Where Co in R has a claim against Cr which R won’t pursue, Co is entitled to initiate and
maintain legal proceedings in name of Co provided the Ds provide Co satisfactory indemnity
against costs (designed to ensure Cr interests aren’t prejudiced) Deangrove
3. Ds still have obligations (financial reporting)
4. No stay on legal proceedings and unsecured creditors entitled to a report within 2 months s 421A
5. Pre-existing contracts not automatically terminated (but ipso facto clauses may entitled other
party to terminate). Receiver might repudiate with resultant damages.
6. Employees contracts adopted, s433
Step 5: effect of R other creditors
1. Other creditors= weak position
2. Can obtain financial info from s 421A report; inspecting Co’s books; six monthly report lodged at
ASIC s 432
3. Can continue debt collection, can supply and extend further credit,
4. Can commence legal proceedings s421A
POWERS OF RECEIVER
1. Board powers to achieve purposes of appointment including s 420
a. Anything necessary or convenient to attainment of objectives- power of sale s 420(1)
b. Power to enter possession and take control of property s 420(2)
c. Carry on business s 420(2)-appointed as ‘receiver and manager’
d. Take or defend proceedings s 420(2)
2. Power to obtain information
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a. Report as to the affairs submitted by the D to the receiver, lists asset and gives financial info
CA s 429
b. Reports can be sought from officers, promoters, employee’s s 430- Co to cooperate s 590
c. Receiver has right to inspect books of Co which relate to property s 431; can use to conduct
an examination of Ds/ other persons s 596A
DUTIES OF RECIEVER
Step 1: has R fulfilled their duties? - break up each asset, consider if duties fo Cr and Co were fulfilled in
respect to each
1 Duties during sale
• To Co
▪ at common law, R owed duty to Co to exercise powers in good faith and not to sacrifice their
interests recklessly. In exercising power of sale in respect to Co’s property, must take
(a) reasonable care to obtain market value, or
(b) if no market value sell property for reasonable price in circumstances s 420A(1)
→ Skinner (security = rare breed of cows; characteristic meant R could capitalise in
selling)
• HELD: R must take reasonable care to take steps to determine what
characteristics of the assets are valuable- If this is done, don’t have to get what
is best – just follow order of (a) then (b)
→ Florgale Uniforms (Receiver sold rare nurses outfits)
• HELD: Focus is on best price available- must consider costs of selling to a
particular market- if high cost involved in marketing (eg because market is
global) would not make any profit- therefore won’t breach duty in selling
locally
→ In the matter of Barrister Chambers
→ Re Landmark Corp Ltd: R to exercise power of sale despite winding up
• To creditor as agent- sale
▪ Primary duty owed to secured creditor to recover secured debt from property, therefore, R
will want to pay secured Cr after sale but…
▪ The CA dictates an order of payment s 433
1st. rent, taxes, rates on the secured property
2nd. costs of realising the secured assets
3rd. receiver’s fees and expenses (incl remuneration- court can fix s 425)
→ however- receiver personally liable for all goods, services property used or
occupied during receivership s 419- BUT may receive indemnity from
appointor
4th. employee’s wages and entitlements
5th. secured creditor
2 Duties to Co generally - Directors Duties
• R is an officer of the Co as defined in s 9 CA. s 420A(1) does not limit the DDs owed by R to the
Co under s 180-184 240A(2)
▪ R may have breached
→ S 180 care and diligence
→ S 181 best interests of Co
→ s 182/183 not to misuse info or position
▪ Co may seek
→ Compensation s 1317J
→ Injunction s 1324
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Document Summary
Issue: creditor wants their money back from the co, but they are unable to pay. Option 1: receivership individual secured creditor appoints someone to sell co property to pay debt. Option 2: voluntary administration multiple creditors, co chooses to save itself. * contractual remedy for individual creditor chasing a debt. Step 1: part 5. 2 ca- receivership is a form of external administration which involves appointment of an independent, insolvency practitioner the registered liquidator" ( receiver") with the relevant qualifications under s 418(1)(d). They take possession of the secured property, sell it, and out of the proceeds, repay the secured debt owed by the co- this continues until the purpose, full repayment of debt is fulfilled. If they choose to appoint, va and r continue separately, but they need to communicate. Receiver might repudiate with resultant damages: employees contracts adopted, s433.
