News

New ASIC power to wind up abandoned companies

Under the Corporations Act 2001 (Act), ASIC has the power to wind up a company on several grounds. These grounds include if ASIC believes that the company is not carrying on business, that the making of a winding-up order is in the public interest or if the company’s review fee has not been paid after 12 months from its due date (Section 489EA of the Act).

In circumstances where ASIC believes the company has been abandoned by its director(s), they now have the power to exercise their discretion to wind up the company.

In determining whether to exercise this power to wind up a company, ASIC also considers whether a liquidation will help facilitate employee access to the FEG scheme (formerly known as GEERS).

This new power is a very useful tool for employees left out of pocket when their employer ceases to trade and entitlements remain unpaid.

To take advantage of this, an employee must lodge a request with ASIC to wind up the company.

In our office, we have recently seen a case where the power of employees to wind up the company in order to access the FEG scheme has proven most beneficial and we draw this to your attention should you have clients left abandoned by a failed enterprise.

Dealing with contractor insolvency

There is little doubt that in the current economic environment we are seeing an increase in insolvency in the building and construction sector.

In this article, we aim to highlight pertinent issues arising from the failure of a contractor.

Firstly, we highlight some of the tell-tale signs that a contractor may be approaching insolvency. These include:

• increased number of disputes
• project delays/missed deadlines
• inability to provide performance security
• requests for early payment
• the resignation of key personnel
• rumours/market intelligence

In the event a builder notices these signs in a contractor there are several remedies to consider, including:

• agreeing to accelerated payments
• taking material costs out of the subcontract and paying the contractor a labour rate only

The above steps should only be considered short-term fixes and only worthy of consideration if the contract is near to an end.

Generally, it may be more appropriate to commence planning for the potential impact of the subcontractor insolvency. These steps include:

• clarifying with the contractor the steps they are taking to manage their cash flow and complete the project
• considering options for replacement contractors
• terminating the contract if there is a right to do so.

With respect to the latter options, there are obvious contractual issues that must be considered and engaging legal advice at this stage would be appropriate prior to taking steps that bring the contract to an end.

Should circumstances result in the appointment of an administrator/liquidator to the contractor the following steps should be followed:

• make immediate contact with the administrator/liquidator to discuss the contractor’s intentions
• determine if it is possible that the contract will provide protections such as the suspension of payments, bank guarantees or retentions that may be relied upon to mitigate any losses
• determine if the administrator/liquidator will be motivated to secure cash for his administration and there may be grounds to engage in negotiation to settle contract obligations at a lower price in consideration of quick payment
• determine if appropriate termination notices should be issued bringing an end to the contractual arrangement with the contractor
• should there be a debt owing to the builder, act quickly to issue statements of account and register a proof of debt to claim as a creditor in the administration.

Insolvency tips for retail administrations

Suppliers dealing with companies approaching insolvency are often caught in an awkward predicament by trying to balance long-standing relationships with a customer wanting stock with the commercial imperative for the supplier to be paid for stock already supplied.

Below we set out a summary of strategies and issues to consider when trading with retailers that may be in financial difficulty.

1. Limit supply – If a trading account is beyond acceptable trading terms and past approved credit limits there is a very good reason to limit the supply of further stock to the company. Often suppliers can be encouraged to continue to supply off the back of promises; however, in tougher economic times, a more hard-nosed approach is justified.
   At the same time, we accept it is a balancing act for a company that may be a critical supplier of goods as this approach may result in their customer moving from a cash squeeze into a collapse and—in that way—the supplier is contributing to their own loss.
2. COD – In situations where suppliers are under great pressure to continue to supply when current terms of trade have reached an unacceptable position, then supply on the basis of cash-on-delivery terms may be the only option left.
3. Retention of title – With the advent of the Personal Property Securities Register (PPSR) the power of a well-drafted retention of title clause, registered as a Purchase Money Security Interest (PMSI) on the PPSR, may be the best tool available to a supplier in the event of the company’s insolvency. 
   It is important for a supplier to act swiftly when notified of the appointment of a liquidator/administrator/receiver and take steps to enforce their interests to recover the goods described in the retention of title clause.

Given the PPSR noticeboard, it is incumbent on an insolvency practitioner to contact the holder of a PMSI, but don’t wait to be contacted. Ensure you are on the front foot.

1. Personal guarantees – Often when a customer needs the supply of stock it is possible for the supplier to improve their commercial position with the supply. Trading arrangements with customers may have evolved over time and as the size of the trading account has increased, the commercial terms of trade may not have been upgraded. When faced with a request to continue supply that exposes the supplier to increased risk it is a fair request for the supplier to seek improved security for that supply and negotiate terms such as the provision of updated director guarantees.
2. Unfair preference recoveries – Should a customer pass into liquidation suppliers must always be aware that the liquidator may look into the trading relationships in the six months prior to external administration and seek to make void payments received by the supplier. The discussion of how to respond to an unfair preference claim from a liquidator is the subject of another whole article in itself, but for the purposes here we highlight this power as a risk that any supplier must contemplate when negotiating ongoing supply with a customer who may appear to be in financial difficulty.

The above tips are provided to assist suppliers to consider the risks of trading with a business that may be beyond acceptable trading terms and, if adopted, may help mitigate the risk of ongoing supply.

Director refused access to books and records by Receiver

The appointment of a Receiver and Manager to a company often leaves directors uncertain about their residual powers and duties.

The recent decision of the Full Court of the Federal Court of Australia Oswal v Burrup Fertilisers Pty Limited (Receivers and Managers Appointed) discussed the issue of a director’s power to access books and records in light of the refusal by a Receiver to give access to them.

In this matter, Mr Oswal (the Director) sought access to a number of categories of books and records created after the appointment of Receivers and Managers. In particular, the Director sought records regarding the potential or actual sale of assets, documents referred to in a Statement of Claim against him and information on the business operation.

The basis for seeking access was to ensure that the sale of assets was conducted in a proper manner and for market value.

The key principles concerning director access to books and records of a company in receivership are:

• A director owes fiduciary duties to the company and has a right of access to the books and records which relate to the affairs of the company so that he might properly perform his duties
• The right of access to books and records arises at common law and under the Corporations Act and the Court has discretion in whether or not to order that an inspection take place
• If there is no evidence that a misuse of power is involved the Court will be reluctant to prevent a director from
• making an inspection
• The Court recognises that there are residual duties which the directors must carry out and that they must continue to ensure the best interests of the company are fulfilled; however, this must not prejudice the proper administration of the Receivership
• A Receiver is entitled to possession of the books and records of the company by virtue of the proprietary interest of the debenture holder and the entitlement to possession is not a legal interest but rather exists to enable him to fulfil the role for which he was appointed

This case reinforces that a director’s ability to inspect books and records of a company in receivership will be restrained if it impacts on the ability of the Receiver to achieve their objectives of a successful realisation of secured assets.