Statistics Related To Insolvency Observance

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Statistics Related To Insolvency Observance

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Discuss About The Statistics Related To Insolvency Observance?

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Introduction:
Insolvency is that state when company’s total liabilities exceed its total assets. Section 95 A[1] of the Corporation Act 2001 states, any organization or individual can be considered as solvent if such organization or individual is able to pay all the debts and liabilities when they become due and payable. This section further states, individual or organization is considered as insolvent if they are not solvent.
In this essay, various terms related to insolvency are discussed such director’s role, ASIC role, various methods of insolvency, and process of insolvency. This essay also defines the statistics related to insolvency and observance. Lastly, brief conclusion is stated for concluding the paper[2].

Meaning of insolvency & signs related to insolvency:
Insolvency is defined under section 95A of the Act, and it is considered as that situation when it becomes impossible for organization or individual to pay its debts. In other words, organization or individual does not have that much assets which can be used to pay the debts of the company. Court determines primary method for the purpose of determining the company’s solvency in case Bell Group Ltd (in liquidation) v Westpac Banking Corporation & Others[3]. In this case, court held that solvency of company can be determined through the assets and management of the company.
Signs related to insolvency: There are number of signs which reflect the actual position of the company such as profitability, goodwill, growth reflect the solvent position of the company. In similar way unprofitability and excess debts reflect the insolvent position of the company. It is necessary for directors of the company to determine the signs of insolvency at former stage for the purpose of preventing the company to goes into liquidation. Some of these signs are stated below:

Cash flow of the company reflects more outgoing cash and less inflow of cash, which means company incurred loss while trading.
Company faces issue in arranging the capital for its day to day working.
Company also faces issue in selling its stock.
New limit is negotiated by the individual of organization with the current financier.
Shareholders and creditors take or threaten to take legal action against the company[4].

Measures taken by directors: after determining the signs of insolvency, it is the duty of directors to take reasonable measures for preventing the company to goes into liquidation. Following are some measures which can be taken by directors of the company:

It is the duty of director to prevent the company from taking any further debt if above stated signs are reflected. However, directors can incurred further loan if it is possible to restructure or refinance the business, and funds in equity form is available for recapitalizing the projects off the company.
Board must pass resolution for the purpose of appointing liquidators and administrators of the company.
It is the obligation of the director to make sure that creditor’s and other stakeholder’s interest has been protected if any risk related to the insolvency occurred.
Directors of the company must not engage in any trading with the outsiders if any risk related to the insolvency occurred or company becomes insolvent.

Liabilities of directors in insolvency:
Corporation Act imposed number of responsibilities on directors of the company if any risk related to insolvency occurred or company becomes insolvent. Section 588G of the Act imposed this liability. According to Section 588G of the Act, it is the duty of the director to restrict the trading at the time of insolvency[5].
Applicability of section 588G- this section is applicable not only on the directors of the company but o those individuals also who were not appointed as company’s director but they were acting as the directors of the company. This section further state, obligation of director arises in following situations:

Organization becomes insolvent at that time when debt is incurred.
Risk related to insolvency occurred if organization decided to take debt
Such reasons are present which make the director’s believe that company face risk of insolvency or becomes insolvent if such debt is incurred by the company. In case Kenna & Brown Pty Ltd v Kenna[6], Court stated that directors must conduct objective assessment for the purpose of determining the insolvency.

Contravention of section 588G- there are two types of contravention related to this section, and these contraventions are stated below:

If directors of the company fail to prevent the company from incurring further debt, even though sufficient reasons are present which make the directors believe that risk related to insolvency is present or company becomes insolvent, then such failure can be considered as contravention of this section and directors of the company are liable under civil provision.
Penalty under criminal provisions will be applicable on directors of the company if directors of the company fail to prevent the company from incurring further debt, even though sufficient reasons are present which make the directors believe that risk related to insolvency is present or company becomes insolvent because of any dishonest reasons.

