What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
In Australia, the Corporations Act 2001 (Cth) is the main legislation governing corporate insolvency and restructuring, while the Bankruptcy Act 1966 (Cth) is the main legislation governing personal insolvency. Further, the Cross-Border Insolvency Act 2008 (Cth) deals with cross-border insolvency.
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
Australia is a creditor-friendly jurisdiction; creditor interests are protected and given greater weight than those of other stakeholders. For example, Australia’s restructuring regimes do not include a debtor-in-possession reorganisation model.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
Are any reforms to the legal framework envisaged?
No. However, in 2016 and 2017 significant amendments were made to Australia’s insolvency laws by the Insolvency Law Reform Act 2016 (Cth) and the Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth). Among other things, these amendments introduced:
- a safe harbour defence for directors’ liability for insolvent trading; and
- a moratorium on the exercise of ipso facto clauses in voluntary administrations, receiverships and schemes of arrangement.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
There are two main ways in which a director may be held liable for their company’s insolvency.
First, Section 588G of the Corporations Act 2001 (Cth) prohibits companies from trading while insolvent. It imposes civil and criminal liability on directors who fail to prevent their company from incurring debts while insolvent. A director may be made personally liable in respect of debts incurred by their company where:
- the company is already insolvent or incurring the debt causes it to become insolvent; and
- the director is aware (or a reasonable person in the director’s position would be aware) that there are grounds for suspecting that the company is insolvent or would become insolvent.
In addition to civil or criminal penalties, directors may be ordered to pay compensation.
Parent companies, referred to in the Corporations Act as “holding companies”, can also be made liable for insolvent trading by their subsidiary companies (Section 588V). A holding company may be required to pay compensation to a liquidator for insolvent trading by a subsidiary.
Second, directors may be held liable if they acted in breach of their general duties as a director, including the duty:
- to exercise reasonable care and diligence;
- to act in good faith and for a proper purpose; and
- not to improperly use their position or information to gain an advantage or cause detriment to the corporation.
When a company is approaching insolvency (in the twilight zone of solvency), its directors must consider the interests of creditors (and not just shareholders) in discharging their duties to the company. A breach of any of these duties may attract civil penalties. Directors may also be held criminally responsible for reckless or dishonest breaches.
What defences are available to a liable director or parent company?
In relation to the duty to prevent insolvent trading, the following defences are available:
- the debt was incurred in connection with a course of action that was reasonably likely to lead to a better outcome for the company than an immediate liquidation or administration, provided that certain statutory prerequisites (including the payment of employee entitlements and the obtainment of advice from an appropriately qualified adviser) are met (the so-called ‘safe harbour’ defence, as set out in Section 588GA of the Corporations Act);
- the director had reasonable grounds to and did expect that the company was and would remain solvent (Section 588H(2) of the Corporations Act);
- the director did not, for illness or some other good reason, take part in the management of the company at the relevant time (Section 588H(4) of the Corporations Act); and
- the director took all reasonable steps to prevent the company from incurring the debt (Section 588H(5) of the Corporations Act).
A parent company also has a defence if it took reasonable steps to ensure that its subsidiary’s directors complied with the safe harbour provision.
In relation to directors’ general duty to exercise reasonable care and diligence, there is a defence for business judgements if the director:
- made the judgement in good faith for a proper purpose;
- had no material personal interest in the judgement’s subject matter;
- informed themselves of the judgement’s subject matter to the extent that they reasonably believed to be appropriate; and
- rationally believed that the judgement was in the corporation’s best interests.
What due diligence should be conducted to limit liability?
The duties that may give rise to liability in insolvency are closely linked. To ensure compliance, directors must inform themselves of and monitor their company’s financial position. They must check that:
- all employee entitlements are being paid;
- the company is meeting its tax reporting obligations;
- proper business records are being kept; and
- appropriate director and officer insurances are in place.
Where the company’s financial position is uncertain, it would be prudent for a director to obtain advice from an appropriately qualified adviser in relation to the company’s solvency and prospects. Following the introduction of the safe harbour defence, directors who take proactive steps to identify courses of action that will address a distressed company’s liquidity issues with the assistance of an appropriately qualified turnaround adviser can avail themselves of that defence.
Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
There are two main types of security:
- security over real property (ie, land); and
- security over personal property.
The most common security interest over real property is a mortgage.
