There are some significant aspects of the law relating to liquidations and bankruptcies to be aware of.  Here is what you need to know.

Voluntary Administration Regime

The voluntary administration regime aims to provide for an insolvent company to be administered in a way that maximizes the chance of the business continuing or at least end in a better result in terms of returns for creditors and shareholders than liquidation.

Under the regime an administrator can be appointed to investigate a company’s affairs and decide whether the company can continue trading.  The administrator holds meeting with creditors to determine whether to pursue liquidation, end the administration or enter into an arrangement with creditors.

During administration, the administrator has control of the company’s business, property and affairs.  No litigation can be commenced or continue against the company during this period.  There is also a moratorium on creditors for a certain time period.  However, creditors with a security interest in the whole of the company’s property can enforce their security at the beginning of the period of administration.

The No Asset Procedure (NAP)

The no asset procedure is an alternative to bankruptcy, aimed at consumer debtors who have accumulated debts primarily from domestic liabilities.  For a debtor to be eligible they must:

  • Have no realizable assets; and
  • Have not previously been admitted to the no asset procedure; and
  • Have not previously been adjudicated bankrupt; and
  • Have total debts of more than $1,000.00 but less than $40,000; and
  • Have no means of repaying any amount towards those debts.

Voidable Transactions, Preferential Payments and Priority Debts

This test for voidable transactions is a “running account” or “continuing business relationship” test which does not void transactions that take place as part of a continuing business relationship.  The onus is on the liquidator who now must instigate or start proceedings to avoid a transaction.

The test to establish an exception to the voidability of preferential payments is a four part test under which a person receiving property must establish that a reasonable person in their position would not have suspected and he or she did not have “reasonable grounds” for suspecting that the company was or would become insolvent.

Generally a debtor’s assets are distributed to all creditors equally in proportion to the size of their claims.  There are some exceptions for priority payments. For example, there is a priority for creditors who protect, preserve the value of, or recover property of the bankrupt for the benefit of the creditors by the payment of money or the giving of an indemnity.

This aims to ensure that with limited exceptions, a debtor’s assets will be distributed to all creditors equally in proportion to the size of the admitted claims and that debts that have previous been given priority retain this priority only if it can be justified by principles of fairness and equity.

Phoenix Companies

The law has deterrent measures in place to allay concerns that “Phoenix” company structures are being abused by directors who are seeking to defeat the legitimate interests of creditors.  These deterrent measures include:

  • Providing restrictions on directors regarding using the name of a failed company.
  • Restriction on the use of trade names.  This applies for five years from the date of the company failure.
  • Criminal penalties where directors have acted in bad faith to defeat legitimate interests of creditors.