Consequences of contravention- following are the consequences of contravention of section 588G of the Act[7]:

Court pass compensation order under section 1317E[8] of the Act if director fails to compile with this section and this order states that directors are personally liable to pay the compensation to the company if any company suffered any operations.
Court pass pecuniary order under section 1317G[9] of the Act if director fails to compile with this section, and this order states the amount of penalty imposed on directors up to $200000.
Court can pass disqualification order under section 206[10] of the Act and as per this order; directors of the company are disqualified to manage the company.
If director fails to compile with section 588G because of any dishonest reason then directors of the company are penalized under criminal provisions, and court can order fine up to 2000 penalty units or imprisonment for the period of 5 years (Corporation Act, 2001).

Alternative ways- if directors have sufficient reasons to believe that company face the risk related to insolvency then directors can opt for these alternative ways also:

Directors can take advice from professionals and experts.
Directors can request secured creditors for appoint the receiver.
Directors must cease the trading of the company.
Directors must restrict the company for taking any other debt.
Board can appoint administrator under section 436A of the Act[11].

Difference between voluntary and involuntary:
If company opts for voluntary administration then company can choose reorganization. This intervention is initiated by the directors of the company if directors have sufficient reason to believe that company face risk of insolvency or becomes insolvent. In this director of the company has power to exercise same level of control. This administration provides the hope of business reorganization.
Under voluntary administration, external administrator is appointed by the company directors and secured creditors. It must be noted that person who is appointed as administrator under this method is known as voluntary administrator.
Investigation is conducted by the voluntary administrator, and in this investigation administrator investigates the company affairs. Investigator sends report to the creditors of the company. In this report investigator state clear views related to the conditions of the company and alternative option available to creditors.
On the other hand, involuntary administration of the company occurred when administrator is appointed by the charge holder, liquidator, and provincial liquidator. Under these method directors of the company has power to exercise similar control. It must be noted that involuntary administration is considered as that stage under which hope off business restructuring is almost nil[12].
Members winding up- If directors of the company does not opt for creditors winding up, then also have one more option that is member’s winding up. Under this option, members of the company pass special resolution for appointing the liquidator. This liquidator is appointed under section 495 of Act[13], which states that liquidator is appointed by passing special resolution in the general meeting. Liquidator is appointed under this section for the purpose of wound up all he operations of the company, and to discharge all the liabilities of the company.
Directors of the company can also opt for voluntary administration of the company, and under this method directors appoint voluntary administrator for the purpose of investigating the matters of the company.

Statistics related to insolvency:
ASIC quarterly statistics related to insolvency shows the result of the last quarter of 2016/17. Result shows an increase of 28% in companies which opt for external administration. Total appointments were 2198 as compared to 1717 in the previous quarter. This can be understood through below stated table[14]:
Companies opt for EXAD:

Month

2016

2017

%change

April

793

590

-25.6%

May

735

792

7.8%

June

755

816

8.1%

Total

2283

2198

-3.7%[15]

Issue related to insolvency:
Australian insolvency law does not state any measures or steps through which directors of the company can reorganize or restructure the business of the company. However, it also fails in recognizing the long term gains of the company such as value of assets, goodwill, reasons of closure at premature level, and liquidation. Law related to insolvency does not provide any options which deals with the business restructuring or help in making the company profitable.
It also fails in providing the measures which protect the interest of directors as well. Making the directors personally liable, while incurring further debt will reduce the capacity of directors to conduct any step for restructuring the business of the company. Following are some issues related to insolvency law in Australia:

It will make the directors personally liable which reduce the capacity of directors to incur any further debt.
Talented people restrict themselves from holding the position of directors because of the personal liability.

Some recommendations related to these issues are sated below:

While taking the decision of premature liquidation, expert advice must be compulsory.
Reduce the personal liability of the directors if they act in good faith[16].