There are diverse security interests for personal property, which are non-exhaustively described in the Personal Property Securities Act 2009 (Cth). Common security interests include:
- fixed and floating charges;
- chattel mortgages;
- conditional sale agreements;
- hire purchase agreements;
- title retention arrangements; and
The legal effect of these security interests comes from the general law and various statutory regimes.
Security interests in land are regulated on a state and territory basis. They may be registered under statutes that exist in each Australian state and territory (which follow the so-called ‘Torrens’ system of land registration).
Security interests in personal property may be registered under the Personal Property Securities Act. In each case, registration affords some level of protection to the holder of the security interest, including priority over unregistered interests. In general, personal property security interests that have not been registered will not be effective in case of the grantor’s insolvency.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In a liquidation (where the company is being wound up), Part 5.6 of the Corporations Act 2001 (Cth) sets out a priority ‘waterfall’ stipulating how creditors’ claims are ranked. Where a creditor’s claim ranks will depend on whether it is a secured creditor or another type of priority creditor and what the assets are. A secured creditor ranks first, except in relation to circulating assets. The main circulating assets are:
- inventory; and
- accounts (debtors).
Employees and administrators and liquidators have a statutory priority in relation to circulating assets, including:
- certain expenses of the liquidator or administrator;
- the costs of the winding-up application; and
- employees’ wages, superannuation and other entitlements.
Other unsecured claims are then ranked equally and paid proportionally.
Can this ranking be amended in any way?
Statutory priorities cannot be varied in liquidation. Priorities as between secured and/or unsecured creditors may be amended by contract (and bind the relevant parties to the contract). Priorities may be varied in a deed of company arrangement (passed by a creditors’ resolution in a voluntary administration), provided that creditors are no worse off than they would be in a liquidation.
What is the status of foreign creditors in filing claims?
In general, the claims of foreign creditors are treated the same way as those of any other creditor in the same position. The Cross-Border Insolvency Act 2008 (Cth) prohibits claims of foreign creditors being ranked lower than the unsecured claims of other creditors solely because the creditor is foreign.
Are any special remedies available to unsecured creditors?
No special remedies are available to unsecured creditors, although certain statutory claims by liquidators in relation to pre-appointment transactions can be pursued for the benefit of unsecured creditors.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
A creditor may apply to the court for a judgment debt in respect of amounts owed thereto. This must then be paid by the debtor; otherwise, the creditor can take action against specific assets or issue a statutory demand. Separately, if a creditor holds security, it may seek to enforce that security, including through the appointment of a receiver. However, once a winding up has commenced, there are no other legal means for debt recovery.
Is trade credit insurance commonly purchased in your jurisdiction?
Trade credit insurance is not widely purchased in Australia.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
A liquidation may be compulsory (ie, court ordered) or voluntary (ie, initiated by the company’s shareholders or creditors).
In the case of compulsory liquidation on the ground of insolvency, the following parties may apply to the court for a winding-up order:
- the company;
- a creditor;
- a contributory;
- a director;
- a liquidator of the company;
- the Australian Securities and Investments Commission (ASIC); or
- a prescribed agency.
The Corporations Act 2001 (Cth) also sets out other grounds for a compulsory liquidation and the persons or entities eligible to apply.
Shareholders may initiate a voluntary liquidation as:
- a members’ voluntary liquidation (where the company is solvent); or
- a creditor’s voluntary liquidation (where the company is insolvent).
A creditors’ voluntary liquidation may also occur at the end of a voluntary administration if the creditors vote for the company to be liquidated.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
An insolvent company may be wound up by a court or voluntarily:
- A (compulsory) court liquidation begins with an application to the court, which appoints the liquidator and ultimately orders the company’s winding up.
- A voluntary liquidation of an insolvent company is ordinarily initiated by its shareholders, but the process is thereafter conducted by the liquidator under the control of the creditors. If the company is already under administration at that point, the creditors may initiate the voluntary liquidation.
In general, the winding-up provisions in the Corporations Act apply to both court and voluntary liquidations, although there are some special provisions that apply to each type. For example, in the case of a court liquidation:
- the court retains the discretion to decide whether to order the company’s winding up; and
- the proceedings leading up to the court’s appointment of the liquidator are judicial.
How are liquidation procedures formally approved?
For a court liquidation:
- the court orders that the company be wound up in insolvency; and
- the liquidator requests that the ASIC deregister the company.
