Chapter 25 Insolvency and liquidation Prepared by Mark Vallely,Learning objectives,Describe the meaning of insolvency and identify the requirements imposed on an administrator of an insolvent company (p. 1278) Identify the legal requirements for the winding up of a company by the court (p. 1289) Compare a voluntary winding up with a winding up by the court (p. 1291) Describe the duties and powers of a liquidator (p. 1294) Describe the different accounts that a liquidator is required to keep (p. 1297) Determine how a companys debts are proven for liquidation (p. 1298) Determine the order of priority of payment of the companys debts in liquidation (p. 1298) Determine the rights and obligations of contributories on liquidation (p. 1305) Prepare accounting records necessary for the liquidation of a company (p. 1309) Describe the role of a receiver appointed by a secured creditor (p. 1315),Introduction,What are the legal requirements if a company becomes insolvent? What are the accounting aspects for liquidating a company? The legal requirements are contained in Corporations Act Chapter 5 - External Administration The purpose of these requirements is to provide a framework through which every effort can be made to keep a company in existence The Act contains several provisions: Part 5.1 arrangements and reconstructions Part 5.2 appointment of receivers and other controllers (to satisfy creditors claims) Part 5.3 appointment of an administrator of a companys affairs Part 5.4 to 5.6 - requirements for liquidation,Insolvency and administration,The main intention of the Corporations Act 2001 is to treat liquidation of a company as a last resort Part 5.3A deals with the appointment of an administrator where directors believe the company may be insolvent s. 95A of the Act A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable. A person who is not solvent is insolvent If a company is insolvent directors Are required to act on behalf of both shareholders and creditors Can appoint a voluntary administrator or liquidator Can be prosecuted if they allow the company to trade whilst insolvent,Directors are expected to appoint a voluntary administrator even before the company becomes insolvent,Insolvency and administration,An administrator may also be appointed: By a liquidator if the liquidator believes that the company will become insolvent (s. 436B) Or by a person who is entitled to enforce a charge on the whole, or substantially the whole, of a companys property (s. 436C). Administration is designed to resolve the companys future direction quickly The administrator Is an independent and suitably qualified person Takes full control of the company, to save either the company or the companys business Otherwise a liquidator should be appointed to wind up the company,Insolvency and administration,Role and powers of the administrator Section 437A(1) sets out the role of an administrator: (1) While a company is under administration, the administrator: (a) has control of the companys business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration,Insolvency and administration,Role and powers of the administrator After taking control of the company the administrator must: Investigate the companys business, property, affairs and financial circumstances Report to creditors on these matters The administrator will provide three options available to creditors End the administration and return the company to the directors control Approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts Wind-up the company and appoint a liquidator The administrator will also provide an opinion on which option is in the best interests of the creditors,Insolvency and administration,Role and powers of the administrator An administrator: Must report to ASIC possible offences by people involved with the company Is not required to report to shareholders Can remove from office a director and appoint a director Deal with secured property with consent of security holders Is liable for debts he/she incurs in the performance of functions/powers Directors are required to assist the administrator By delivering the books or identifying where the books are kept By providing a statement about the companys business, property, affairs and financial circumstances By providing further information from time to time as reasonably required by the administrator,Insolvency and administration,The administrators accounts An administrator is required: To keep proper accounting records To submit a statement of r