ASIC Role:
ASIC play very important role in the insolvency of the company, and ASIC has power to deregister the company if ASIC has reason to believe that company ceased its trading and fees and penalties due to ASIC and other authorities are not paid by the company. However, if following reasons are present then ASIC can deregister the company:

Company fails to submit its annual fee within the 12 months from the date on which fee becomes due.
ASIC issued compliance notice to the company and company does not submit any response related to that notice within the period of 18 months from the date of issue of notice.
Processing related to the winding of the company is started and company fails to appoint liquidator[17].

Observation:
There are number of legislations and case laws which clarify that director of the company are personally liable if they breach their fiduciary duty. However, corporation Act fails to recognize the interest of minority shareholders at the time of insolvency. In case law Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 10 ACLR 395[18], court held that if directors of the company breach their fiduciary duty then members can rectify the action of the director in general meeting. In case such rectification defrauding the minority then such rectification was considered as invalid. Therefore it is necessary to consider the interest of the minority while making any decision; otherwise such decision will be considered as invalid decision.
Conclusion:
In this essay, various terms related to insolvency are discussed and this discussion clearly states that role of directors of the company is very important at the time of insolvency. As stated, directors are personal responsible to ensure the interest of creditors and stakeholders.

References
ASIC. Types of Insolvency. < https://asic.gov.au/regulatory-resources/insolvency/types-of-insolvency/>, Accessed on 15th September 2017.
Australian Debt Solvers, Company Insolvency Survival Booklet, , Accessed on 15th September 2017.
AICD. Insolvent trading, , Accessed on 15th September 2017.
Quinlan, M. (2005). Formal Reorganization in business. , Accessed on 15th September 2017
ASIC, Corporate insolvencies: June quarter 2017, < https://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf>, Accessed on 15th September 2017.
ASIC, ( 2010). Duty to prevent insolvent trading: Guide for directors, https://download.asic.gov.au/media/1241384/rg217-29july2010.pdf, Accessed on 15th August 2017.
ASIC. ASIC initiated deregistration of company. < https://www.asic.gov.au/for-business/closing-your-company/deregistration/asic-initiated-deregistration-of-company/#ReasonsforDereg>, Accessed on 15th September 2017.
[1] Corporation Act 2001- Section 95A.
[2] ASIC. Types of Insolvency. < https://asic.gov.au/regulatory-resources/insolvency/types-of-insolvency/>, Accessed on 15th September 2017
[3] Bell Group Ltd (in liquidation) v Westpac Banking Corporation & Others.
[4] Australian Debt Solvers, Company Insolvency Survival marketing, , Accessed on 15th September 2017.
[5] Corporation Act 2001- Section 588G.
[6] Kenna & Brown Pty Ltd v Kenna.
[7] AICD. Insolvent trading, , Accessed on 15th September 2017.
[8] Corporation Act 2001- Section 1317E.
[9] Corporation Act 2001- Section 1317G.
[10] Corporation Act 2001- Section 206.
[11] Corporation Act 2001- Section 436A.
[12] Quinlan, M. (2005). Formal Reorganization in Australia. https://www.allens.com.au/pubs/pdf/insol/pap15mar05.pdf, Accessed on 15th September 2017.
[13] Corporation Act 2001- Section 495.
[15] ASIC, Corporate insolvencies: June quarter 2017, < https://download.asic.gov.au/media/4410590/201706-june-qtr-2017-summary-analysis.pdf>, Accessed on 15th September 2017.
[16] ASIC, ( 2010). Duty to prevent insolvent trading: Guide for directors, https://download.asic.gov.au/media/1241384/rg217-29july2010.pdf, Accessed on 15th August 2017.
[17] ASIC. ASIC initiated deregistration of company. < https://www.asic.gov.au/for-business/closing-your-company/deregistration/asic-initiated-deregistration-of-company/#ReasonsforDereg>, Accessed on 15th September 2017.
[18] Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 10 ACLR 395.

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