For a creditors’ voluntary liquidation, the liquidator must submit a report to ASIC and hold a final joint meeting of the creditors and members to explain how:
- the liquidation proceeded; and
- the company’s assets were realised and distributed.
The company is then automatically deregistered by ASIC three months after the notice of the meeting of creditors and members is lodged with ASIC.
What effects do liquidation procedures have on existing contracts?
The effect of liquidation on existing contracts will depend on the precise circumstances. The newly adopted ipso facto regime does not apply when companies proceed directly to liquidation. Accordingly, the entry into liquidation by a counterparty to a contract will often give rise to termination rights under the contract. Separately, a liquidator can carry on the company’s business to a limited extent – namely, for the beneficial disposal and winding up of that business. It is therefore possible that the performance of an existing contract may not be affected. However, it is more common that on liquidation, the contract will cease to be performed. Separately, the liquidator may disclaim certain contracts (particularly where the contract is unprofitable or contains onerous terms).
What is the typical timeframe for completion of liquidation procedures?
There is no set period for liquidation. It will depend on the complexity of the company’s structure and affairs and the extent to which the liquidator’s investigations into the company’s affairs discloses matters requiring action (eg, whether the liquidator will seek to undo dealings entered into before liquidation or take action against the directors for breach of their duties).
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
In a court liquidation, the liquidator is appointed by a court following a winding-up application. In a voluntary liquidation, the liquidator is appointed by a resolution of the company’s shareholders.
A liquidator’s functions, powers and responsibilities are governed by:
- the Corporations Act;
- the Insolvency Practice Rules (Corporations) 2016 (Cth); and
- general law.
A liquidator’s powers and duties are generally the same or similar regardless of whether they are appointed by the court or creditors.
A liquidator’s powers include:
- carrying on the company’s business;
- paying the company’s creditors;
- making compromises and arrangements with creditors or claimants;
- bringing legal proceedings on the company’s behalf;
- selling or otherwise disposing of the company’s property; and
- entering into agreements on the company’s behalf (subject in some cases to court approval).
A liquidator’s duties include:
- impartially investigating the company’s affairs;
- collecting the company’s property and applying it to discharge the company’s liabilities;
- reporting to ASIC, including where it appears to the liquidator that officers, employees or members may have been guilty of criminal offences in relation to the company;
- keeping proper books; and
- lodging returns to ASIC annually and at the end of administration.
What is the extent of the court’s involvement in liquidation procedures?
Where a company is wound up by the court, the court appoints a liquidator and has general superintendence over the winding-up process. General powers include:
- staying or terminating the winding up;
- ordering the delivery of money, property or books to the liquidator;
- appointing a special manager;
- making various orders regarding debts or claims; and
- preventing persons from absconding.
Voluntary liquidation is mostly a non-judicial process. However, a court may inquire into, and make orders in relation to, the external administration of the company on:
- its own initiative where proceedings are before the court; or
- application of certain persons (eg, a person with a financial interest in the company, an officer of the company or ASIC).
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
A liquidator may call a creditors’ meeting at any time. In certain circumstances, the liquidator may be required to do so, including where the creditors pass a resolution requiring a meeting or where there is a matter which requires creditor approval.
- request information from the liquidator;
- inspect the liquidator’s books;
- inform the liquidator of their knowledge of matters relevant to the company’s affairs; and
- remove or replace a liquidator.
Creditors may also appoint a committee of inspection to undertake these functions and monitor the liquidator’s conduct.
In general, where a company is in liquidation, a creditor cannot:
- pursue individual proceedings against the company or in relation to its property; or
- proceed with any enforcement process in relation to that property.
However, secured creditors retain their right to realise or otherwise deal with their security interests.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Compared with creditors, directors and shareholders have a fairly confined role in liquidation procedures.
DirectorsIn general, directors must do whatever the liquidator reasonably requires, including:
- attending to the liquidator;
- providing information to the liquidator; and
- attending meetings of the company’s creditors or members.
Directors must also deliver up all books in their possession that relate to the company.
ShareholdersIn an insolvency, shareholders rank behind the creditors and their involvement in liquidation procedures is limited.
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
A scheme of arrangement can be proposed by:
- the company;
- a creditor;
- a member; or
- the company’s liquidator.
A voluntary administrator is usually appointed by the company’s directors, following a resolution that the company is insolvent or likely to become insolvent in the future. A voluntary administrator may also be appointed by a secured creditor or a liquidator.
A secured creditor may also appoint a receiver, or a receiver and a manager, over the company’s assets in accordance with the documents giving rise to the security interest and the Corporations Act 2001 (Cth).
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
Schemes of arrangement A scheme of arrangement is a form of compromise between a company and some or all of its creditors or shareholders. When it is a compromise with creditors, it is called a ‘creditors’ scheme of arrangement’. When it is a compromise with shareholders, it is called a ‘members’ scheme of arrangement’.
For restructuring purposes, a creditors’ scheme is often used. A scheme may be proposed by:
- the company;
- a creditor;
- a member; or
- the company’s liquidator (if one has been appointed).
For a creditors’ scheme to be formally implemented, the proposer must obtain approval from each class of affected creditors and then from the court. The scheme, once approved, binds all creditors. The scheme will usually be administered by a scheme manager, but this is not compulsory.
Voluntary administrationVoluntary administration is a corporate rehabilitation procedure whereby an independent insolvency practitioner is appointed to control a company’s business, property and affairs with a view to maximising its chances of survival or ensuring a better return for creditors and members than would result from an immediate winding up.
The voluntary administration process may be initiated by:
- a secured creditor; or
- a liquidator.
The administrator assumes control of and investigates the company’s affairs. At the conclusion of those investigations, the administrator reports to creditors and must convene a meeting of the company’s creditors, who will then decide on the future of the company on the basis of the administrator’s report. The creditors may at that point resolve to:
- execute a deed of company arrangement;
- end the administration and return control of the company to the directors; or
- wind up the company.
Deeds of company arrangementA deed of company arrangement is a compromise between a company and its creditors. Deeds of company arrangement are commonly preferred to schemes of arrangement in insolvency situations because they provide many of the same advantages, but are quicker and easier to establish and can be varied.
A deed of company arrangement is implemented by resolution of creditors at the ‘watershed’ meeting. The administrator of the company becomes the deed administrator. The deed is binding on all creditors, although there are carve-outs for secured creditors and owners or lessors of property who did not vote in favour of the deed. In general, the Corporations Act allows for flexibility in the content of the deed, but the priority that is given to employee entitlements in a winding-up context must be preserved (unless the relevant employees agree or the court orders otherwise). The court has a general supervisory jurisdiction and may (on an application by the Australian Securities and Investments Commission (ASIC) or a creditor) make orders to protect the interests of the company’s creditors.
ReceivershipReceivership involves the realisation of specific assets of a company for the benefit of a secured creditor. The receiver is appointed by the secured creditor or (less frequently) by a court. A person appointed as a receiver takes control of the company’s property and has the power to deal with and dispose of that property, applying the proceeds to the amount that is owed to the secured creditor. A receiver that has the power to manage the company’s affairs is known as a receiver and manager. The receiver must take all reasonable care to sell the property for no less than market value or the best price that is reasonably obtainable. The receiver ultimately carries out its role under the supervision of ASIC and the court. Receivership ends:
- when the amount owed to the creditor has been paid;
- when the assets have been realised; or
- on order of the court.
How are restructuring plans formally approved?
Schemes of arrangementThere are stringent requirements for obtaining approval for a scheme of arrangement. A person making the proposal must apply to the court to obtain authority to convene a meeting of creditors. In so doing, the applicant must provide the court with:
- the draft scheme;
- an explanatory statement of the scheme;
- documents to be sent to creditors; and
- any necessary preliminary agreements.
ASIC must also be provided with all documents and be given an opportunity to be heard during the court hearings. At the meeting itself, the applicant must secure voting majorities in each class of creditors to which the scheme is directed (being 75% by value and a majority by number present and voting). The applicant must then seek approval for the scheme from the court at a second hearing, at which the court must be satisfied that the scheme is fair and reasonable.
Voluntary administration and deed of company arrangementVoluntary administration can be initiated by:
- the directors;
- a substantial secured creditor; or
- a liquidator.
The administrator must then convene a meeting of creditors, who will decide whether to proceed with a deed of company arrangement. A resolution to enter into a deed of company arrangement must be passed by a majority (in number and value) of creditors voting. The administrator has a casting vote in the case of a deadlock.
What effects do restructuring procedures have on existing contracts?
The effect of restructuring procedures on existing contracts will depend on the circumstances.
Where a company enters into administration, the administrator will – unless otherwise released from their obligations by the court – be personally liable for debts that it incurs during the administration. Accordingly, whether the administrator continues to perform existing contracts will depend on the contract’s circumstances.
The new ipso facto provisions (which apply to many contracts entered into after 1 July 2018) limit the ability of a counterparty to terminate contracts on administration or where a scheme of arrangement is being propounded. However, there are a number of statutory exclusions to the types of contract subject to the ipso facto protections, so the individual circumstances of each contract must be carefully considered.
What is the typical timeframe for completion of restructuring procedures?
Schemes of arrangementA creditors’ scheme of arrangement generally takes approximately four months, although it may take substantially longer. This will depend on:
- the time required to commission any relevant independent expert reports;
- the complexity of the scheme;
- court availability; and
- whether there are any objections to the scheme.
There is also a minimum period for ASIC to review the scheme material before the first court hearing (at least 14 days).
Voluntary administrationThis will depend on the complexity of the companies under administration. The first creditors’ meeting must be held within eight days of the administrator being appointed, unless a time extension is received from the court. A second creditors’ meeting must be held within 25 business days of appointment, unless a time extension is granted. It is not uncommon for administrators to seek, and be granted, time extensions for both the first and second creditors’ meetings. At the second meeting, if the creditors accept a deed of company arrangement, the company must sign it within 15 business days, unless a time extension is obtained.
Deed of company arrangementThe timeframe for a deed of company arrangement will depend entirely on its commercial terms. The deed must specify an end date or end conditions.
ReceivershipThe receivership will last for the period required for the receiver to deal with the assets at issue. This may be days, months or years, depending on the complexities involved.
What is the extent of the court’s involvement in restructuring procedures?
The court’s involvement will depend on the form of restructuring adopted. The court is highly involved in a scheme of arrangement, for which its ultimate approval is required.
An administrator is subject to the general supervision of the court, although the court’s role is generally limited. A court may make orders about how the relevant provisions of the Corporations Act are to operate in relation to a company and to protect creditors. A court may also declare whether an administrator was validly appointed.
What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
A scheme of arrangement requires the approval of the majority of each class of creditors being compromised (75% by value and a majority by number who are voting on the scheme). An objecting creditor may seek to be heard at the court hearings.
It is not uncommon for the entity propounding a scheme to seek a stay of proceedings against the company while the scheme is being propounded.
In respect of deeds of company arrangement, there is an obligation to report to creditors and to seek their approval for the deed.
Under what conditions may dissenting creditors be crammed down?
For a scheme of arrangement, it is necessary to obtain the approval of each class of creditors to which the scheme is directed. There is no cross-class cram-down mechanism. However, there is a growing trend in Australia to minimise the number of classes. Classes are determined by grouping creditors who share a ‘community of interest’, which is to be assessed by reference to the rights creditors have against the company and which may be affected by the scheme. It has been interpreted broadly, so as to minimise veto rights for minority creditors (and has the effect of allowing a cram down in some circumstances).
By contrast, deeds of company arrangement may be executed on a resolution of the creditors; all unsecured creditors and secured creditors can vote on the deed and there is no need to obtain the approval of each class of creditors individually. Unsecured debts may be crammed under the terms of the deed, although an objecting creditor may challenge a deed on the basis that they would have received a greater return under a liquidation of the company.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
For restructures adopted through schemes of arrangement, the directors will usually need to convene the relevant creditors and members meetings. Where the restructure is being adopted via a members’ scheme of arrangement, shareholders consent will also be required.
The involvement of directors and shareholders in a deed of company arrangement will depend on the terms of the deed of company arrangement, but is often minimal.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
Companies may undertake restructuring outside the formal processes of external administration.
Advantages of informal work-outs include:
- Maintaining control over the company – the voluntary administration process involves surrendering control over the future direction of the company. From that point on, it is for the creditors to determine the next steps and day-to-day control of the company passes to the administrator. Informal work-outs mean that the management retains control of the company and may also avoid indirect consequences, such as creating market uncertainty.
- Lower costs – informal work-outs avoid the need to appoint an administrator and the costs of compliance with relevant statutory provisions.
Disadvantages of informal work-outs include:
- Less transparency – the flipside of the flexibility of informal work-outs for the company is that it may be more difficult for stakeholders to assess the steps being taken.
- No stay on creditor enforcement actions – creditors are not restrained from proceeding with individual actions or enforcement processes in relation to debts or from commencing winding‑up proceedings. That in turn may undercut the purpose of the informal work-out.
- Risk of directors’ liability for insolvent trading – there are general prohibitions on trading while insolvent. However, this risk has been ameliorated by the introduction of safe harbour provisions in the Corporations Act 2001 (Cth), which were designed to give directors and companies more capacity to undertake informal work-outs in response to financial distress. The safe harbour provisions qualify the insolvent trading prohibitions by adding a defence where a course of action was undertaken that was “reasonably likely to lead to a better outcome for the company” other than an immediate winding up, provided that certain statutory requirements are met.
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
The Corporations Act 2001 (Cth) identifies several classes of voidable transaction. In general, a transaction falling within one of these classes may be voidable if it was entered into, or something was done to give effect to it, in the six months before the winding up began. Types of transaction that may be voidable include:
- unfair preferences – where the transaction resulted in an unsecured creditor being paid in preference to other creditors;
- uncommercial transactions – where a reasonable person in the company’s circumstances would not have entered into the transaction having regard to all relevant matters, including the costs and benefits;
- unfair loans to the company – where the interest or charges on the loan were or have become extortionate; and
- unreasonable director-related transactions – in effect, these are uncommercial transactions that involve a director of the company or a close associate of a director.
The process for setting aside these transactions is not automatic. Instead, a company’s liquidator must apply to the court to have a transaction set aside. Until recently, only liquidators could apply to have a voidable transaction set aside. However, legislative amendments in 2017 made it possible for liquidators to assign that right to a third party.
On the making of an application, the court may make various orders in relation to a transaction if it is satisfied that it is voidable. For example, it may direct a person to pay money or transfer property to the company. There are defences available to a creditor in such a proceeding, including that they had reasonable grounds to and did expect that the company was and would remain solvent.
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
Once a company has begun the winding-up process, there is no general process by which it may continue to conduct business.
A liquidator may carry on a company’s business so far as is (in the liquidator’s opinion) required for the beneficial disposal or winding up of that business. However, the liquidator may enter into agreements for a term of more than three months only with court or creditor approval.
Stakeholder and court involvement
To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
Creditors, directors and shareholders are generally not directly involved in the conduct of a company’s business during insolvency proceedings. However, creditors may be requested to approve certain proposals by the liquidator.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
A liquidator may obtain credit, whether on the security of the company or otherwise. Any agreements with a term of more than three months require court or creditor approval.
Administrators may also obtain credit, including on secured terms. If security is to be given, it is necessary to obtain court approval that the giving of security will not prejudice creditors (eg, In the matter of OneSteel Manufacturing Pty Ltd  FCA 325).
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
Wages, superannuation contributions and other amounts due to employees of the company are among the debts and claims that have priority over other unsecured debts and claims. In some circumstances, amounts due to employees may take priority over some security interests. Australia also has the fair entitlements guarantee – a legislative safety net scheme which guarantees certain employee entitlements.
In addition, the Corporations Act 2001 (Cth) prohibits agreements and transactions that are intended to defeat the recovery of employee entitlements.
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
Recognition of foreign proceedings is done in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross‑Border Insolvency, which was incorporated into Australian law by the Cross-Border Insolvency Act 2008 (Cth).
Winding up foreign companies
What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
The Corporations Act 2001 (Cth) enables the compulsory winding up of foreign companies that carry on business in Australia. In general, the statutory provisions that govern the courts’ powers to order and supervise the winding up of companies also apply to foreign companies, with some adaptations as necessary.
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
In applying the centre of main interests criterion, the Australian courts have generally followed the approaches of the English courts and the European Court of Justice. In short, the ‘centre of main interests’ is “where the debtor conducts the administration of [its] interests on a regular basis”. Identifying the centre requires looking at objective criteria that can be ascertained by third parties (including creditors and potential creditors).
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
Cooperation with foreign courts is governed by Chapter IV of the UNCITRAL Model Law on Cross‑Border Insolvency. In addition, the Corporations Act provides that courts in external administration matters must act in aid of the courts of certain countries prescribed in the regulations.